A top Federal Reserve official said yesterday that locally owned banks do a better job of serving communities and small businesses, but they are threatened by federal policies that favor their big competitors.

In testimony before a U.S. House of Representatives subcommittee, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and the Fed’s longest-serving policy-maker, said that community banks as a whole have held up better than megabanks over the course of the recession, but warned, “The more lasting threat to their survival concerns whether this model will continue to be placed at a competitive disadvantage to larger banks.”

Because of their local ownership and the local focus of their operations, community banks have a vested interest in the success of their communities, Hoenig said. This creates a powerful alignment between what’s in the bank’s best interest and what’s in the community’s best interest. “It is the very ‘skin in the game’ incentive that regulators are trying to reintroduce into the largest banks,” said Hoenig.

“There is no better test of the viability of the community bank business model than the financial crisis, recession, and abnormally slow recovery,” said Hoenig. “The community bank business model has held up well when compared with the megabank model… Community bank earnings last year were lower than desired but on par with those of larger banks. However, community banks generally had higher capital ratios that put them in a better position to weather future problems and support lending.”

“Data show that community banks have done a better job serving their local loan needs over the past year,” Hoenig added. “Community banks, as a whole, increased their total loans by about 2 percent as compared to a 6 percent decline for larger banks… Business lending in particular stands out, with community bank loans dropping only 3 percent as compared with a 21 percent decline for larger banks.”

While community banks are as viable, if not more so, in today’s market than big banks, their survival is challenged by the government’s too-big-to-fail policies and financial support for megabanks. “Because the market perceived the largest banks as being too big to fail, they have had the advantage of running their business with a much greater level of leverage and a consistently lower cost of capital and debt,” said Hoenig, who has been a persistent critic of policies that favor the nation’s largest banks.

“Despite the provisions of the Dodd-Frank Act to end too-big-to-fail, community banks will continue to face higher costs of capital and deposits until investors are convinced it has ended,” Hoenig said.

Soujourners Magazine, April 1, 2012

In this cover story for Sojourners Magazine, Stacy Mitchell writes that there is remarkably little evidence to support the idea that bigger banks are superior and calls for a new set of rules—banking policies for the 99 percent.

One meaning of the word “occupy” involves asserting sovereignty over a place. For the demonstrators who set up camp in lower Manhattan last fall, “occupying” was a reassertion of popular sovereignty at the very epicenter of our economic system. It was a challenge to the power that giant corporations—and Wall Street banks in particular—have amassed. It was a challenge to the way these firms have captured the levers of government and rigged policy to protect their own positions and profits at the expense of everyone else.

More than three years after their reckless greed triggered the Great Recession, the nation’s biggest banks have paid almost no penalty and are bigger than ever. In 2007, the top four banks—Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo—held assets of $4.5 trillion, which amounted to 37 percent of U.S. bank assets. Today, they control $6.2 trillion, or 45 percent of bank assets, according to the Federal Deposit Insurance Corporation. For them, the recession was a brief hiccup, promptly ameliorated by a public bailout and a return to robust profitability. Last year, these four firms, together with the next two largest banks, Goldman Sachs and Morgan Stanley, paid out $144 billion in compensation, making 2011 their second highest payday ever. According to the Bureau of Labor Statistics, the average bank teller made $24,980 in 2010. Such rank-and-file employees didn’t benefit from the big bonuses and compensation packages which were heavily concentrated at the top of the corporate ladder.

Meanwhile, joblessness, staggering debt, and foreclosure have devastated countless families. Many have shared their stories on the We Are the 99 Percent Tumblr website, which should be required reading for the 1 percent. It provides a heart-breaking account of living in a society “made for them, not for us,” of drowning in debt and struggling merely to secure a means of keeping food on the table.

The Occupy movement brought this injustice to the forefront and reawakened American populism. It set the public discourse in a new direction and launched a conversation about the scale and structure of our banking system. Many Americans seem quite eager to have this conversation, and to act on it. Last fall, more than 600,000 people, citing the issues raised by Occupy, closed their accounts at big banks and moved to small local banks and credit unions.

WE RELY ON BANKS for three basic functions. Banks offer a safer alternative for parking one’s money than under the mattress. They facilitate payments, allowing businesses and individuals to use checks, credit cards, wire transfers, and other means to pay one another without having to physically exchange cash. Lastly, they extend credit, helping people buy homes and make other purchases, and enabling businesses to finance their growth.

For half a century, from the 1930s until the 1980s, this is what banking was all about. Laws enacted during the Great Depression strictly limited banks’ size and scope. Under the 1933 Glass-Steagall Act, banks that accepted deposits (and thus were covered by federal deposit insurance) were barred from investment banking activities, such as trading in securities. Banks were also limited to serving their home states and prohibited from expanding across state lines.

These policies kept much of our banking system in the hands of locally owned banks and credit unions. Banking practiced at a community scale is very different from banking at a global scale. For one thing, it creates a strong mutuality of interest between lender and borrower. Because local banks hold onto most of their loans, they have no interest in luring borrowers into mortgages they can’t repay. Local banks engage in what is often called “relationship banking.” They get to know their customers and the local economy, and use this “soft” information (which doesn’t show up on a credit report) to inform their lending decisions. This enables local banks to successfully make loans to a broader range of businesses and individuals.

This community-rooted banking system proved remarkably stable—between 1940 and 1980, there were fewer than 260 bank failures, compared to more than 2,800 in the years since. But in the 1980s, Congress and federal regulators began chipping away at the policies underpinning this system, lifting caps on interest rates and loosening mortgage rules. The 1990s saw the wholesale dismantling of the Depression-era policies. The barriers that kept banks from expanding across state lines were eliminated in 1994, opening the way for a wave of mergers. In 1999, Congress overturned Glass-Steagall, giving its blessing to the mixing of commercial and investment banking under one roof. Still more deregulation followed in the 2000s, when Congress shielded derivatives (contracts with a fluctuating value derived from underlying assets) from oversight and federal regulators exempted national banks from complying with state consumer protection laws, including, most disastrously, those governing subprime mortgages.

All of this was pushed through under the guise of allowing the financial system to modernize. Bigger banks, the argument went, would be efficient, reduce consumer costs, and produce innovative new financial products. Proponents of deregulation, including the influential former Federal Reserve Chair Alan Greenspan, insisted that oversight of the financial system was largely unnecessary. Financial firms’ own internal risk models and the discipline of the market, he argued, were far better at minimizing risk than government regulators.

Between 1985 and 2007, the number of banks in the U.S. fell from about 14,000 to 7,000, as smaller banks were bought up, first by regional and later by national banks. By 1995, a new breed of “giant” banks had emerged—massive conglomerates with more than $100 billion in assets (in today’s dollars). In 1995, these giants held 17 percent of bank assets. By 2010, their share had mushroomed to 59 percent. Meanwhile, the share of assets held by small and medium-sized banks (those under $10 billion in assets) fell from 47 to 22 percent.

As big banks took over, relationship banking was supplanted by anonymous “transactional” banking. Banks no longer shared a mutuality of interest with borrowers. Rather than hold mortgages on their books, the big banks pooled them together, converted them to securities, and sold slices of the resulting pie to investors. They made their money not as small banks had, by earning interest over the life of the loans, but through fees paid every time they issued a mortgage or sold a mortgage-backed security.

The more loans they made, securitized, and sold, the more fees these banks earned. In the lead-up to the crisis, Wall Street began stuffing the U.S. economy with more and more credit. This helped drive up housing prices, which attracted more investment dollars to mortgage-backed securities, which, in turn, spurred lenders to extend still more (and increasingly risky) loans.

On top of this, those promised “new financial products” came in the form of complex derivatives. Although some derivatives serve a legitimate purpose—such as helping a farmer hedge against the possibility of corn prices falling just as her crop comes in—the vast majority of what Wall Street cooked up, like the now-notorious credit default swaps, were nothing more than a means of gambling, a way to speculate on the future value of a mortgage security or a commodity. It was spectacularly profitable. Many financial elites and even policymakers began to see finance not as means of facilitating the “real economy”—the part concerned with producing actual goods and services—but as end in itself.

Unchecked, the financial industry grew to eclipse, and ultimately strangle, the real economy. Although often blamed, subprime mortgages did not cause the financial crisis. The value of these loans wasn’t large enough to deal such a death blow—and, as we can see today, it’s home loans in general, not just subprime ones, that are underwater. What brought down the system were the layers of derivatives piled on top of these loans. Derivatives were used to mislead investors about the risk that they were taking on. Also, because information about them generally didn’t have to be reported to regulators, no one knew who had how many. Wall Street had created an inverted pyramid, with trillions of dollars in speculative positions resting on a small base of doomed mortgages. When derivatives started going toxic en masse, no one knew which customers were going bankrupt next, and the whole pyramid collapsed, leaving the nation’s largest banks insolvent. Had it not been for extraordinary government intervention, most would have failed.

Through all of this, locally owned banks and credit unions stuck to their knitting. Few had any involvement with the Wall Street casino. Indeed, when the crisis hit, the vast majority were fine; they hadn’t made mortgages that were doomed to default or loaded up on toxic securities. Their real challenge came with the recession, as their customers lost jobs and fell behind on loan payments, and with the bursting of the Wall-Street-created real estate bubble, the property providing collateral for these loans plummeted in value. The government offered comparatively little help to community banks; they were treated as small enough to fail. The programs that were available were structured to meet the needs of big banks, not the particular challenges facing small ones. Since 2007, more than 400 community banks have failed.

