Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity (22 page)

Once this happened, Lerner had the freedom to expand the program even further, using the bus-token-based LETS currency to pay for public works projects, such as housing and infrastructure. The LETS was allowing him to invest in the city and its future instead of simply ameliorating poverty.
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True, this ended up putting more bus tokens into circulation than were actually needed for transportation purposes, but by then the value of the tokens on the LETS exchange meant more than the seats on the bus that originally backed them. Twenty-five years later, the city has some of the highest quality-of-life indices in the world. Approximately 70 percent of households still participate in the garbage-for-tokens program, and the city is able to recycle some 60 to 70 percent of its trash locally. Today, the United Nations points to Curitiba as a leader in sustainable urban development.
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The Curitiba bus token shows that LETS are scalable and needn’t be limited to small communities. Once a region agrees upon a medium of exchange, it can enjoy the liquidity of monetary stimulus but with no day of reckoning when the central bank comes to collect. The region is not expected to grow just to pay back interest; it can simply recover and reach sustainability.

Complementary currency helps to insulate communities disempowered by deflation, inflation, or volatility as the economy moves from one extreme to another. All too often, the financial crises that merely unsettle the hubs of political and economic power truly decimate outlying regions and smaller communities at the very end of the money supply chain. Local currencies, time dollars, and LETS are programmed to be nonextractive, highly transactional, and free of borrowing costs.

4. From Extracting to Enabling: The New Local Bank

In such a climate, how are traditional banks to participate effectively in the financial rehabilitation of the communities they serve? How are they supposed to function at all once people begin to see central currency as extractive, and the bank as a foreign corporation removing value from the
community in the form of interest? Again, just as for their corporate brethren, it’s by adopting a hybrid approach. Here’s just one possibility:

Sam’s Pizzeria is thriving as a local business, and Sam needs $200,000 to expand the dining room and build a second restroom. Normally, the bank would evaluate his business and credit and then either reject his loan request or give him the money at around 8 percent interest. The risk is that he won’t get enough new business to fill the new space, won’t be able to pay back the loan, and will go out of business. Indeed, part of the cost of the loan is that speculative risk.

In a more hybrid approach, the banker could make Sam a different offer. The bank could agree to put up $100,000 toward the expansion project at 8 percent
if
Sam is able to raise the other $100,000 from his community in the form of market money. Sam is to sell digital coupons for $120 worth of pizza at the expanded restaurant at a cost of $100 per coupon. The bank can supply the software and administrate the escrow. If Sam can’t raise the money, then it proves the community wasn’t ready, and the bank can return everyone’s money.

If he does raise the money, then the bank has gained the security of a terrific community buy-in. Sam got his money cheaper than if he borrowed the whole sum from the bank, because he can pay back the interest in retail-priced pizza. The community lenders have earned a fast 20 percent on their money—far more than they could earn in a bank or mutual fund. And it’s an investment that pays all sorts of other dividends: a more thriving downtown, more customers for other local businesses, better real-estate values, a higher tax base, better public schools, and so on. These are benefits one can’t see when buying stocks or abstract derivatives. Meanwhile, all the local “investors” now have a stake in the restaurant’s staying open at least long enough for them to cash in all their coupons. That’s good motivation to publicize it, take friends out to eat there, and contribute to its success.

For its part, the bank has diversified its range of services, bet on the possibility that community currencies will gain traction, and demonstrated a willingness to do something other than extract value from a
community. The bank becomes a community partner, helping a local region invest in itself. The approach also provides the bank with a great hedge against continued deflation, hyperinflation, or growing consumer dissatisfaction with Wall Street and centrally issued money. If capital lending continues to contract as a business sector, the bank has already positioned itself to function as more of a service company—providing the authentication and financial expertise small businesses still need to thrive.

The bank transforms itself from an agent of debt to a catalyst for distribution and circulation. Like money in a digital age, it becomes less a thing of value in itself than a way of fostering the value creation and exchange of others.

Less a noun than a verb.

“Our favorite holding period is forever.”

—Warren Buffett

Okay, suppose the digital economy delivers on its deepest promises. Let’s say we transcend our industrial-age thinking and develop platforms dedicated to serving the needs of people instead of simply removing them from the value equation. Let’s say we transition to a business landscape in which corporations don’t have to grow in order to remain solvent. And, as long as we’re doing so well, let’s say we get down to the operating system of money itself and reprogram it from the ground up to be biased less toward preserving passive wealth for the rich and more toward exchanging value among everyone else.

Retrieving the ethos and mechanics of the medieval bazaar may be great for promoting live trade, but how does it provide stability or security? When everything is moving, how does anyone accumulate wealth? If
money really is about to become less of a noun than a verb, then what’s an investor supposed to do?

Sure, it’s easy for the 99 percent to celebrate the impending collapse of the investment economy; we’ve bailed out the private bankers with public funds enough times that we can’t help but delight in the fact that they’re losing their ability to extract value out of thin air while the rest of us work for a living.

