Slow Money Alliance

Comment by Jason Bradford on April 23, 2010 at 8:55am

I was asked to give a talk on Food Security and Peak Oil in Eugene a while back and the Eugene Weekly just published a transcript of my remarks for their Earth Day special: http://www.eugeneweekly.com/2010/04/22/views2.html

In this talk I discuss banking in the context of the environment. I don't detail this in the talk (only had 10 minutes), but there CAN be a difference between banking and finance.

Banks have the legal right to make loans on money they don't have. They are required to keep a reserve of money, but this comes to only 10% of what they have out as loans. So, if a bank makes a loan for $1,000, it is backed by $10 in deposits (checking and savings accounts). The other $900 is simply created, instantly, once the paper work is complete and the electronic digits are in the bank database.

What banks must do to stay solvent is make sure their loans are paid back at principal plus interest at a good enough rate to maintain that 10% reserve requirement. If they can't do this for short periods of time banks can get loans from other banks who are doing better, or the Central Bank. This stabilizes the system if a certain branch or region of the nation is having economic trouble.

However, if the whole economy is depressed then the entire banking system is in trouble and only the Central Bank can step in. What I see happening going forward is more and more difficulty in the banking sector and therefore bank credit becoming more difficult to get and more expensive (i.e., with higher interest rates).

Now let me connect this to Slow Money....

I don't see any way for bank credit to build a sustainable, local, innovative food system. This is why Farmland LP is using the private equity model. We buy land and associated infrastructure to do organic farming using equity, not debt. By doing so, we are not tied to a fixed interest rate and the possibility of having our assets seized if bad weather wipes out a crop one year and we can't make payments. This is a model of patient financial capital that brings stability and alignment of mission into the movement for a new food system.

I would really like to bring the Slow Money conversation to this area. I am one of the founders of Slow Money and my company is set up perfectly as a Slow Money vehicle. This area should be a premier example of a fantastically beautiful transition and I want to help make that happen.

Comment by Jef Jelten on April 23, 2010 at 9:28am

That was a great piece on food security and Peak Oil Jason. A very important issue indeed.

I personally would like to see more emphasis on Food Processing, however non-glamorous it may seem this is where the focus needs to be for a multitude or reasons including energy use involved. The bulk of harvest happens within a fraction of the year, processing allows people to eat for the balance of the year. Processing is not optional.

We have all the farmers we need (production), and it would seems to me we have the demand (people tend to eat). What we do not have is processing that can bring the two elements together.

And you are 100% correct that financing for processing is not available along with the fact that it's not very sexy for angle investors. This is why I am joining Slow Money in hopes of attracting savvy investors who can recognize the urgent need.

Cheers!

Comment by William Ray Ford on April 23, 2010 at 6:47pm

I met with a new processor at the BEC on Thursday. He has a very small operation to get started and I can't wait to see how he does with his first product. You are right on Jef.

I think we have the concerned and motivated people here in the valley to make an impact with slow money. Jason did a nice job explaining how the banks work. I wish a banker would join us here at slow money and tell us how it is from their perspective. I read the first quarter's report from a small hedge fund north of us who reported that China had just raised the real estate capital requirements to secure a loan from 40% to 50% as opposed to the liar loans that drove our housing bubble here in the states. When are people going to wake up and invest in things that are sustainable? Good to see some comments on this group.

Comment by Biff Traber on April 24, 2010 at 10:02am

Bill, I agree with you that I think we have potential investors for local investing. And the need for such investment is there. I am, however, unclear on what actually needs to be done to get some of this going. While angle investors looking for big pay-out exits in a few years do not fit here, don't we still have the same needs - start-up or early (angel) money followed by larger investments (ala venture capital)? How large are these investments for a small slow money company? Will debt funding (if available) actually work for local food processing start-ups? Or is it as Jason describes, only equity funded? If debt could work, should we be looking for other sources of loans? perhaps we could create a revolving loan fund as the Energy Action group created? ..

