Cooperatives: for a stronger, stable economy
Sound Consumer | December 2008
by Paul Hazen
Our distressed economy offers an incredible opportunity for cooperatives. Most co-ops haven’t suffered the full brunt of the volatile credit market, yet the media largely has overlooked the reasons why.
What caused our current economic crisis? Popular analysts attribute it to greed, deregulation and predatory lending.
Mortgage lenders and Wall Street are guilty of many of these accusations. But there’s one major flaw in the logic of this finger-pointing — these are symptoms, not causes, of our financial system. In other words, it’s the nature of the beast.
Investor-owned businesses, pressured by investors demanding higher returns, place the highest value on profit. An unsatiated pool of investors can flee, destroying a company’s primary source of capital and bankrupting the business. For business leaders, this clearly is not an option.
Investor-owned businesses also can find that their employees’ or consumers’ interests are at odds with those of the investors. That executives often hold large amounts of company stock creates an even deeper conflict of interest. Are higher-ups making the right decisions for the company, or are they just making the decisions that boost their own portfolios? Unfortunately, as the subprime mortgage crisis revealed, it’s often the latter of the two.
This high-risk, profit-first model has, in many ways, failed. While it made our country affluent, it also left us vulnerable.
People want to know where we go from here, what sort of business model could have averted the crisis. The answer is simple and decidedly American.
We need to invest in business cooperatives.
People gravitate toward comfort and security in times of crises. That’s why business cooperatives are so appealing right now.
Structurally, cooperatives are distinct from investor-owned businesses. Those who use a co-op’s services actually own an equal share of the business. There are no majority shareholders or single owners and fluctuations on Wall Street exert only an indirect influence on business.
Co-ops include Fortune 500 businesses such as the Associated Press, and Land O’Lakes and Sunkist (two of the most powerful food suppliers in the country). According to a vast, USDA-funded study at the University of Wisconsin, co-ops hold more than $1 trillion in assets and have more than 125 million members.
Following the Great Depression, credit unions — another type of cooperatively owned business — grew exponentially. Experts, including Ivy League finance professors, agree that credit unions most likely will see a similar surge in the near future.
Credit unions have remained stable in the current wave of bank failures. George Hofheimer, chief research officer of the Filene Institute, a nonprofit think tank that studies credit unions, said that they’ll attract members because they haven’t had to tighten their lending standards. Credit is flowing as freely today as it was a year ago.
That’s because credit unions, like other cooperatives, don’t answer to investors.
Consequently, they’ve made less risky moves, such as packaging subprime mortgages into stock and selling them on the market. Because every member is an equal owner, there’s no incentive for anyone — president, CFO or CEO — to try to manipulate stock price. No single person stands to gain more than another. The excesses of AIG simply couldn’t have happened in a co-op.
This makes for business with a face. Because revenues stay local, credit unions’ gains represent gains to the community. And as owners, each member has a say in the business’ governance. This creates a culture of transparency, a far cry from the culture of many investor-owned corporations.
These efficiencies manifest in real, tangible benefits to consumers. Credit unions offer better interest rates on deposits and lower interest rates on loans. The average interest on a 48-month car loan at a credit union, for example, is 1.4 percent lower than at a bank.
What draws members to credit unions — strength, good deals, self-reliance, community focus — also draws people to other types of business cooperatives. Food co-ops, housing co-ops, purchasing co-ops (buyers that come together to leverage economies of scale) — all have blossomed in recent years, bringing services to people who either couldn’t afford them or were geographically marginalized.
There’s no such thing as an invulnerable business model and certainly co-ops feel the stress of a weakened economy. But as the Great Depression showed, business cooperatives can help stabilize an economy in turmoil.
By working cooperatively, Americans will regain the trust in each other and in the economy that in recent months have been so severely damaged.