Let's Cut Out the Banks and Finance American Innovation
Just this morning, I heard that my favorite union printing press had closed its doors. Last night, I heard that Olsson's, the great book/music place in Washington, D.C., closed all five of its stores last month. There are times when I work at my Vox Pop café in Manhattan and wait one hour for a single customer to walk in. Consumer spending is going steadily down. Unemployment is around 6.5 percent, and that's just the "official" rate.
I don't want to lose my company. I've worked so hard to build it over five years. I've been an entrepreneur since I started my first company at age 25. Along the way, I've seen how companies can grow, change the world, have an effect. I have seen how value is created.
Most of us have heard how great microfinance programs have been for poor, enterprising people -- many of them previously disempowered women -- in villages across the developing world. Why not try something like that here?
What if we had a big, grassroots, community-focused "green venture capital fund" in every town in America? What if there was new money available to all the creative souls out there yearning to quit their lousy job, or get out of the army of the unemployed and start a company that did something in the public interest?
We could do this. We could create a U.S. Social Ventures Administration -- a fund that that backed companies that offered a nice financial return on investment, but also a serious social return to the public.
Let's face it: As a presidential candidate, Barack Obama's $700 billion bailout was a mistake. Sure, it was a mistake made under pressure. But alongside John McCain and President Bush, he voted for a financial fiasco that no one believes in now, even Bush's own Treasury secretary.
Well, I'm well outside the circle of the "center-right" economists on whom Obama is leaning for advice. Robert Reich recently claimed, "we don't need visionaries," but I beg to differ. What if you took a hybrid of progressive social values, environmentalism, American hustle and the magic of the marketplace? (Yep, this is a hybrid sure to piss off everybody! Or it just might work…)
Instead of thinking about government handouts, let's reframe the argument: What if the U.S. federal government started thinking of itself as an investor, instead of as a reluctant donor? Instead of a handout, the USG should expect a return (either social or financial) on whatever money it puts into a venture. So, a new program should be started, the U.S. Social Ventures Administration (USSVA).
President-elect Obama recently said: "We'll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead."
That's great, but what's the plan for execution? And how can he get everyone on board? What if the execution of this vision was designed in a way that fired up both the working class and Wall Street? Well, I've worked at Kinko's, and I've worked on Wall Street; there is a way to do this.
The USSVA would advance a whole new way to think about finance. It would take the best of free-market economics and principled government planning. USSVA would fund new ventures in the public interest, like the infrastructure and green energy projects Obama promised. But USSVA could eventually be expanded to include new-media companies, to enrich our democracy through new technology and a freer exchange of ideas and information. We could use USSVA to reindustrialize the USA, and retool our plants and factories. We could use USSVA to rejuvenate American agriculture, to move away from pesticide-laden crops and get away from genetically modified factory farming. All of which would boost employment and put the whole U.S. economy on steroids, so to speak.
Commercial venture capital is a form of finance unique to the USA. A venture capital firm takes a piece of ownership in a new and growing firm and looks forward to when that company's growth provides an opportunity to "exit" in about five years. When the investors exit, they sell their stake for usually 5 to 20 times what they paid for it. It's a great deal, but only around 1 in 3 investments grows to that point. So a venture capital firm is ready to write off losses on most of its investments. Experimentation and risk are built into the system.
The exit, though, is a triumphant experience for the founders, the original shareholders and the VC firm. Often, the exit takes the form of the company getting acquired by a bigger firm, or, even better, the company goes public by selling shares on a public stock exchange. This represents a triumph of economic democracy: the people have supported the products or services of a particular firm by choosing to spend their money with that firm. The original entrepreneurs sacrificed for years to get the firm going. The big payoff is the explosive growth in the value of their shares at the moment of the public offering.
Here's a real-world example: I met this guy, Bob Nape, who runs a solar panel company in Ithaca, N.Y. He's been established for a good couple of years, but he really wants to grow. Let's say he goes to USSVA with a good business plan. USSVA could choose to invest $2 million in Nape's company and own 45 percent of it. With that $2 million, in five years Nape's company will grow. He would hire more people, and he would buy more goods and services for his company. The local economy in Ithaca will feel the love.
