Sunday, April 12, 2015

Working Capital

Everybody needs working capital. That's not something you build up on your resume, it's the term businesses use for cash on hand to pay bills. Many a business with a bright future has failed because it couldn't meet payroll or pay for its raw materials. The business world is pitiless.

In that way, in that vulnerability, everyone is a business. Working families have to have cash on hand to buy groceries or the kids go hungry. Up and coming young adults have to pay the rent or they end up on the street.

When businesses run low on working capital, they borrow from banks. For six years now, the Fed has helped them by cutting interest rates to zero. This has enabled many businesses to weather the tight times of the Great Recession. Not only did they survive, but they grew and added jobs and helped the economy get back on its feet. Had it not been for the Fed's making money easy to get, we might still be in recession. Certainly many small businesses, and some big ones, wouldn't have made it.

Families and individuals haven't been so blessed. The easy money for businesses did not trickle down to personal loans. Banks, still feeling the (somewhat self-inflicted) pain of sub-prime mortgage defaults, did not make credit broadly available to individuals. Bushinesses were put on Fed welfare, if you will, while individuals were forced into austerity. Like Greece. 

When they run out of money, many working people turn to payday lenders. These are the Shylocks of the lending industry. They'll give you what you need to carry you through until your next paycheck---$100, $500, $1,000--but they charge such high rates of interest that if you fall behind you might never catch up. A payday loan can sink you. And even if it doesn't, it takes an obscene cut out of your income.

Elizabeth Warren made her bones railing against this practice and others like it. Nobody likes payday lenders, but like cockroaches they manage to survive extermination. Part of the reason is that they provide, even though at an exorbitant price, something people desperately need. Unless the Fed can figure out a way to make banks pass along to individuals with less than sterling credit histories the easy money it gives them, or government shuts them down, payday lenders will continue to be a last resort for struggling families and individuals.

Many of us give to charity; and there are many good causes deserving of generosity. I've begun to wonder whether increasing working capital for hardworking people living paycheck-to-paycheck might not be another good cause. I think of micro loans in Africa, where investors with a charitable bent go into a village and identity the woman (and it's usually a woman) who is something of the village matriarch and give her small amounts of money to start local enterprises: weaving; water purification; whatever the village needs that human capital can leverage if it has seed money.

Micro loans are meant to make money, but at their heart they are save-the world projects. Catalysts for entrepreneurship. Grease to lubricate the potential of people. 

How about grease for the working-capital needs of workers living on the edge? To keep them afloat. To keep them productive. Like African micro loans, that kind of investment would be meant to do good, in that it would help people, but it would also be economically farsighted, in that people would stay productive and benefit the economy in general.

Donors would identify a person in a struggling community--East LA, Southside Chicago, Ferguson, MO, plenty of towns in the South--and give him or her a small amount of money to lend to people in need for very short periods: a week or two, maybe as much as a month. No interest, the borrower would be told. Just pay it back. If times get better for you, maybe you'll put a few dollars in the pool so others can benefit as you have.

What do you think would happen? How many would pay back their loans? How long would the pool last?

Those are good questions. The pessimist in me thinks this is a really stupid idea that will result in free money to a few and a lending bank account that drains as fast a backyard wading pool with a hole in the side. Maybe. I'm not sure how much good a lot of my charitable contributions do in any event. To me, they are more like hopes. Hopes that my donation might help a little, even though the problems we try to address this way are vast and perhaps intractable. Still, we try.

But what if my pessimistic side is wrong? What if our local godfathers and godmothers have the moral suasion within, and practical knowledge of, their communities to keep the money going out and coming back in. Think of the good they could do. They would be the neighborhood Fed, increasing the money supply, but not just for businesses, not just for the well off. For regular folks working hard to make ends meet. For most Americans.

This isn't a money-maker, so private capital isn't going to be interested. Maybe there is a way for government to help, but I don't think so. Government, even at it's best, is inefficient; at it's worst, corrupt. There is so much room for corruption and abuse here, that I think government would almost certainly fail to pull this off. It would take people finding the people they trust, people they believe have the respect of their community. Those personal connections are what would make this work. Maybe that means it could never get to be very big. Or maybe it just means it would have to build slowly and carefully. Not a bad thing. Quick solutions are almost never durable

I have a friend who would be a great candidate to be one of the people to look after and dispense this kind of funding. She came to this country with little and is now a citizen who runs a licensed day-care business in her home and has raised three wonderful children, two of whom will be the first in their family to go to college. She and her husband work hard, not just two jobs, but many jobs. She says she doesn't know why everyone comes to her to resolve their problems. But I do. It's because she is, in Sonia Sotomayor's words, a wise Latina.

I asked her what she would think if I gave her $1,000 to lend to people in need, people she knew and trusted. She said people in her community do that. They always ask for a little interest, she said. "You borrow $100 for a month, you pay back $110."

That's 120% a year, I told her. She understood the number, but not the point. It's just the way they do things. And maybe that's best. Maybe you need the interest to keep people serious and responsible. Or maybe if you're lending out of your own pocket you just need to make it worthwhile. "Everyone's got to make money," she said.

I asked her if she thought she would get the money back if she lent it at no interest. I asked her if it would be too much trouble, too much pressure, to be the one to decide who would get money and who would not, and to make sure it came back. She was enthusiastic, if somewhat incredulous. I'm not sure she thought I was serious. Or that anyone would be serious about such a thing as free loans.

Little wonder. In the world of predatory payday lenders, when even your pals charge 120% annual interest, free money, on trust, just because you need it, would take some getting used to. Like clean water and electricity. Like so many of the things introduced in the last century that we now take for granted. The fact that we take them for granted, that one day we might take these kinds of community lending pools for granted, does not diminish their importance to making us a prosperous country where individual effort is rewarded, and where a helping hand is there when we need it. Not just when the Fed cuts rates for the financial industry. For everyone. For the people who do the work and pay the bills and buy the products that make our economy work for all of us.

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