THE FINANCIAL CRISIS spurred the first serious reconsideration of the bigger-is-better ideology that took hold more than 30 years ago. Some leading economists and policymakers have come out in favor of breaking up the big banks. During the congressional debate on financial reform, which began in late 2009, several proposals were put forward to fundamentally restructure banks, including a bill by Sens. Maria Cantwell and John McCain to reinstate the Glass-Steagall Act and another by Sen. Sherrod Brown to cap the size of banks.

Neither of these proposals passed. Instead, Congress crafted the Dodd-Frank Wall Street Reform Act, which left the banking system largely intact. It had a few good elements to be sure, notably the creation of the Consumer Financial Protection Bureau, but Dodd-Frank did nothing to alter the industry’s current structure. It merely tightened some of the rules under which banks operate. The debate over the law’s passage, meanwhile, offered still more evidence of the dangerous amount of political power held by big banks. Back on their feet and flush with profits, the banks deployed an army of lobbyists who succeeded in weakening many of the Dodd-Frank bill’s already modest provisions.

Wall Street assumed Dodd-Frank would be the last word on financial reform. But, as the Occupy movement and several other populist uprisings last year, including the National Nurses United march on Wall Street in June, made clear, Americans are not at all content with the idea of continued rule by a handful of financial monopolists.

THE EMPIRICAL EVIDENCE is on the side of populism.

Indeed, there is remarkably little hard data to support the idea that bigger banks are superior. They are not safer. Rather than reduce risk, highly concentrated and complex financial systems actually magnify and rapidly transmit it to the rest of the economy. Nor have big banks lowered costs for consumers. Fees for checking account services, such as overdrafts and stop-payment orders, are an average of 20 to 40 percent higher at big banks than at small banks and credit unions. Several studies have also found that big banks pay lower interest on savings and charge higher rates on many loans.

How can this be? The deregulation of the 1990s was sold to us on the grounds that economies of scale would enable bigger banks to operate more efficiently and cut costs. But it turns out that banks peak in efficiency at about $5 billion to $10 billion in assets, according to economists. Beyond that size they become weighed down by bureaucracy and actually operate less efficiently. Today’s giant banks are orders of magnitude larger—JPMorgan Chase, for example, has more than $2 trillion in assets—which suggests their dominance is less a function of market optimization than the exercise of political and economic power.

Nor does size deliver a wider array of services. Most local banks and credit unions offer the same services that big banks do. About 90 percent have online bill-pay and three-quarters offer credit cards. They adopt new technologies at nearly the same pace. One in seven local banks, for example, already allows customers to make payments with their smartphones, while half plan to install the service within two years. What they cannot do on their own, small institutions often accomplish by working together. Most credit unions, for example, belong to a national cooperative that gives their customers surcharge-free access to more than 28,000 ATMs.

Most compelling of all, small community-based financial institutions do far more for the real economy than their gambling-minded Wall Street rivals. Although small and mid-sized banks hold only 22 percent of bank assets, they account for 54 percent of all small business lending. The largest 20 banks, meanwhile, control nearly 60 percent of assets but provide only one-quarter of small business lending.

What accounts for this huge gap? Small business lending thrives in the context of relationship banking because it requires a nuanced judgment about the likelihood of a particular entrepreneur succeeding in a particular local market. Big banks, which make decisions at a distance, often relying on computer models, are not very good at sorting good credit risks from bad, so, rather than face higher defaults, they keep a tight rein on small business credit. The economic consequences are significant: Research has found that, all else being equal, regions dominated by big banks are home to fewer small businesses.

HOW DO WE RETURN to a banking system that is more local and more responsive to the needs of communities? Hundreds of thousands of people have already taken direct action by dumping their accounts at big banks and moving to a local bank or credit union. The shift has been sizable enough to expand the market share of credit unions by about 10 percent and give many small banks a boost. But we should remember that, while banks need deposits, loans are how they generate income. To have more of an impact, we need to move our borrowing too, including ditching our big bank credit cards for locally issued cards, and turning to local banks and credit unions when we need a new car loan or plan to refinance a mortgage.

But direct action by consumers will only get us so far, in part because big banks have other sources of funding besides our deposits. Ultimately, we must marshal our real power, as citizens, to deliver another round of policy change and tackle the problem of bigness head-on. That may seem a tall order, but it’s worth remembering that it took Franklin Roosevelt years to enact his full suite of banking reforms. Here are the policies we might start with:

Break up the biggest banks. In January, Public Citizen, a nonprofit group, petitioned federal regulators to break up Bank of America on the grounds that it “is too large and complex to manage or regulate properly, and its financial condition is poor and could deteriorate … causing a devastating financial crisis.” While the financial condition of other giant banks is not quite as precarious, the same logic applies to them. Regulators should untangle these conglomerates before we find ourselves in another financial crisis.

Enact anti-concentration policies. To spur more decentralization, Congress should reinstate Glass-Steagall’s separation of commercial and investment banks, cap the share of the nation’s deposits that any one bank can amass, and introduce a graduated tax on bank assets that would further deter bigness.

Protect consumers. Big banks have made much of their money by fleecing consumers, not only through fees but also by funding some of the nation’s worst predatory lenders. By cracking down on abusive practices, the new Consumer Financial Protection Bureau could create a more level playing field for responsible financial institutions.

Penalize speculation. A growing movement is calling for a financial transaction tax, a modest tax on each Wall Street trade. The tax would be too small to burden legitimate investment, but would dampen high-speed trading and other forms of Wall Street speculation while raising revenue that could be invested in the real economy.

Establish public partnership banks in each state. The only state where local banks have flourished in recent decades is North Dakota, which has four times as many local banks per capita as the national average. Their strength is owed largely to the Bank of North Dakota, a publicly owned “bankers’ bank.” BND does not serve consumers directly but partners with local banks to increase their lending capacity. It’s a smart model, and more than half a dozen other states are now considering legislation to replicate it.

There is nothing inevitable about a highly concentrated banking system, in which speculation trumps productive investment. Today’s giant banks are the product of policies adopted in the 1980s and 1990s. Recent events have made the consequences of those policies painfully clear. It is time for a new set of rules—a banking policy for the 99 percent.

For background see “Too Big to Lend.”

Two years ago, Bank of America made headlines in nearly every major national news outlet when it announced it would “hire more than 1,000 small business bankers.”  It’s been using the hirings to gin up a steady stream of positive local press ever since, most recently in Florida, where newspapers reported last month that Bank of America was adding 130 of these special loan officers.

But what exactly these “small business bankers” have been doing is anyone’s guess.  Small business lending at Bank of America has plunged 38 percent since 2009, falling from $34 billion to $25 billion, according to FDIC data.

The story is much the same at the other giant banks.  Even as they’ve been pushing out marketing messages touting their support of small businesses, big banks, including JP Morgan Chase and Citigroup, have been steadily shrinking their small business portfolios.

Overall, the volume of small business lending at the nation’s largest 18 banks has fallen 21 percent since 2009.  But the picture is even worse when you consider that these banks have gained market share.  As a share of their assets, small business lending at these banks fell 33 percent. The top banks now control 60 percent of U.S. bank assets, but provide only 27 percent of small business loans.

Small business lending has fallen some at small and mid-sized banks, but not nearly as much as it has at big banks. Today, there are 938 fewer small and mid-sized banks than there were three years ago and their share of bank assets has fallen from 23 to 21 percent.  Even so, these banks continue to provide 54 percent of small business loans, the same share they held three years ago.

All of this adds up to what may be the most compelling argument for breaking up the nation’s biggest banks (by passing Senator Sherrod Brown’s SAFE Banking Act). A critical function of our banking system is financing small businesses and big banks are doing a rotten job of it.

Trying to cajole or compel them to do more won’t make much difference because the problem is largely inherent to their scale.  They lack the local decision-making and intimate knowledge of local borrowers and local markets that small banks have, which leaves them ill-equipped to make smart judgments about the likelihood that a particular business will succeed or fail.

This mismatch between the scale of banks and the needs of the real economy is hurting the recovery. A NYSE survey published in August reported that 47 percent of small businesses have been unable to secure the funds they need and two-thirds are planning either layoffs or no new hiring in 2013.

There are long-term consequences too.  Studies have found that regions where big banks are especially dominant end up with fewer small businesses and slower job growth over time than areas where small local banks are still vigorous.

In a recent survey by George Washington University and Thumbtack.com, 6,000 small business owners were asked an open-ended question: “What policies or programs could the government change or implement that would help your business?”  The policy most commonly mentioned by small businesses had nothing to do with taxes or regulation.  It was improved access to loans.

As actual small businesses struggle, big banks continue to use the idea of small businesses to prop up their own image.  A couple of weeks ago, 13 big banks publicly congratulated themselves on reaching the halfway mark in a pledge made last fall to increase small business lending by $20 billion.  As Ami Kassar reported in his New York Times blog, the banks achieved this with two audacious sleights of hand.  They counted companies with up to $20 million in annual revenue as “small.” And they raised the credit limit on many existing lines of credit, counting these dollars as loan growth even if the borrowers did not actually tap into the extra credit.