And believe me, they are scared. The finance and investing conferences I’ve spoken at over the past decade have increasingly been characterized by panic: Interest rates of all kinds are too low to make much money collecting them. Holding money doesn’t work in a low-interest environment, so investors are forced into stocks, commodities, and private equity. And with everybody crowding into those investments, they end up overvalued in comparison to the underlying assets.

Central bankers pour more money into the economy, and they scratch their heads in amazement that it doesn’t lead to jobs and inflation. What they don’t see is that employment and prices are remaining low because the injected money isn’t trickling down into the economy of wages and products. It stays in the investment sector, where it’s the financial instruments themselves that are inflating. Meanwhile, wealth managers and hedge fund operators I encounter are less spooked by inflation than they are by
de
flation. As we get more efficient at sourcing and making stuff, prices go down, profits go down, and wages go down—but all the investment capital still needs to park itself somewhere and, ideally, grow.

It’s not just the bankers’ problem. Although most of us aren’t running hedge funds, we, too, need a place to save effectively for our kids’ college educations and our own retirements. Favor banks and LETS systems are great for those who are willing to work and keep working, but does escaping the growth trap mean that regular people lose any ability to invest and accumulate capital for the long term?

Initially, it appeared that digital technologies would be a boon for the individual investor—the little guy. The net would make markets more transparent, spread financial information more democratically, and let
people trade for themselves, just like the pros. It should provide a way to disintermediate the bankers and brokers—cutting out the middlemen and keeping more autonomy and cash for oneself. Digitally powered trading seems to be further along an ever-improving continuum of agency for individual investors. But for all this to be true, we have to accept the underlying premise that individuals taking charge of their own future security is a winning proposition.

Unfortunately, the best evidence indicates that it’s not, nor was it ever really meant to be. In
Forbes
writer Helaine Olen’s analysis of the finance industry,
Pound Foolish
, she reveals that our current retirement savings practices have less to do with making secure futures for ourselves than with growing a profitable new sector of financial services around this human need.
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For most of the postwar period, Olen explains, American workers enjoyed the promise of employer-provided pensions. The companies they worked for would garnish a percentage of every employee’s paycheck, invest it, and return an agreed-upon sum, beginning when the worker retired and continuing until he died. If its return on investment was greater than its pension commitments, the company could keep the surplus as profit. By the same token, if its pension fund failed to generate high enough returns to meet its benefit commitments, the company was obliged to make up the difference. That missing money had to come from somewhere, and neither executives nor shareholders appreciated spending profits on past employees, who had long since ceased providing their value.

Of course, in most cases companies found creative ways of passing the liability on to their employees, anyway. They would renegotiate pension commitments
2
or pit union members against one another by offering to pay for retirement benefits of the old by reducing those of junior employees.
3
A dismal pension outlook could even give a company the leverage it needed to reduce salaries and benefits across the board,
4
threaten bankruptcy, or move to a right-to-work state with no union at all.
5

Many companies even abused the pension system, dipping into
supposedly protected pension accounts to fund ongoing operations or risky investments. The worse things got for a company, the more likely it was to see the pension fund as an emergency bank account. In some instances, companies would default altogether on their pension obligations after investing in risky or self-serving instruments.
*
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In the economic downturn of the 1970s, many pension funds failed to meet their required targets, leaving companies on the hook for the difference. So they began to look for a way to relieve themselves of any fiduciary responsibility for their employees’ retirement. The whole idea of retaining employees as quasi-family members over the course of their entire careers and then rewarding them with money for life seemed quaint but contrary to the free-market principles of the Thatcher-Reagan era, anyway. Companies and government alike began to treat employees more as independent contractors—free-market players, personally responsible and ultimately dispensable.

Independent contractors and other self-employed workers were already using tax-deferred individual retirement accounts to save for their futures. Although IRAs rarely made as good returns as professionally managed and collectively pooled pension funds, they were still a legal instrument through which self-employed people could earn tax credits for making contributions to their own retirements. Then, in 1981, a benefits consultant named Ted Benna looked at the existing tax codes and argued that they could be read in a way that would allow companies to provide workers with the opportunity to invest in IRAs.
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Businesses jumped on this interpretation and ran with it to Congress.

