Value banks: Goodchildian reflections

Last winter, I was at a restaurant that periodically has days when all tips are donated to a particular charity. This time around, it was Howard Brown, a Chicago-based LGBT health organization that is probably best known for its Brown Elephant thrift stores. The call for donations was particularly urgent: if Howard Brown did not raise a certain amount of money (something like $50K), it would have to close its doors.

It struck me as ridiculous that such a valuable organization could be permanently lost due to such a small shortfall. (As it happens, they were able to raise the money and continue to be doing fine as far as I can tell.) But when I read that announcement — inspired in part by an article about North Dakota’s mini-Fed — I turned to The Girlfriend and declared that they needed to band together with other charities and create a bank. That way, the charity bank could simply give Howard Brown a cheap bridge loan, getting rid of artificial time crunches. (They would still need to raise donations, but the availability of cheap credit would provide for “income smoothing.”)

As we brainstormed further, we thought that taking consumer deposits would be a great idea, too, and would probably be relatively successful — particularly in the wake of the financial crisis, I think many more people are conscious of how destructive for-profit banks can be and would appreciate the opportunity to support a charity bank. In fact, this would provide a way for people to support charities even if they didn’t have enough disposable income to donate, as they could simply move their checking and savings account there. If this seems to be somewhat extraneous to what charity organizations do, I’d point out that there’s no inherent connection between running a thrift shop and running health clinics, for example — and many charities also offer the possibility of gift annuities, which have some conceptual similarities to putting one’s bank deposits in a charity bank.

At this point, this thought-experiment is threatening to enter into some uncomfortable territory similar to my reflections about retirement accounts — could the charity bank (assuming it got up to a certain size) have a proprietary trading desk? Would our assessment of speculative financial engineering change if there was a participant in that zero-sum game who was funnelling the profits to pro-social causes rather than further financial engineering? That’s what Goodchild envisions in his proposal for “value banks” in Theology of Money, which I only later came to understand was basically the same kind of proposal that I was “independently discovering.”

Any thoughts? In particular, does anyone know what concretely would have to happen to build something like this (i.e., would it have to be a credit union, etc.)?

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5 Responses to “Value banks: Goodchildian reflections”

  1. BB Says:

    If you don’t need dividends and can live with a slim margin of profit, then you could literally just buy T-bills and live on 3% or so. If you are a real bank, you can get the Fed to lend you money for practically nothing and then just buy T-bills with it! So you can pull 3% profit with no trading for the foreseeable future (since nobody is doing anything about unemployment, and there’s no demand and nobody is doing anything about demand, this will be the state of affairs for some time). It’s a genius idea, and it would tug the heartstrings of every television station and internet news site- it would be huge.

  2. Wr Says:

    Well I’m not much of a banks-and-money person, but not only would join this bank – I’ve been looking for it for some time now. I believe it would be something like and perhaps qualify as a Community Development Bank (http://goo.gl/14K6s), ShoreBank in Chicago used to be one before insolvency at the end of the last decade.

    Such a thing would also probably want to look into “B Corps” (http://goo.gl/8lqrL & http://www.bcorporation.net/), though i suppose that is a more heavily experimental classification and someone what more expensive.

  3. daniel silliman Says:

    The problem/question is, given how much fundraising is done *because* of looming disasters threatening extinction, would deserving charities be able to raise the necessary funds if this threat were removed?

  4. burritoboy Says:

    The problem is that you make most loans based off of some asset that the borrower has. Otherwise, the borrower has many incentives to simply steal the money and disappear. Individual humans can’t so easily do this, because they have a personal credit score that they cannot discard. Organizations can relatively easily do this.

    If a non-profit borrower has assets, you can make a loan based on those assets. Of course, the difficulty comes when they default on the loan and you end up kicking the kids out of the orphanage so you can sell the land for condos, so that your bank doesn’t go under too. But big non-profits usually do have borrowed money (you can secure loans off their investment portfolios, for one thing).

    ShoreBank did some things along the lines you suggest and went belly-up. Though their problem was mostly that they ended up very exposed to real estate.

    You can’t secure a loan based on “future expected charitable donations” – that’s not an asset by any stretch of the imagination. That’s almost certainly something with very high private-equity like risks. But you’re not getting any big winners from a portfolio of non-profits, since obviously they’re not going to go public or get acquired by another player. And all PE/VC players require equity (usually with board seats) and rely on a few big winners to ride out all the losers. There are some venture lenders, but their loans usually are collateralized by some real asset, or they know that the PE or VC players in the deal have ponied up significant amounts of money, so the PE/VC guys aren’t going to let the company do whatever it wants.

  5. Aaron deOliveira Says:

    @burritoboy Would it be possible to provide loans like Kiva does? Their basic model is one of “community security”. The ability for the entire community to receive loans is contingent that everyone in the community stay current on their loans. You could group say 5 charities together and make them surety for each other following this model. You could even make every loan contingent on all borrows remaining current.

    This model has the community police itself in order to maintain access to funding.


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