Perhaps dreaming up PR schemes like this is what all those “small business bankers” at Bank of America spend their days doing.

While just 24 percent of big banks offer totally free checking, more than 60 percent of credit unions and small banks do, according to a new report (“Big Banks, Bigger Fees“) from the U.S. Public Interest Research Group (PIRG).

To gather data for the report, PIRG staff made inquiries at over 300 bank and credit union branches in 17 states. They found that credit unions and small banks have lower fees on average and do a better job of disclosing fees to prospective customers.

(Data from 2009 likewise show that, the bigger the bank, the higher the fees.)

PIRG also found that many financial institutions are failing to comply with the Truth In Savings Act, which requires that banks make complete fee schedules available to prospective customers. Just 42 percent of big banks provided comprehensive fee information on the first request, while 52 percent of small banks and 64 percent of credit unions did.

One potential downside of banking at a small bank or credit union is that these institutions do not have large national ATM networks like the big banks do. But PIRG found that small institutions are increasingly addressing this. The report found that one-quarter of small banks are not charging an “off-us” fee when a customer uses another bank’s ATM (compared to just 6 percent of big banks). Some small banks are even reimbursing customers for ATM surcharges (which are levied by the bank that owns the machine), allowing for several transactions per month at any ATM at no cost.

Credit unions, not surprisingly, have approached this problem cooperatively. Through a national agreement, customers of most credit unions can access more than 28,000 ATMs owned by other credit unions for free.

While smaller institutions are slightly slower in adopting the latest technologies, they do catch up.  A recent survey by the Independent Community Bankers of America, for example, found that half of local banks already offer or plan to offer mobile banking by 2013.  Most are also moving quickly to adopt remote image deposit.  Many other services, including online bill payment, credit cards, and wire transfers, are already standard at the vast majority of community banks (see this graph).

In this TEDx talk, delivered on October 20, 2012 at TEDxDirigo‘s Villages conference at Bates College in Lewiston, Maine,  conference, ILSR Senior Researcher Stacy Mitchell argues for a new phase in the local economy movement. She notes that there’s been a resurgence of support for small farms, local businesses, and community banks, but argues:

“As remarkable as these trends are, they are unlikely to amount to more than an small sideshow on the margins of the mainstream if the only way we can conceive of confronting corporate power and bringing about a new economy is through our buying decisions… What we really need to do is change the underlying policies that shape our economy. We can’t do that through the sum of our individual behavior in the marketplace. We can only do it by exercising our collective power as citizens.”

Please watch and leave us your comments. And please share it. (The “Share” button on the YouTube page makes it easy to embed the video on your own website or Facebook.)

Local farms, independent retailers, and community banks are all experiencing newfound public support and growing in number. While these trends are encouraging, local businesses still account for only a small share of the economy. In this 15-minute talk, delivered at the ISEC’s Economics of Happiness conference in May 2012, ILSR’s Stacy Mitchell presents a compelling case for moving local enterprises from the economy’s margins to its mainstream.

Stacy Mitchell – Local Revival from The Economics of Happiness on Vimeo.

Stacy Mitchell is a senior researcher for the Institute for Local Self-Reliance, and the author of Big-Box Swindle: The True Cost of Mega-Retailers. This is her plenary talk at ISEC’s Economics of Happiness Conference 2012, held in Berkeley, California. For more information about Stacy Mitchell, go to www.ilsr.org/stacy-mitchell/ To learn more about the Economics of Happiness Conference or about ISEC’s work, go to www.theeconomicsofhappiness.org.

This presentation was delivered on June 14, 2013, at the BALLE Conference in Buffalo, New York.  Download a PDF version of the text. 

Welcome, everyone.  Thanks for being here.  (Slide 2)  I’m Stacy Mitchell.  I direct the Institute for Local Self-Reliance’s Independent Business Initiative, which provides research, policy analysis, and tools to help communities gain greater control over their own economic futures.

Let me begin by offering a little background on this session. (Slide 3)  The movement for local economies has grown dramatically over the last decade.  We’ve attracted public support and engaged tens of thousands of entrepreneurs and community leaders.  But I think we’ve reached a point where we can’t get much further solely with the strategies we’re using now.  We’re at a stage where we need to up our game.  I want to suggest to you today that moving a policy agenda is a key part of what we need to do.

I’m hoping we can tackle four key questions in this session (Slide 4):

• Why is changing public policy essential to our success?
• How can we frame a compelling narrative for policy change?
• What would be the primary components of our agenda?
• What are the initial steps we need to take?

The format for today is that I’m going to kick off the session by providing some thoughts on each of these questions. Then we’re going to turn to the panel.  We have four terrific panelists today: Kimber Lanning of Local First Arizona; David Levine of the American Sustainable Business Council; Micaela Shapiro-Shellaby of the Coalition for Economic Justice here in Buffalo; and Jonathon Welch, owner of Talking Leaves Books, also here in Buffalo.  They each have a story to share about a policy win that will help us reflect on some of these themes.  And then we’re going to have a roundtable discussion. I’ll be bringing in all of you at that point for what I hope will be a lively conversation.  So, with that, let me dive in.

Why is it essential that we work on policy now?

(Slide 5) Let me give you the “good news/bad news” story on where things stand in a few sectors.

Let’s start with food. The good news is that we’ve seen remarkable regeneration of local food systems over the last ten years. (Slide 6) The U.S. is home to 112,000 more small farms today than existed in 2002.  (Slide 7) The number of farmers markets has grown from about 3,000 to almost 8,000.  (Slide 8) And, perhaps most surprising of all, we’ve added over 1,400 new locally owned small grocery stores, many of which are succeeding by specializing in locally produced food.

(Slide 9) But here’s the bad news.  All of this activity is still a very small part of the food system.  Locally grown foods, including those marketed directly to consumers and those sold in grocery stores, account for less than 2 percent of the market.  (Slide 10) If we look at independent grocers, although they have grown in numbers, their overall market share has shrunk from about 25 to 20 percent in the last decade.  Meanwhile, we’ve experienced massive consolidation in the rest of the food system. (Slide 11) Walmart was a small player in the grocery industry 15 years ago, with only about 4 percent of grocery sales.  (Slide 12) Today it captures one of every four dollars Americans spend on groceries. (Slide 13) The top 5 supermarket chains have grown from one-quarter of the market to one-half.

(Slide 14) This consolidation among retailers has triggered a wave of mergers among food processing companies, as they try to bulk up to hold their own selling to Walmart.  Four meatpackers now account for 85 percent of the nation’s beef.  A single dairy company, Dean Foods, processes 40 percent of the milk produced nationally and 70 percent of the milk in New England.  (Slide 15) With a single dominant buyer of milk, dairy farmers are struggling to get a fair price.  As consumers, we don’t even notice the demise of choice, because Dean Foods markets under dozens of different brands.

So, local food enterprises are flourishing, but they are still a sliver of the market. The rest of the food system, meanwhile, has become more concentrated and industrialized than ever before.

(Slide 16) Or look at banking. On the heels of a massive financial crisis, there was a sudden, widespread public recognition of the fallacies of big banks and a mass movement to shift deposits to local banks and credit unions.  Hundreds of thousands, certainly, and probably more like millions, of people have moved their accounts.  Credit unions have gained 7 million new members since 2007.

(Slide 17) And, yet, in that same space of time, one of every five locally owned banks and credit unions closed their doors.  That’s about 3,000 fewer local financial institutions than we had six years ago.  The share of banking assets held by local banks and credit unions has shrunk, as has their share of U.S. deposits.  Meanwhile, the largest banks have gained ground and are now bigger than ever.  Let me show you what that shift looks like. (Slides 18, 19, 20) Today, giant banks hold 56 percent of bank assets.  (Slide 21) If you look closer, in fact, you’ll see that the banking system is largely in the hands of just four banks, each of which has a staggering $2 trillion in assets.

Or consider the independent retail sector.  (Slide 22) Independent Business Alliances and Local First campaigns have taken root in over 150 cities.  ILSR’s annual Independent Business Survey has consistently found that these initiatives are making a difference.  And, indeed, we’ve seen a remarkable reversal of the trends in some key sectors. (Slide 23) There are 249 more independent bookstores today than there were in 2009.  (Slide 24) The number of independent fabric stores, pet stores, and small neighborhood food markets has grown.

(Slide 25) And yet, the overall market share of independent retailers continues to fall. Walmart is opening 219 new stores in the U.S. this year and 260 next year.  (Slide 26) And the future of retail looks even more ominous.  A single company, Amazon, now captures one-third of online orders and is doubling in size every two to three years.

What’s going on? The localism movement is driving real change that we can measure, but it is running up against major structural forces that are moving the economy in the opposite direction.  (Slide 27) Chief among those forces are government policies that undermine local businesses and expand corporate power.