After all, alternative energy is bound to be a hot stock in the Obama era. Nape's firm is a sound investment in light of increasing demand. In five years, there could be an exit, at which time 45 percent of Nape's company would be worth much more than the investment USSVA put in. There could be a public offering. USSVA (i.e. the U.S. government) would get back something like $5 million to $10 million for the $2 million it put in. Then, USSVA would have more money to invest in the next round of companies in Ithaca.
USSVA could eventually be a self-sustaining government entity. In time, it won't even need an annual budget from Congress. It's time for government to use the power of the markets. USSVA would be an incubator for thousands of new companies producing things that people need. It might save the planet. It would help people feel good about doing meaningful work, saving their country, realizing a larger purpose.
This Is the Ultimate Way to Say No to Bailouts
This is not a top-down infusion of cash into the financial sector. I'm interested in figuring out how we can unite workers and entrepreneurs to transform this global economy and get everyone back to work. And, why not go beyond that? Let's think of everyone not just working but also building a better world.
So, rather than another $700 billion for the banks, or tens of billions for the Big Three carmakers, let the market run its course. These firms made their choices. Now they have to live with them. The banks chose to lobby President Bill Clinton for the repeal of the 1933 Glass-Steagall Act. Then they engaged in that unhealthy mix of commercial and investment banking, which led to the subprime mortgage crisis, which led to the credit markets shriveling up, which led to this recession. In Detroit, the Big Three helped kill the electric car; they've resisted fuel-efficiency and ignored a changing world. Now they want a blank check? Their SUVs heated up our planet. Congress was right to rebuff them. But how do we create their replacements? The USSVA.
But there will be some resistance to these ideas, surely.
Cantankerous voices in the old right wing might say this sounds like socialism. Au contraire, the socialists kicked me out of their party for saying stuff like this. Really, what I'm proposing here is the future of capitalism. In purely capitalistic terms, this is a plan to use market forces and public equity markets to create an exit for the original investors, even if one of the original investors happens to be an experimental government entity.
It's not about the state holding onto assets and companies, it's about the state helping to create the companies we must create for the public good and then letting them grow on their own. For the USSVA, it's all about the exit; it's all about starting cool new companies and then looking to recoup the original investment in about five years.
In fact, part of the charm of this plan is that it could be a public/private hybrid in which we might work with the private megacapital of the hedge funds, banks and big VC firms. The USSVA could form investor partnerships to give capital a safer place to grow in turbulent times. Again, the focus here is on the exit, on using, recouping and then reinvesting capital.
But what will prevent the USSVA from becoming a slush fund of nepotism; what's to keep it from the predations of crony capitalists? How will we know that the funds are being wisely used? The answer is democracy. Real democracy means transparency. We could build into the plan a guarantee to the lawmakers who pass it, and the public that supports it, that 100 percent of the transactions of USSVA will be transparent. We will have an "open books" policy and put all information online. We could even incorporate people's ideas into the funding goals of USSVA using Internet democracy. President-elect Obama gets this, his team set up a Web site that listens to people at http://www.change.gov/.
Another possible problem with this USSVA plan is that it might "sound too corporate" to some. Well, I know from personal experience that the left in this country is plagued with psychological hang-ups about money. (I'm working on my own, believe me.) We resent money; we feel weird about it.
There's a basis for some of this. We have seen an extreme form of Machiavellian capitalism in recent years, symbolized perfectly by Bush and Vice President Dick Cheney, Enron and Halliburton. Capitalism unregulated creates an elite, and that elite creates monopolies that squelch competition.
But USSVA is not the old capitalism. It's the future of capitalism. It's a plan to democratize this brutal system, share wealth, spread opportunity and use the explosive power of public equity markets.
It's a New Deal, but one that has grown wiser through the experiences of the '60s, civil rights, the peace movement, the dot-com boom, Internet democracy and the recent massive popular rejection of the Bush/McCain policies.
Finance all too often is a thing shrouded in mystery, the exclusive domain of an elite. But really, progressives, moderates, libertarians, democratically minded, pro-environment, green-leaning people should feel right at home in finance. After all, to fund a company, to invest in something is to show hope, to show audacity, to show a faith that the basic human creativity inside us all will get us beyond a time of fear, violence and despair.