I know its lots of questions but I have a sense that there is a need and opportunity but I don't know what are some of the next steps. Perhaps this group can help.

Comment by William Ray Ford on April 24, 2010 at 12:28pm

I am with you Biff and I am sure a lot of other folks are in the same boat not knowing what those next steps are. I don't think that it is only equity money that will kick slow money off. Debt and a small revolving loan thing is a good idea. There are a couple of small business programs out there already. Alan Fudge the Director of the SBDA hosted out at LBCC and the BEC board treasure mentioned he was able to get one of the local companies a $24K loan. I don't think the company he was working with has been in business quite 3 years yet. That is one of the major hurdles. Most of the start ups don't have a 3 year history and at least 2 years of financials when they "need" the money. Of course there lots of other issues establishing and administering such what appears to be a "high risk" start up loan. Linn County had a fund that I consider very successful and well managed by Keith Miller, now retired, for many years. It was established using Regional Investment Funds via the Regional Investment Board but Business Oregon at the state has a new and different centralized rather then a regional approach for economic development using the lottery funds. I am not sure how well their new support concept is working. One of the reasons I posted here for the slow money site is an attempt to get folks like us discussing possible solutions. Jef Jelton of Sun Savor is one of the ones that seems very long on sustainable ideas but without the access to capital to advance those ideas. He is getting some help from OSU and the BEC but it is with grants not equity or loans as far as I can tell. He is really just getting started. As I recall the maximum loan over in Linn County was for $50K. I think the Linn County fund still exists but is run via the Board of Commissioners.

Comment by Jef Jelten on April 24, 2010 at 1:16pm

Great comments guys!

One of the things I have been thinking of is talking about investment in localization as an investment in quality of life. Sure you can spend your wealth to buy a big house, nice car, vacation, etc. but when it really comes down to it it's the community you live in that defines the quality of your life. A healthy, vibrant community is a joy without a price tag and it consistently rates very high as a top priority with the retiring demographic that holds a large % of the nations wealth.

Sounds like a win win to me.

Comment by Jason Bradford on April 24, 2010 at 7:02pm

I don't want to come across as saying the private equity is the "only way." But debt financing is going to be on shorter terms with a higher risk premium and fewer and fewer businesses will be willing to take it on.

A bit more background (and sorry if this seems like "General Ed" but I find that most people don't see things this way or know about what money is). Debt and its flip side, credit, are the money supply of the nation and world. We can't pay off our monetary debts for a couple of reasons:

1. If everybody paid off their debts then no money would be in circulation (aside from a few bills and coins, which are only ca. 2% of the money supply), and

2. Our collective monetary debts are now too large for the productive capacity and pollution tolerance of the planet--both in terms of natural and industrial capital. (I know, this point could be discussed ad nausea).

We were structurally determined to get into this situation because of the debt-based, fractional reserve nature of our money supply (which is a key facilitator of rapid economic growth). Because credit comes with a debt burden that is principal plus interest, the money loaned into existence is insufficient currently to pay back debt going forward. What MUST happen for the system to remain stable is for credit/debt expansion to keep on going, forever, into the future so that principal and interest can be paid in the future.

The banking system therefore generates a constantly increasing demand on resources because money is a claim on productive assets. We have not successfully decoupled our economies from the material world, and if you measure economic output in units of energy or tonnage of material our economy grinds through more and more each year, exponentially more, in parallel with the expansion of the money supply.

However, more people are connecting the dots that this is game of musical chairs. Money is a claim on assets, but the amount of monetary claims outstanding is FAR BIGGER than the underlying assets. What we should see going forward is a flight from virtual assets (e.g., paper or digital wealth) into tangible assets, such as metals, land, energy reserves, etc.