Let me give you a few examples. (Slide 28) Since 1995, through the farm bill, the federal government has distributed $275 billion to farmers.  Nearly 80 percent of those dollars went to the largest 10 percent of farms in the country.  It’s no wonder that a quarter-pounder often costs less than a pound of locally grown broccoli. (Slide 29) Our state and federal tax codes, meanwhile, are littered with loopholes that big corporations can use to escape taxes that their smaller competitors must pay.  This modest office building in Wilmington, Delaware, has only a few parking spots, but it’s an address used by hundreds of companies, including Walmart, General Motors, and CVS, as part of a scheme to avoid paying state corporate income taxes.  (Slide 30) In the banking sector, as we all know, our response to the financial crisis was to create a slew of programs and policies that bailed out big banks and made it harder for local banks to survive.

Local, state, and federal policy have all conspired to tilt the playing field. My concern is that, if the only way we try to transform the economy is through our individual actions as consumers, investors, and entrepreneurs, local enterprises are going to remain little more than an interesting side-note on the margins of the economy.  It’s not that our consumer choices don’t matter.  They absolutely do, especially to the local businesses, banks, and farms that count on those dollars.  But as consumers we’re too weak to change the larger dynamic.  (Slide 31) It’s as though we have to push a giant boulder up a hill. In theory, if we aligned all of our purchasing decisions, we could do it.  But that’s a tall order in the real world.  It’s a hard way to make change.

(Slide 32) Our real power lies in our citizenship.  (Slide 33) We need to use our political muscle as citizens to level the playing field and to make the job of growing local economies easier.  We’re much more powerful as citizens than we are as consumers. Corporations know this, which is why they are always talking about us and positioning us as consumers, while weakening our authority as citizens.  We need to reclaim our citizenship and start advancing change not just in terms of buying locally or even investing locally, but in joining with our friends and neighbors to remake public policy.

How can we frame a compelling narrative for policy change?

(Slide 34) We need a shared framework and narrative that all of our allied organizations — Local First groups and Independent Business Alliances, as well as national organizations like ILSR — can use to convey our vision for the economy and build momentum for change.  By incorporating this shared language across our various campaigns and initiatives, we can begin to make the local economy story part of the public discourse and, as this narrative gains currency, it will in turn strengthen and improve our odds of winning  specific policy campaigns.

(Slide 35) To give you an example of what I’m talking about, consider the idea of “limited government,” which has had an enormous impact on policy-making in the last thirty years.  We can all explain the basic story of limited government: It’s the idea that if we shrink government and get government out of the way, people and companies will be free to innovate and grow the economy.  It’s an idea loaded with powerful values, like freedom. Whether you agree with it or not, it’s a policy narrative that influences many debates over federal regulations, state budgets, and so on.

(Slide 36) We would do well to articulate a similarly bold and value-laden framework for a localist policy agenda.  For ILSR, the heart of the story is about community self-determination. It’s about breaking the power that big corporations have over our livelihoods, our democracy, and our environment.  It’s about shifting economic activity to locally and cooperatively owned enterprises that are accountable to their communities and operating at a sustainable scale.

(Slide 37) One outcome of this transition would be a more democratic distribution of wealth and income, as well as a richer variety of meaningful jobs, something our current economy fails to deliver.  Another would be a dramatic narrowing of the distance between those who make economic decisions and those who feel the impacts, resulting in a more responsible approach to natural systems and the environment.  And, finally, it would lead to more resilient communities; in times of rapid change, economic resources that are controlled locally are much more readily marshaled and reconfigured to meet shifting local realities.

For ILSR anyway, that’s the compelling narrative. The challenge is how to best communicate, promote, and advance these ideas.  That’s what I’m hoping we can dig into during today’s roundtable conversation and in the open space session that follows.

What would be the primary components of a localist policy agenda?

(Slide 38) Let me suggest seven broad areas of policy change that we need to pursue.

1. Stop Subsidizing the Corporate Economy (Slide 39)

We need a national campaign for a level playing field.  Governments provide billions of dollars a year in subsidies and tax advantages for the biggest companies.  Most people have only a dim idea of the degree to which this goes on.  They assume that local businesses are failing because they can’t compete, but, to a large extent, it’s because the game is rigged.

There are some bright spots.  (Slide 40) After many years in which local governments in the Phoenix metro gave multi-million dollar subsidies to shopping mall developers and big-box stores, the state finally passed a policy that effectively bans these subsidies.

(Slide 41) A handful of states in the last few years have adopted combined reporting, which closes a loophole that allows big companies to dodge paying income taxes. (Slide 42) This brings the total number of states that have adopted this policy to about half.

(Slide 43) Last month, the U.S. Senate passed the Marketplace Fairness Act, which would, at long last, extend to large online retailers the same requirement to collect sales taxes that local brick-and-mortar stores are subject to.

We need to draw public attention to and fight to end all of these kinds of inequities in our tax and incentive policies.

2. Restructure the Financial System to Operate at a Community Scale  (Slide 44)

(Slide 45) Right now, we have a banking system that operates at a giant global scale.  Not surprisingly, it does a great job of financing giant global corporations, extracting wealth from local communities, and concentrating assets in the hands of a few.

(Slide 46) If we want to regenerate local economies, we need a banking system that operates at a community scale.  We need to break up the big banks and return to the decentralized financial sector we had 25 years ago, in which local banks and credit unions held the majority of the assets.  In some respects, the policy solutions in this sector are quite simple, because it’s a matter of resurrecting the rules that governed U.S. banking from the 1930s to the 1990s.

There are many reasons why this is critical.  One is that local banks have a mutual interest with their customers.  In the words of a community banker in Minneapolis, “We do well when our borrowers do well.”  As has recently been made clear, that is not at all the case with big banks.  Their own short-term interests very often run directly counter to the interests of their borrowers and customers.

(Slide 47) Another reason is that local banks provide the lion’s share of small business loans.  Although small and mid-sized community banks account for only about one-quarter of bank assets, they provide almost 60 percent of small business loans.  Big banks hold over half the assets, but provide only about one-quarter of the small business loans.  Lacking deep knowledge of local markets and borrowers, big banks have a much harder time accurately judging risk and therefore limit their small business lending.

(Slide 48) In terms of solutions, at the federal level, there’s a bill in Congress that has gathered some support, the Brown-Vitter Bill, which would require big banks to hold more capital and would likely spur the biggest banks to break up.

Several states, meanwhile, are looking at the idea of creating State Partnership Banks, modeled on the Bank of North Dakota.  Many of you are probably familiar with the Bank of North Dakota, which uses the state government’s deposits to expand the lending capacity of local banks and provide a secondary market for mortgages.  It’s the reason that North Dakota has four times as many local banks per capita as the U.S. as a whole, as well as much more robust local business lending.

At the local level, a growing number of people are beginning to talk about how to establish Local Economy Investment Pools that would allow cities, counties, and other institutions to invest a portion of their funds in financing local economy enterprises and infrastructure.

3. Adopt Planning Policies that Create Great Habitat for Local Businesses (Slide 49)

(Slide 50) Zoning is one of the most powerful tools communities have for shaping the built environment and nurturing the kind of economy they want to see. Indeed, it’s no coincidence that the U.S. cities that have the highest concentrations of independent businesses have zoning rules that protect historic buildings, favor pedestrians and transit over cars, mandate multi-story mixed used buildings, and  insist on humanly scaled development.  (Slide 51) In cities where zoning rules do the opposite — undermine traditional commercial districts and encourage auto-oriented sprawl — independent businesses are often few and far between.

(Slide 52) Some communities have found other innovative ways to use zoning to support the local economy.  San Francisco, for example, has a formula business policy that limits the ability of chains to open in a neighborhood unless they meet specific criteria in the law and have the support of the neighbors.  Not surprisingly, the city is home to many more independent grocers, hardware stores, bookstores, and other retailers than other large U.S. cities.

(Slide 53) Another example is Cape Cod.  In 1990, voters created the Cape Cod Commission, a regional body composed of representatives of each of the Cape’s fifteen towns.  The commission has the authority to review, and reject, large development projects that could significantly impact the local economy or environment, including any commercial building over 10,000 square feet.  In order to be approved, the project has to demonstrate that it’s going to be good for the economy.  The commission’s decisions are guided by a Regional Policy Plan, which t frowns on development outside of town centers and favors projects that protect the Cape’s character, expand local ownership, and enable the region’s communities to meet more of their own needs instead of relying on imports.

4. Enforce Strong Competition Policies (Slide 54)

(Slide 55) We need to stop allowing big companies to use their size and power to game the market and undermine their local competitors.  At various points in our history, we have been called upon to break-up dangerous concentrations of market power, and we now find ourselves at another one of those moments.
For many decades, the primary aim of antitrust policy was to maintain a large number of mostly small businesses and limit concentrations of market power.  But this began to change in the 1980s, when antitrust policy became narrowly focused on consumer prices.  Antitrust authorities took the position that, as long as a company could deliver lower prices in the short term, it didn’t matter how big it became or how much market power it amassed.

This approach has been a disaster for small businesses and competition.  We need to reclaim the original spirit of antitrust policy.  Dairy farmers should have a variety of processors competing for their milk.  Prescription benefit management companies should not be allowed to force consumers to use a mail-order prescription service owned by the benefit company instead of a community pharmacy.  A single retailer should not be allowed to capture half of the grocery market, which is the share Walmart now has in about 40 metro areas. (To give you a sense of how much things have changed, in 1966, the U.S. Supreme Court blocked a merger between two supermarket chains, because together they would have 9 percent of the market in Los Angeles.)

