We shouldn’t have needed the meltdown of Lehman Brothers, 10 years ago this week, to realize that the U.S. economy’s incentives were all screwed up. Nowadays those incentives are still misaligned, but we can address this before another financial crisis hits.
Then, as now, banks are organized in a way so that they can still flourish even if millions of people lose their homes. The banks’ bottom line, after all, is to enrich their shareholders and top executives, whatever happens to their customers. Then, as now, some of these same banks are so big that the federal government will likely bail them out of trouble. Then, as now, regulations over finance manage to be both grueling for bankers and inadequate for protecting everyone else.
But in the years since Lehman went down, people have been rediscovering an old, cross-partisan tradition in American business, one that can correct the bad incentives capable of steering us back into another crash: Cooperatives, owned by the people they serve. Hundreds of thousands of individuals moved from investor-owned banks to customer-owned credit unions. These people opted out of the backwards incentives of a financial system designed to serve the wealthiest and opted into a proven alternative.
Visionary changes are needed to make sure that consumer-controlled finance is a viable option for everyone.
Credit unions, however, bear restrictions that leave them unable to compete head-on with profit-seeking banks. They’re limited in who their members can be and what services they provide. They’re also inhibited by regulations designed for much larger, more dangerous institutions. A bipartisan reform passed earlier this year helped lighten the burden, but more visionary changes are needed to make sure that consumer-controlled finance is a viable option for everyone.
Some activists have begun taking a parallel strategy: reviving the old populist idea of chartering public banks, enabling cities and states to manage their own resources more intentionally. Like credit unions, public banks have to answer to a higher cause than investor profits.
Typically, those on the left tend to blame Wall Street for the crash, while those on the right prefer to blame the federal government — specifically the incentives baked into the government-sponsored enterprises Fannie Mae and Freddie Mac. There is truth to both stories. And while a new Republican proposal proposes to simply sell off their functions to the highest bidder, an equally drastic idea came from Democratic Rep. Maxine Waters: turn Fannie and Freddie into a lender-owned cooperative.
Federal Reserve economists argued for this solution in the wake of the 2008 crash. Rather than expecting government to shore up their risk-taking, a cooperative entity would ensure that banks would be fully on the hook for any funny business their industry might be tempted to pull.
Moreover, the one-member, one-vote structure of a cooperative would help ensure that small banks have a real seat at the table. Already, such co-ops of banks are familiar and highly functional; they facilitate interbank money transfers and enabled the growth of the credit-card industry. The old BankAmericard, for example, gained traction once it spun-off as a cooperative called Visa V, +0.50% . Rep. Waters has put the industry on notice that if Democrats take the House in November, they will be coming for Freddie and Fannie.
A symptom that quickly followed from the crash in the housing market was widespread unemployment, though layoffs and business failures. Because of this, in the years since, there has been growing interest in making employees owners of the companies where they work — for example, Southwest Airlines LUV, -1.69% and New Belgium Brewing.
Expanding employee ownership is now on both the Democratic and Republican party platforms, and members of both parties came together to pass historic legislation last month to that end. Cities from Richmond, Calif., to New York have been testing a wide range of strategies for investing in this type of business. Massachusetts Senator Elizabeth Warren has a bill to put workers on corporate boards.
Keep in mind that employee-owned firms experienced faster growth in the wake of the downturn than competitors and provided greater job security. Employee ownership aligns the incentives of executives and those who work for them, and it bucks the trend in recent decades of soaring profits alongside flat-line wages. If workers are owners, they get a slice of whatever profits they generate.
Today, more than 24 million employees work for businesses at risk of shuttering without a succession plan. This “silver tsunami” is an unprecedented danger, but it is also an opportunity for widespread conversions to employee ownership — and, in turn, to a society in which the benefits and responsibilities of owning a business can be far more widely shared.
It is tempting to put the crisis of 10 years ago behind us, but much of what caused it remains in force. Perverse incentives won’t be fixed by the market alone or by some magic policy tweak. We need the imagination to rethink how we do business, and to learn from unsung models of shared ownership that have succeeded in the past. For the economy to become a safer place for all of us, more of us need to own it.
Nathan Schneider is the author of “Everything for Everyone: The Radical Tradition That Is Shaping the Next Economy” (Nation Books, 2018), and an assistant professor of media studies at the University of Colorado, Boulder.