Some may think that this will lead to an inflation of asset prices (e.g., Farmland LP comes to an area and bids up prices because they have so much money :-) ). That may not be true. Consider that if the banking system is in trouble then credit is scarce, i.e., less money is in circulation. This is deflationary. Furthermore, it takes only $1 of bank deposits to create $10 of credit. Therefore, bank financing is generally the inflationary force. A private equity company like mine has to raise ALL the monetary capital it needs to purchase land, not put "10% down" and get the other 90% like magic.

Regarding Venture Capital. That model is not likely to work very well either as it demands enormous rates of return that are simply unlikely for most of the kinds of businesses we actually need. A well run farm may generate 8-15% return after several years, for example, not the double your money in 5 years that venture capital tends to seek.

Governments could, in theory, be a critical resource. Governments can take over the role of private banks and assume the function of money creation. This does tend to happen in banking crises historically, but seems unlikely in the US anytime soon. Public banking is generally much more stable and would be a fine topic to consider. North Dakota has public banking, for example.

I do expect government and foundation grants to be available in small amounts, but likely less so going forward due to weak tax revenues and market returns. Basically, I don't see a near term economic recovery that is lasting until we actually BUILD the sustainable economy!

Then there are the non-monetary, quality of life issues that Jef brings up and I could wax on about that but think I should stop now....

Comment by Jef Jelten on April 24, 2010 at 8:05pm

Well said Jason.

However considering what you say it sounds like we all should be wary and resistant to the repatriatization or laundering of the massive amounts of money which makes up the bulk of the wealth which is actually ill gotten gains, digital made up faux money, taxpayer funds payed out (or promised to be paid out from) to the financial industry and distributed as bonuses, attempting to become real tangible goods. However attractive it is to tap into this supposed resource it is the ultimate in cynicism and in my opinion morally corrupt and only serves to exaggerate the ever increasing discrepancy in wealth which will ultimately lead to the worst possible out come in this country and the world.

Other than that... have a nice day!

Having said that I feel inclined to quote the brilliant comedian Gilda Rattner and say "never mind".

Because

Comment by Jason Bradford on April 24, 2010 at 9:32pm

Well, this is why I work to have local investors. In an ideal world, we would have the pension funds and university endowments of the local institutions actually putting their money into their community rather than those horrible financial instruments and institutions you refer to.

With Slow Money you have potential investors and businesses that are more fair and environmentally conscious and less corrupted.

Most of the farmland funds in the world are exactly what you fear. Rich nations buying the farmland of poor nations so they can grow food for export. A couple of years ago a land deal between South Korea and Madagascar led to the toppling of the government of Madagascar and South Korea was told "no."

If you want to follow this stuff see the NGO GRAIN: http://www.grain.org/front/

And closer to home, here's something from The Oil Drum: http://www.theoildrum.com/node/5702

So yes, we should be wary. This is potentially a real threat. A society with extremes between haves and have nots is really terrible and we are likely to see greater divisions if we are not proactive about it.

Comment by Jason Bradford on April 26, 2010 at 9:35am

More related to Jef's comment re. "massive amounts of money which makes up the bulk of the wealth which is actually ill gotten gains, digital made up faux money, taxpayer funds payed out (or promised to be paid out from) to the financial industry and distributed as bonuses, attempting to become real tangible goods. "

There's a great program of This American Life that looked at the CDOs based on subprime mortgages. A fantastic listen:

http://www.thisamericanlife.org/radio-archives/episode/405/inside-job

"A hedge fund named Magnetar comes up with an elaborate plan to make money. It sponsors the creation of complicated and ultimately toxic financial securities... while at the same time betting against the very securities it helped create. Planet Money's Alex Blumberg teams up with two investigative reporters from ProPublica, Jake Bernstein and Jesse Eisinger, to tell the story. Jake and Jesse pored through thousands of pages of documents and interviewed dozens of Wall Street Insiders. We bring you the result: a tale of intrigue and questionable behavior, which parallels quite closely the plot of a Mel Brooks musical."

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