These are all very common-sense statements that would resonate strongly with most Americans and certainly most independent business owners. It’s up to us to start this conversation and build the popular support necessary to chance current policy and enforcement practices.

5. Shift Spending by Public Institutions (Slide 56)

The spending choices of our schools, city agencies, state governments, public universities, public hospitals, and so on should reflect our values and be guided by a principle of maximizing economic outcomes for local communities.  That can be accomplished in part by implementing a modest price preference for goods and services produced or provided by local businesses.

6.  Make Targeted Local Economy Investments (Slide 57)

There are areas of the country where wealth and resources have been so depleted that simply removing barriers and creating the right environment for local entrepreneurs is not enough.  There are also sectors of the economy where key pieces of infrastructure for local production and distribution are missing.  Both kinds of gaps need targeted intervention.

(Slide 58) One example of how to do this is the Pennsylvania Fresh Food Financing Initiative.  Seeded with $30 million in state money, this loan fund has raised more than $120 million in capital to finance over 80 locally owned grocery stores in low-income urban and rural communities that lacked stores selling fresh food and where conventional bank loans for start-up food retailers were hard to come by.  All but one of the businesses financed by this program have been successful.

7.  Collect Better Data and Set Benchmarks to Track Progress (Slide 59)

Local and state governments, as well as the federal government, collect lots of data on the economy, but the information they gather and publish is not very useful for tracking the market share of place-based enterprises.  Few states could tell you, for example, what share of their food comes from local or regional sources.  No state regularly analyzes economic leakages to see where there are opportunities to develop local industries to meet local needs.  Many states do not even publish information on the economic development incentives they provide and the outcomes of those giveaways.

Cities, meanwhile, collect information on every business that applies for a license to operate and, yet, no city that I know of could tell you what percentage of its retail space is occupied by locally owned businesses and how that has changed over the last decade.  At the federal level, the U.S. Economic Census contains useful data, but it is released so slowly that it’s invariably out-of-date and some of the most relevant data are published only at the national level and not broken down by state or city.

All of this makes it difficult to measure change over time and see the impact of policy changes.  We need to direct public agencies to collect better, more relevant data about the economy, which would enable us to establish benchmarks to track progress.

What are the steps we need to take to advance this agenda?

(Slide 60) Let me suggest three fronts as we move forward.  First, as I said earlier, I think we need to work together to develop a shared narrative and policy statement that independent business networks and local economy groups can publicize and incorporate into their own activities and campaigns.  That’s a process that we’ll begin today in the open-space session and continue in the coming months, inviting other allies who are not here today to join in.

Second, we need hard data to back up this vision for the economy.  To this end, we need to continue to build the empirical case for a decentralized economy.  We need rock-solid research demonstrating that locally owned, community-scaled enterprises are viable and have the potential to comprise a major share of the economy.  This is a significant part of what ILSR does.  (Slide 61) We’ve produced, for example, an analysis showing that most states could meet all or most of their energy needs with small-scale renewable power production.  (Slide 62) Our research also has shown that the optimal size for a bank, both in terms of efficiency and productive lending, is many times smaller than the giant banks that now dominate our economy.

(Slide 63) Lastly, we need to build power and political capacity among independent business owners and advocates.  That’s why the work your organizations are doing to bring independent businesses together to solve their common challenges is so crucial and I hope you’ll join with us in making policy change a central part of your strategy.

Over the last few years, the U.S. Small Business Administration (SBA) has dramatically reduced its support for smaller small businesses and shifted more of its loan guarantees to larger small businesses.  (The SBA’s definition of a “small” business varies by sector, but can be quite large.  Retailers in certain categories, for example, can have up to $21 million in annual sales and still be counted as small businesses.)  Under the SBA’s flagship 7(a) loan program, the number of loans for less than $150,000 has declined precipitously.  In the mid 2000s, the SBA guaranteed about 80,000 of these loans each year, and their total value accounted for about 25 percent of the loans made under the program.  By 2013, that had dropped to 24,000 loans comprising just 8 percent of total 7(a) loan volume.  Meanwhile, the average loan size in the program doubled, from $180,000 in 2005 to $362,000 in 2013.

Since 2000, the overall volume of business lending per capita at banks has grown by 26 percent (adjusted for inflation).  But this expansion has entirely benefited large businesses.  Small business loan volume at banks is down 14 percent and micro business loan volume is down 33 percent.  While credit flows to larger businesses have returned to their pre-recession highs, small business lending continues to decline and is well below its pre-recession level.

Even as their big competitors are awash in capital, many locally owned businesses are struggling to secure the financing they need to grow.  A new ILSR analysis has found that, since 2000, bank lending to large businesses is up 36 percent, while small business loan volume has fallen 14 percent and  “micro” business loans — those under $100,000 — have plummeted 33 percent.

(The largest corporations do not even need to rely on bank loans, of course, but can finance their growth through the soaring stock and corporate bond markets.)

The problem is not a lack of demand.  In our 2014 Independent Business Survey, 42 percent of business owners that needed a loan in the previous two years reported being unable to obtain one.  Startups, businesses with fewer than 20 employees, and enterprises owned by minorities and women are having an especially difficult time.  Even with the same business characteristics and credit profiles, small businesses owned by African-Americans and Latinos are less likely to be approved for loans, according to one recent study.

One consequence of this credit shortage is that many small businesses are either not adequately capitalized or have been forced to rely on high-cost alternatives, such as credit cards.  Both scenarios make them more vulnerable to failing.

The broader consequences for our economy are significant.  Studies show locally owned businesses are a primary source of net new job creation, contribute to higher median household incomes, and increase social capital.  Yet independent businesses in many sectors are losing market share, while the number of new startups has steadily fallen over the last two decades.  Insufficient capital is a key culprit driving these trends.

To shed light on this problem and help inform policy discussions,  ILSR has published an overview of the small business lending landscape. Among the key takeaways:

• Local community banks provide a disproportionate share of small business loans.  Indeed, it is their decline, in both numbers and market share, that is largely to blame for the constriction in small business lending.  As local banks lose ground to big banks, there are fewer financial institutions focusing on small business lending and fewer resources devoted to it. The top 4 banks now control 43 percent of all banking assets, but account for only 16 percent of small business loans.  
• Credit unions account for less than 7 percent of small business loans, but have significantly expanded their lending in the last decade, growing from $14 billion in business loans to over $44 billion today.  Only about one-third of credit unions currently participate in this market, however. 
• Federal loan guarantees, provided through the U.S. Small Business Administration, have historically played an important role in expanding credit to small businesses that don’t quite meet conventional lending requirements.  In an alarming trend, however, the SBA has dramatically reduced its support for smaller businesses and shifted more of its loan guarantees to larger businesses (which still count as “small” under the agency’s expansive definitions).  Since the mid 2000s, the number of business loans under $150,000 guaranteed by the SBA each year has fallen from about 80,000 to 24,000.  Meanwhile, the SBA’s average loan size has more than doubled to $362,000.
• Crowdfunding has garnered a lot of attention recently as a potential solution to the small business credit crunch, but crowdfunding remains a tiny drop in the bucket, compared to the resources of the banking system.  At the beginning of 2014, banks and credit unions had about $630 billion in small business loans on their books.  The total volume of business financing provided through crowdfunding amounts to less than one-fifth of 1 percent of this. Although crowdfunding will undoubtedly grow and could emerge as a valuable source of capital for local enterprises, it does not obviate the need to fix the structural problems in our banking system that are impeding the development of community-scaled enterprises. 

ILSR’s overview outlines several policy approaches that focus on reducing concentration in the banking system, expanding community banks, allowing credit unions to make more loans to small businesses, and reorienting the SBA’s loan programs to once again meet the needs of truly small businesses.

by Olivia LaVecchia

When the country’s giant banks were teetering on the verge of collapse during 2008’s financial crisis, the U.S. government stepped in to bail them out. The banks were, in a phrase that has since become infamous, “Too Big To Fail.”

Would the government do it again? And does the expectation that it would step in give megabanks an unfair competitive advantage over local community banks?

Those are the questions at the heart of an eagerly awaited report released at the end of July by the Government Accountability Office, a nonpartisan federal department. In a conclusion that highlights the need for more regulatory action to reduce concentration in the banking system, the G.A.O. found that the answers to both questions are “yes.”

Six years after the bailout, the country’s biggest banks have only grown bigger. Just four megabanks, each with more than $1.5 trillion in assets, control 45 percent of the country’s banking industry, up from 37 percent in 2007, according to FDIC data. The consequences for the economy — higher consumer fees, fewer small business loans, and more risky speculative trading — are substantial.

To Senators David Vitter, a Republican from Louisiana, and Sherrod Brown, a Democrat from Ohio, these are among the signs that “Too Big To Fail” works as a kind of implicit insurance — and as such, a subsidy — for the megabanks. Because creditors and investors believe taxpayers will rescue the banks if anything goes awry, they are willing to finance big banks at much lower interest rates than they offer smaller institutions.

The Senators have introduced a bill, the “Terminating Bailouts for Taxpayer Fairness Act,” that aims to end this implicit government subsidy, and create a fairer playing field for community banks.