Luckily for them, their new legislation suggestions promoting individual financial responsibility dovetailed perfectly with the greater Reaganite theme of personal empowerment. People, it was believed, should have direct access to personal finance, the game of speculation. And so,
with the help of a salivating financial services industry, the now-ubiquitous 401(k) was legislated into existence.
8

A hybrid of the IRA and traditional pension plans, the 401(k) is funded by a monthly percentage of the employee’s salary and, sometimes, an optional contribution from the employer. The employee then picks from a range of diversified portfolios, administered by an outside financial firm. Instead of guaranteeing a lifetime of benefits, employers now only have to provide access to a plan and a matching contribution up front, if that. The employee alone is responsible for whether the plan appreciates, keeps up with inflation, or is invested responsibly. Moreover, the costs of asset management, brokerage fees, and financial services are also shifted from the company to the individual employees.
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The finance industry loved this new product, since it meant that instead of advising a few pension-holding companies, it could advise millions of new 401(k)-holding individuals. By saving individually instead of collectively, workers end up paying hundreds or even thousands of times for the same advice. Plans can charge a base fee upwards of 0.65 percent—even before kickbacks from brokerage houses and internal fund fees—making it hard for any of these plans to accrue earnings, much less keep up with inflation.
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Those charges apply whether the fund makes or loses money. Neither the financial advisor nor the plan administrator is liable for results. Under the new scheme, a much larger portion of the same pot of retirement money could be extracted in fees to support the careers of many more financial advisors and services, since now everyone gets a customized, personal account.

Financial firms also won a vast pool of new clients with very little financial acumen and no real bargaining power—a far cry from the professional, corporate pension managers of the past. The industry made every effort to market retirement plans as tools of empowerment for individuals. As their own marketing research shows, however, they were actually pitting the unique weaknesses of individual investors against themselves, leveraging the investors’ ignorance of the marketplace and its rules, as well as known gaps—what gamers would call “exploits”—in people’s
financial psychology.
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The more that financial firms promoted these plans, the more employers were free to drop their pensions and the more workers came to rely exclusively on their own savings plans and market skills. This channeled additional money into the finance industry, which then had funds to spend on marketing for more profitable financial products and on lobbying for less regulation in creating them.

In our digital society, we take for granted that retirement is one’s personal responsibility. Young professionals understand that they’re playing a game, competing against one another in the marketplace of jobs as well as that of retirement strategies. As the United States’ manufacturing base declines, fewer young workers expect old-fashioned, long-term guarantees such as pensions, anyway.
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The rise of the 401(k) and concurrent decline in pensions emerged at a propitious moment in American history, when a strain of “free market” fundamentalism had seeped from the Goldwater and Friedman fringes of the Republican Party into the technolibertarian mainstream. The long boom of the 1990s, and its accompanying corporate focus on lean management and cost cutting, only amplified that trend.
13

This confluence of circumstances—the invention of individual, tax-deferred savings instruments, the decline in American manufacturing, the rise of ultrafree-market ideology, the growing power of finance as a PR and lobbying force, and the availability of online trading tools—created a feedback loop in which each element further exaggerates and entrenches the others. Between 1979 and 2012, pension enrollment rates dropped from 28 percent to 3 percent of employees.
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All this would be fine if individual retirement accounts performed as well as or better than the old pension plans. But as reported by sources from
Forbes
to
USA Today
, 401(k) participants actually end up saving
less
money, not more—and certainly not enough to retire on securely. Managing and monitoring retirement saving accounts require a degree of financial acumen that is simply beyond that of the average person. (It’s actually beyond the capability of most advisors.) Commissions and financial fees—often obfuscated—account for the rest of the decline in returns. In fact, until
the hard-won (but easily and regularly rescinded) banking reforms of 2012, retirement fund managers were not even required to report the fees they charged.
15
That’s right: from the emergence of these plans in 1981 until the summer of 2012, there literally was no legal requirement to inform consumers how much they were paying for the privilege of having a retirement account. They could look up the fees internal to the mutual funds, but the financial firms administering the accounts were not required to disclose them. And consumers were accordingly clueless. A 2011 AARP survey noted that 71 percent of 401(k) holders erroneously believed that they were not being charged any fees, while another 6 percent admitted they did not know whether they were being charged or not.
16
As a result, according to
Forbes
, in 2011 pension-style plans performed at a 2.74 percent rate of return, while 401(k)s actually
lost
an average 0.22 percent.
17

So personal retirement plans are sold as a means of empowering the individual investor to get in on the game, but in practice they more frequently exploit a person’s ignorance and lack of negotiating power.
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For a middle-class worker’s 401(k) to perform well enough to retire on, he must not only invest like a pro but also never get seriously ill, never get divorced, and never get laid off.
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In other words, it doesn’t work in real life.

By tasking individuals with their own retirement savings, companies transferred risk to employees, shifted profits to shareholders, and created a tremendous new market for financial services—which in turn siphoned off more value from people to the banking sector. Nevertheless, a majority of us still hold out hope that those upward graphs and pie charts about compound earnings are really true—even though our investments are not going up as advertised. Most of us believe the story told to us by our employer-assigned financial advisors and the business press: that over time, those of us keeping our money in the stock market will average 7 or 8 percent a year. MIT economist Zvi Bodie has looked at the composite of the S&P since 1915 and shown the true rate of return for any forty-four-year period of investment over the past century. The real average is about 3.8 percent. The best moment for a person to have retired would have been 1965, for an average gain of about 6 percent. Retire today, and you’re
looking at having made under 3 percent.
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Before fees, of course. So much for taking charge of our own finances.
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