The Senators are also the ones who called for the G.A.O. report, in order to get a better sense of just how big the megabanks’ advantage is.

In the report, the G.A.O. looked at one particular benefit that the taxpayers’ guarantee nets the megabanks: whether they’re able to borrow money – issue debt – more cheaply than smaller financial institutions. Using 42 models, the G.A.O. found that though the benefit has tapered off in recent years, during the heart of the financial crisis, in 2008 and 2009, megabanks were able to borrow at significantly lower rates.

Since the release of the report, the financial industry has tried to spin these results in its favor, arguing that though the advantage once existed, recent reforms, like the Dodd-Frank Act of 2010, have ended it.

That reading, however, misses the full picture. It makes sense that in the current stable economy, unworried creditors view banks as on an even field, and the advantage of the government’s backing drops. But the G.A.O. study shows that the value of the government’s guarantee soars during times of crisis, when creditors are more concerned about a bank’s backup plan. In other words, when we again hit turbulent financial waters, the biggest banks will benefit – a mechanism that not only undercuts smaller institutions, but rewards the megabanks’ risk-taking.

“[The] report confirms that in times of crisis, the largest megabanks receive an advantage over Main Street financial institutions,” Sens. Brown and Vitter said in a joint statement. “Wall Street lobbyists may try to spin that the advantage has lessened. But if the Army Corps of Engineers came out with a study that said a levee system works pretty well when it’s sunny – but couldn’t be trusted in a hurricane – we would take that as evidence we need to act.”

In a Senate Banking subcommittee hearing the day after the report’s release, experts testified to the scale of the subsidies. One, taxpayer guarantee authority Edward J. Kane, argued that the G.A.O study looks at only one benefit, and that other benefits the megabanks receive from the government’s backing – for instance, paying their stockholders lower returns – mean that the value of the subsidy is even greater.

The G.A.O. report underscores the need to eliminate Too Big To Fail policies, and the “advantages and distortions they create,” as Sen. Brown said at the hearing. To do this, Sens. Brown and Vitter have proposed a series of changes in the “Terminating Bailouts for Taxpayer Fairness Act” that would sharply reduce the possibility of government bailouts for megabanks in the future.

The bill would require the largest banks — those with more than $500 billion in assets — to rely on equity capital for at least 15 percent of their funding. That would effectively put investors, rather than taxpayers, on the front lines should a megabank sustain large losses. The largest eight U.S. banks currently derive only 5 percent of their funding from shareholders, according to the FDIC.

Under the proposed bill, community banks’ capital requirements, currently about 10 percent, would remain unchanged. Mid-sized regional banks would be required to hold 8 percent equity.

In the wake of the G.A.O. report, Sens. Brown and Vitter are renewing their call for change. “Unless you think we can eliminate financial crises forever,” Sen. Brown said at the hearing, “the G.A.O.’s report is another reminder that we have more work to do.”

–

Olivia LaVecchia, an award-winning journalist, is a former staff writer for City Pages.

Photo credit: Michael Aston

Two years ago, Bank of America made headlines in nearly every major national news outlet when it announced it would “hire more than 1,000 small business bankers.”  It’s been using the hirings to gin up a steady stream of positive local press ever since, most recently in Florida, where newspapers reported last month that Bank of America was adding 130 of these special loan officers.

But what exactly these “small business bankers” have been doing is anyone’s guess.  Small business lending at Bank of America has plunged 38 percent since 2009, falling from $34 billion to $25 billion, according to FDIC data.

The story is much the same at the other giant banks.  Even as they’ve been pushing out marketing messages touting their support of small businesses, big banks, including JP Morgan Chase and Citigroup, have been steadily shrinking their small business portfolios.

Overall, the volume of small business lending at the nation’s largest 18 banks has fallen 21 percent since 2009.  But the picture is even worse when you consider that these banks have gained market share.  As a share of their assets, small business lending at these banks fell 33 percent. The top banks now control 60 percent of U.S. bank assets, but provide only 27 percent of small business loans.

Small business lending has fallen some at small and mid-sized banks, but not nearly as much as it has at big banks. Today, there are 938 fewer small and mid-sized banks than there were three years ago and their share of bank assets has fallen from 23 to 21 percent.  Even so, these banks continue to provide 54 percent of small business loans, the same share they held three years ago.

All of this adds up to what may be the most compelling argument for breaking up the nation’s biggest banks (by passing Senator Sherrod Brown’s SAFE Banking Act). A critical function of our banking system is financing small businesses and big banks are doing a rotten job of it.

Trying to cajole or compel them to do more won’t make much difference because the problem is largely inherent to their scale.  They lack the local decision-making and intimate knowledge of local borrowers and local markets that small banks have, which leaves them ill-equipped to make smart judgments about the likelihood that a particular business will succeed or fail.

This mismatch between the scale of banks and the needs of the real economy is hurting the recovery. A NYSE survey published in August reported that 47 percent of small businesses have been unable to secure the funds they need and two-thirds are planning either layoffs or no new hiring in 2013.

There are long-term consequences too.  Studies have found that regions where big banks are especially dominant end up with fewer small businesses and slower job growth over time than areas where small local banks are still vigorous.

In a recent survey by George Washington University and Thumbtack.com, 6,000 small business owners were asked an open-ended question: “What policies or programs could the government change or implement that would help your business?”  The policy most commonly mentioned by small businesses had nothing to do with taxes or regulation.  It was improved access to loans.

As actual small businesses struggle, big banks continue to use the idea of small businesses to prop up their own image.  A couple of weeks ago, 13 big banks publicly congratulated themselves on reaching the halfway mark in a pledge made last fall to increase small business lending by $20 billion.  As Ami Kassar reported in his New York Times blog, the banks achieved this with two audacious sleights of hand.  They counted companies with up to $20 million in annual revenue as “small.” And they raised the credit limit on many existing lines of credit, counting these dollars as loan growth even if the borrowers did not actually tap into the extra credit.

Perhaps dreaming up PR schemes like this is what all those “small business bankers” at Bank of America spend their days doing.

While just 24 percent of big banks offer totally free checking, more than 60 percent of credit unions and small banks do, according to a new report (“Big Banks, Bigger Fees“) from the U.S. Public Interest Research Group (PIRG).

To gather data for the report, PIRG staff made inquiries at over 300 bank and credit union branches in 17 states. They found that credit unions and small banks have lower fees on average and do a better job of disclosing fees to prospective customers.

(Data from 2009 likewise show that, the bigger the bank, the higher the fees.)

PIRG also found that many financial institutions are failing to comply with the Truth In Savings Act, which requires that banks make complete fee schedules available to prospective customers. Just 42 percent of big banks provided comprehensive fee information on the first request, while 52 percent of small banks and 64 percent of credit unions did.

One potential downside of banking at a small bank or credit union is that these institutions do not have large national ATM networks like the big banks do. But PIRG found that small institutions are increasingly addressing this. The report found that one-quarter of small banks are not charging an “off-us” fee when a customer uses another bank’s ATM (compared to just 6 percent of big banks). Some small banks are even reimbursing customers for ATM surcharges (which are levied by the bank that owns the machine), allowing for several transactions per month at any ATM at no cost.

Credit unions, not surprisingly, have approached this problem cooperatively. Through a national agreement, customers of most credit unions can access more than 28,000 ATMs owned by other credit unions for free.

While smaller institutions are slightly slower in adopting the latest technologies, they do catch up.  A recent survey by the Independent Community Bankers of America, for example, found that half of local banks already offer or plan to offer mobile banking by 2013.  Most are also moving quickly to adopt remote image deposit.  Many other services, including online bill payment, credit cards, and wire transfers, are already standard at the vast majority of community banks (see this graph).

In this TEDx talk, delivered on October 20, 2012 at TEDxDirigo‘s Villages conference at Bates College in Lewiston, Maine,  conference, ILSR Senior Researcher Stacy Mitchell argues for a new phase in the local economy movement. She notes that there’s been a resurgence of support for small farms, local businesses, and community banks, but argues:

“As remarkable as these trends are, they are unlikely to amount to more than an small sideshow on the margins of the mainstream if the only way we can conceive of confronting corporate power and bringing about a new economy is through our buying decisions… What we really need to do is change the underlying policies that shape our economy. We can’t do that through the sum of our individual behavior in the marketplace. We can only do it by exercising our collective power as citizens.”

Please watch and leave us your comments. And please share it. (The “Share” button on the YouTube page makes it easy to embed the video on your own website or Facebook.)

Local farms, independent retailers, and community banks are all experiencing newfound public support and growing in number. While these trends are encouraging, local businesses still account for only a small share of the economy. In this 15-minute talk, delivered at the ISEC’s Economics of Happiness conference in May 2012, ILSR’s Stacy Mitchell presents a compelling case for moving local enterprises from the economy’s margins to its mainstream.

Stacy Mitchell – Local Revival from The Economics of Happiness on Vimeo.

Stacy Mitchell is a senior researcher for the Institute for Local Self-Reliance, and the author of Big-Box Swindle: The True Cost of Mega-Retailers. This is her plenary talk at ISEC’s Economics of Happiness Conference 2012, held in Berkeley, California. For more information about Stacy Mitchell, go to www.ilsr.org/stacy-mitchell/ To learn more about the Economics of Happiness Conference or about ISEC’s work, go to www.theeconomicsofhappiness.org.

This presentation was delivered on June 14, 2013, at the BALLE Conference in Buffalo, New York.  Download a PDF version of the text. 

Welcome, everyone.  Thanks for being here.  (Slide 2)  I’m Stacy Mitchell.  I direct the Institute for Local Self-Reliance’s Community-Scaled Initiative, which provides research, policy analysis, and tools to help communities gain greater control over their own economic futures.

Let me begin by offering a little background on this session. (Slide 3)  The movement for local economies has grown dramatically over the last decade.  We’ve attracted public support and engaged tens of thousands of entrepreneurs and community leaders.  But I think we’ve reached a point where we can’t get much further solely with the strategies we’re using now.  We’re at a stage where we need to up our game.  I want to suggest to you today that moving a policy agenda is a key part of what we need to do.

I’m hoping we can tackle four key questions in this session (Slide 4):

• Why is changing public policy essential to our success?
• How can we frame a compelling narrative for policy change?
• What would be the primary components of our agenda?
• What are the initial steps we need to take?

The format for today is that I’m going to kick off the session by providing some thoughts on each of these questions. Then we’re going to turn to the panel.  We have four terrific panelists today: Kimber Lanning of Local First Arizona; David Levine of the American Sustainable Business Council; Micaela Shapiro-Shellaby of the Coalition for Economic Justice here in Buffalo; and Jonathon Welch, owner of Talking Leaves Books, also here in Buffalo.  They each have a story to share about a policy win that will help us reflect on some of these themes.  And then we’re going to have a roundtable discussion. I’ll be bringing in all of you at that point for what I hope will be a lively conversation.  So, with that, let me dive in.

Why is it essential that we work on policy now?

(Slide 5) Let me give you the “good news/bad news” story on where things stand in a few sectors.

Let’s start with food. The good news is that we’ve seen remarkable regeneration of local food systems over the last ten years. (Slide 6) The U.S. is home to 112,000 more small farms today than existed in 2002.  (Slide 7) The number of farmers markets has grown from about 3,000 to almost 8,000.  (Slide 8) And, perhaps most surprising of all, we’ve added over 1,400 new locally owned small grocery stores, many of which are succeeding by specializing in locally produced food.

(Slide 9) But here’s the bad news.  All of this activity is still a very small part of the food system.  Locally grown foods, including those marketed directly to consumers and those sold in grocery stores, account for less than 2 percent of the market.  (Slide 10) If we look at independent grocers, although they have grown in numbers, their overall market share has shrunk from about 25 to 20 percent in the last decade.  Meanwhile, we’ve experienced massive consolidation in the rest of the food system. (Slide 11) Walmart was a small player in the grocery industry 15 years ago, with only about 4 percent of grocery sales.  (Slide 12) Today it captures one of every four dollars Americans spend on groceries. (Slide 13) The top 5 supermarket chains have grown from one-quarter of the market to one-half.

(Slide 14) This consolidation among retailers has triggered a wave of mergers among food processing companies, as they try to bulk up to hold their own selling to Walmart.  Four meatpackers now account for 85 percent of the nation’s beef.  A single dairy company, Dean Foods, processes 40 percent of the milk produced nationally and 70 percent of the milk in New England.  (Slide 15) With a single dominant buyer of milk, dairy farmers are struggling to get a fair price.  As consumers, we don’t even notice the demise of choice, because Dean Foods markets under dozens of different brands.

So, local food enterprises are flourishing, but they are still a sliver of the market. The rest of the food system, meanwhile, has become more concentrated and industrialized than ever before.

(Slide 16) Or look at banking. On the heels of a massive financial crisis, there was a sudden, widespread public recognition of the fallacies of big banks and a mass movement to shift deposits to local banks and credit unions.  Hundreds of thousands, certainly, and probably more like millions, of people have moved their accounts.  Credit unions have gained 7 million new members since 2007.

(Slide 17) And, yet, in that same space of time, one of every five locally owned banks and credit unions closed their doors.  That’s about 3,000 fewer local financial institutions than we had six years ago.  The share of banking assets held by local banks and credit unions has shrunk, as has their share of U.S. deposits.  Meanwhile, the largest banks have gained ground and are now bigger than ever.  Let me show you what that shift looks like. (Slides 18, 19, 20) Today, giant banks hold 56 percent of bank assets.  (Slide 21) If you look closer, in fact, you’ll see that the banking system is largely in the hands of just four banks, each of which has a staggering $2 trillion in assets.

Or consider the independent retail sector.  (Slide 22) Independent Business Alliances and Local First campaigns have taken root in over 150 cities.  ILSR’s annual Independent Business Survey has consistently found that these initiatives are making a difference.  And, indeed, we’ve seen a remarkable reversal of the trends in some key sectors. (Slide 23) There are 249 more independent bookstores today than there were in 2009.  (Slide 24) The number of independent fabric stores, pet stores, and small neighborhood food markets has grown.

(Slide 25) And yet, the overall market share of independent retailers continues to fall. Walmart is opening 219 new stores in the U.S. this year and 260 next year.  (Slide 26) And the future of retail looks even more ominous.  A single company, Amazon, now captures one-third of online orders and is doubling in size every two to three years.

What’s going on? The localism movement is driving real change that we can measure, but it is running up against major structural forces that are moving the economy in the opposite direction.  (Slide 27) Chief among those forces are government policies that undermine local businesses and expand corporate power.

Let me give you a few examples. (Slide 28) Since 1995, through the farm bill, the federal government has distributed $275 billion to farmers.  Nearly 80 percent of those dollars went to the largest 10 percent of farms in the country.  It’s no wonder that a quarter-pounder often costs less than a pound of locally grown broccoli. (Slide 29) Our state and federal tax codes, meanwhile, are littered with loopholes that big corporations can use to escape taxes that their smaller competitors must pay.  This modest office building in Wilmington, Delaware, has only a few parking spots, but it’s an address used by hundreds of companies, including Walmart, General Motors, and CVS, as part of a scheme to avoid paying state corporate income taxes.  (Slide 30) In the banking sector, as we all know, our response to the financial crisis was to create a slew of programs and policies that bailed out big banks and made it harder for local banks to survive.

Local, state, and federal policy have all conspired to tilt the playing field. My concern is that, if the only way we try to transform the economy is through our individual actions as consumers, investors, and entrepreneurs, local enterprises are going to remain little more than an interesting side-note on the margins of the economy.  It’s not that our consumer choices don’t matter.  They absolutely do, especially to the local businesses, banks, and farms that count on those dollars.  But as consumers we’re too weak to change the larger dynamic.  (Slide 31) It’s as though we have to push a giant boulder up a hill. In theory, if we aligned all of our purchasing decisions, we could do it.  But that’s a tall order in the real world.  It’s a hard way to make change.

(Slide 32) Our real power lies in our citizenship.  (Slide 33) We need to use our political muscle as citizens to level the playing field and to make the job of growing local economies easier.  We’re much more powerful as citizens than we are as consumers. Corporations know this, which is why they are always talking about us and positioning us as consumers, while weakening our authority as citizens.  We need to reclaim our citizenship and start advancing change not just in terms of buying locally or even investing locally, but in joining with our friends and neighbors to remake public policy.

How can we frame a compelling narrative for policy change?

(Slide 34) We need a shared framework and narrative that all of our allied organizations — Local First groups and Independent Business Alliances, as well as national organizations like ILSR — can use to convey our vision for the economy and build momentum for change.  By incorporating this shared language across our various campaigns and initiatives, we can begin to make the local economy story part of the public discourse and, as this narrative gains currency, it will in turn strengthen and improve our odds of winning  specific policy campaigns.

(Slide 35) To give you an example of what I’m talking about, consider the idea of “limited government,” which has had an enormous impact on policy-making in the last thirty years.  We can all explain the basic story of limited government: It’s the idea that if we shrink government and get government out of the way, people and companies will be free to innovate and grow the economy.  It’s an idea loaded with powerful values, like freedom. Whether you agree with it or not, it’s a policy narrative that influences many debates over federal regulations, state budgets, and so on.

(Slide 36) We would do well to articulate a similarly bold and value-laden framework for a localist policy agenda.  For ILSR, the heart of the story is about community self-determination. It’s about breaking the power that big corporations have over our livelihoods, our democracy, and our environment.  It’s about shifting economic activity to locally and cooperatively owned enterprises that are accountable to their communities and operating at a sustainable scale.

(Slide 37) One outcome of this transition would be a more democratic distribution of wealth and income, as well as a richer variety of meaningful jobs, something our current economy fails to deliver.  Another would be a dramatic narrowing of the distance between those who make economic decisions and those who feel the impacts, resulting in a more responsible approach to natural systems and the environment.  And, finally, it would lead to more resilient communities; in times of rapid change, economic resources that are controlled locally are much more readily marshaled and reconfigured to meet shifting local realities.

For ILSR anyway, that’s the compelling narrative. The challenge is how to best communicate, promote, and advance these ideas.  That’s what I’m hoping we can dig into during today’s roundtable conversation and in the open space session that follows.

What would be the primary components of a localist policy agenda?

(Slide 38) Let me suggest seven broad areas of policy change that we need to pursue.

1. Stop Subsidizing the Corporate Economy (Slide 39)

We need a national campaign for a level playing field.  Governments provide billions of dollars a year in subsidies and tax advantages for the biggest companies.  Most people have only a dim idea of the degree to which this goes on.  They assume that local businesses are failing because they can’t compete, but, to a large extent, it’s because the game is rigged.

There are some bright spots.  (Slide 40) After many years in which local governments in the Phoenix metro gave multi-million dollar subsidies to shopping mall developers and big-box stores, the state finally passed a policy that effectively bans these subsidies.

(Slide 41) A handful of states in the last few years have adopted combined reporting, which closes a loophole that allows big companies to dodge paying income taxes. (Slide 42) This brings the total number of states that have adopted this policy to about half.

(Slide 43) Last month, the U.S. Senate passed the Marketplace Fairness Act, which would, at long last, extend to large online retailers the same requirement to collect sales taxes that local brick-and-mortar stores are subject to.

We need to draw public attention to and fight to end all of these kinds of inequities in our tax and incentive policies.

2. Restructure the Financial System to Operate at a Community Scale  (Slide 44)

(Slide 45) Right now, we have a banking system that operates at a giant global scale.  Not surprisingly, it does a great job of financing giant global corporations, extracting wealth from local communities, and concentrating assets in the hands of a few.

(Slide 46) If we want to regenerate local economies, we need a banking system that operates at a community scale.  We need to break up the big banks and return to the decentralized financial sector we had 25 years ago, in which local banks and credit unions held the majority of the assets.  In some respects, the policy solutions in this sector are quite simple, because it’s a matter of resurrecting the rules that governed U.S. banking from the 1930s to the 1990s.

There are many reasons why this is critical.  One is that local banks have a mutual interest with their customers.  In the words of a community banker in Minneapolis, “We do well when our borrowers do well.”  As has recently been made clear, that is not at all the case with big banks.  Their own short-term interests very often run directly counter to the interests of their borrowers and customers.

(Slide 47) Another reason is that local banks provide the lion’s share of small business loans.  Although small and mid-sized community banks account for only about one-quarter of bank assets, they provide almost 60 percent of small business loans.  Big banks hold over half the assets, but provide only about one-quarter of the small business loans.  Lacking deep knowledge of local markets and borrowers, big banks have a much harder time accurately judging risk and therefore limit their small business lending.

(Slide 48) In terms of solutions, at the federal level, there’s a bill in Congress that has gathered some support, the Brown-Vitter Bill, which would require big banks to hold more capital and would likely spur the biggest banks to break up.

Several states, meanwhile, are looking at the idea of creating State Partnership Banks, modeled on the Bank of North Dakota.  Many of you are probably familiar with the Bank of North Dakota, which uses the state government’s deposits to expand the lending capacity of local banks and provide a secondary market for mortgages.  It’s the reason that North Dakota has four times as many local banks per capita as the U.S. as a whole, as well as much more robust local business lending.

At the local level, a growing number of people are beginning to talk about how to establish Local Economy Investment Pools that would allow cities, counties, and other institutions to invest a portion of their funds in financing local economy enterprises and infrastructure.

3. Adopt Planning Policies that Create Great Habitat for Local Businesses (Slide 49)

(Slide 50) Zoning is one of the most powerful tools communities have for shaping the built environment and nurturing the kind of economy they want to see. Indeed, it’s no coincidence that the U.S. cities that have the highest concentrations of independent businesses have zoning rules that protect historic buildings, favor pedestrians and transit over cars, mandate multi-story mixed used buildings, and  insist on humanly scaled development.  (Slide 51) In cities where zoning rules do the opposite — undermine traditional commercial districts and encourage auto-oriented sprawl — independent businesses are often few and far between.

(Slide 52) Some communities have found other innovative ways to use zoning to support the local economy.  San Francisco, for example, has a formula business policy that limits the ability of chains to open in a neighborhood unless they meet specific criteria in the law and have the support of the neighbors.  Not surprisingly, the city is home to many more independent grocers, hardware stores, bookstores, and other retailers than other large U.S. cities.

(Slide 53) Another example is Cape Cod.  In 1990, voters created the Cape Cod Commission, a regional body composed of representatives of each of the Cape’s fifteen towns.  The commission has the authority to review, and reject, large development projects that could significantly impact the local economy or environment, including any commercial building over 10,000 square feet.  In order to be approved, the project has to demonstrate that it’s going to be good for the economy.  The commission’s decisions are guided by a Regional Policy Plan, which t frowns on development outside of town centers and favors projects that protect the Cape’s character, expand local ownership, and enable the region’s communities to meet more of their own needs instead of relying on imports.

4. Enforce Strong Competition Policies (Slide 54)

(Slide 55) We need to stop allowing big companies to use their size and power to game the market and undermine their local competitors.  At various points in our history, we have been called upon to break-up dangerous concentrations of market power, and we now find ourselves at another one of those moments.
For many decades, the primary aim of antitrust policy was to maintain a large number of mostly small businesses and limit concentrations of market power.  But this began to change in the 1980s, when antitrust policy became narrowly focused on consumer prices.  Antitrust authorities took the position that, as long as a company could deliver lower prices in the short term, it didn’t matter how big it became or how much market power it amassed.

This approach has been a disaster for small businesses and competition.  We need to reclaim the original spirit of antitrust policy.  Dairy farmers should have a variety of processors competing for their milk.  Prescription benefit management companies should not be allowed to force consumers to use a mail-order prescription service owned by the benefit company instead of a community pharmacy.  A single retailer should not be allowed to capture half of the grocery market, which is the share Walmart now has in about 40 metro areas. (To give you a sense of how much things have changed, in 1966, the U.S. Supreme Court blocked a merger between two supermarket chains, because together they would have 9 percent of the market in Los Angeles.)

These are all very common-sense statements that would resonate strongly with most Americans and certainly most independent business owners. It’s up to us to start this conversation and build the popular support necessary to chance current policy and enforcement practices.

5. Shift Spending by Public Institutions (Slide 56)

The spending choices of our schools, city agencies, state governments, public universities, public hospitals, and so on should reflect our values and be guided by a principle of maximizing economic outcomes for local communities.  That can be accomplished in part by implementing a modest price preference for goods and services produced or provided by local businesses.

6.  Make Targeted Local Economy Investments (Slide 57)

There are areas of the country where wealth and resources have been so depleted that simply removing barriers and creating the right environment for local entrepreneurs is not enough.  There are also sectors of the economy where key pieces of infrastructure for local production and distribution are missing.  Both kinds of gaps need targeted intervention.

(Slide 58) One example of how to do this is the Pennsylvania Fresh Food Financing Initiative.  Seeded with $30 million in state money, this loan fund has raised more than $120 million in capital to finance over 80 locally owned grocery stores in low-income urban and rural communities that lacked stores selling fresh food and where conventional bank loans for start-up food retailers were hard to come by.  All but one of the businesses financed by this program have been successful.

7.  Collect Better Data and Set Benchmarks to Track Progress (Slide 59)

Local and state governments, as well as the federal government, collect lots of data on the economy, but the information they gather and publish is not very useful for tracking the market share of place-based enterprises.  Few states could tell you, for example, what share of their food comes from local or regional sources.  No state regularly analyzes economic leakages to see where there are opportunities to develop local industries to meet local needs.  Many states do not even publish information on the economic development incentives they provide and the outcomes of those giveaways.

Cities, meanwhile, collect information on every business that applies for a license to operate and, yet, no city that I know of could tell you what percentage of its retail space is occupied by locally owned businesses and how that has changed over the last decade.  At the federal level, the U.S. Economic Census contains useful data, but it is released so slowly that it’s invariably out-of-date and some of the most relevant data are published only at the national level and not broken down by state or city.

All of this makes it difficult to measure change over time and see the impact of policy changes.  We need to direct public agencies to collect better, more relevant data about the economy, which would enable us to establish benchmarks to track progress.

What are the steps we need to take to advance this agenda?

(Slide 60) Let me suggest three fronts as we move forward.  First, as I said earlier, I think we need to work together to develop a shared narrative and policy statement that independent business networks and local economy groups can publicize and incorporate into their own activities and campaigns.  That’s a process that we’ll begin today in the open-space session and continue in the coming months, inviting other allies who are not here today to join in.

Second, we need hard data to back up this vision for the economy.  To this end, we need to continue to build the empirical case for a decentralized economy.  We need rock-solid research demonstrating that locally owned, community-scaled enterprises are viable and have the potential to comprise a major share of the economy.  This is a significant part of what ILSR does.  (Slide 61) We’ve produced, for example, an analysis showing that most states could meet all or most of their energy needs with small-scale renewable power production.  (Slide 62) Our research also has shown that the optimal size for a bank, both in terms of efficiency and productive lending, is many times smaller than the giant banks that now dominate our economy.

(Slide 63) Lastly, we need to build power and political capacity among independent business owners and advocates.  That’s why the work your organizations are doing to bring independent businesses together to solve their common challenges is so crucial and I hope you’ll join with us in making policy change a central part of your strategy.