Opinion: Regional banks are the only way to save New York
As Gov. Andrew Cuomo ponders more economic development spending, two truths about the Great Recession have been revealed.
The first truth New Yorkers must grasp is that they were over-dependent on financial capital as an engine of growth in their economy. When the financial crisis erupted, the state economy was left naked in the storm because it was too reliant on the financial services industry to generate growth.
In 2007, the banks invested less than $50 billion in New York’s manufacturing sector but an eye-popping $800 billion in risky mortgages, loans and other financial products. This dependence on finance capital generated significant volatility in the growth model, which exploded with catastrophic results in 2008 and required a colossal transfer of money from the poor to the rich. Taxpayers bailed out the banks to the tune of $700 billion, yet the “great refusal” of the banks to lend continued unchallenged.
As a result, the upstate regions, deprived of capital, were stripped of jobs, which consequently led to population decline – establishing a vicious cycle of ever-decreasing circles. The state ended up bailing out both the banks and the communities, which had been decimated by the recklessness of the money managers. Recent Chinese market tremors only serve to reinforce the fact that history repeats itself. Sorry New York, but you are not yet out of the danger zone.
The second truth is that there was very weak private-sector growth outside of real estate and finance. This led to an economic strategy predicated on debt – made all the more risky by its exposure to the giant roulette wheel on Wall Street, which was, at that very moment, violently spinning off its axis. There can be no way out of the quagmire New York has sunk into unless it reacquaints itself with the problems of finance capital, and develops a new private sector-led growth strategy to address the failures of the debt-driven economy.
A stimulus package conceived without embedding investment within a strategic plan that leads to the creation of new institutions, however, presents a similar problem. As the civic economists of the Catholic Church would say, “you are generating debt, not value.” In a sense, it is the economic equivalent of smoking crack. What happens when the high – the stimulus – wears off? You crash, you burn, and then you need more candy.
Therein lies the main problem with the Neo-Keynesianism preached by economists such as Paul Krugman. The concept of public spending in times of crisis is so ancient it traces its origins back to Solon of Athens. But why should the role of banker be assigned to the treasury? The lack of capital in the regions requires not simply that the state turn on the “air conditioner” to temporarily lower the fiscal temperature, but rather the endowment of new and innovative financial institutions capable of building long-term reciprocal relationships with local companies and workers and addressing their specific needs.
A good place to begin is the lack of availability of capital for small and medium-sized business growth in the regions. This gets to the heart of the matter as regards the changes New York needs to make. Financial investment always offers higher rates of return than “real” economies, which are long-term, more embedded things, because the value added is nominal and unconnected to genuine improvements in productivity. Leading up to the crash, the demand for “best value” only made things worse as New York’s assets were sucked into Wall Street where the returns were undeniably better. And yet, it turned out that what was being offered was a three card trick; there is no infinite maximum-returns economy that involves neither real productivity improvements nor real labor.
One solution to this conundrum is the concept of regional banks that would be prohibited from lending outside of their area – making capital available locally to businesses and households, countering the Wall Street effect of sucking all surplus to speculation, and engaging in the urgent task of generating private-sector growth in the areas that need it most: the “faraway towns” of Buffalo, Binghamton and Rochester. Jazz musician Charles Mingus believed that “freedom comes from structure.” This musical value should now be applied to the economy.
Europe exports many things to America. We could go further. In 2008 it transpired that Germany was Europe’s most productive, resilient economy. In Germany, regional banks that are constrained to lend within particular areas are a necessary part of the social ecology in that they resist the centralizing power of capital, allow more secure access to credit for local and small businesses and constrain the destructive demand for maximum return on investment. They also offer an alternative to usurious payday lending, one of the central growth areas in their economy.
If Cuomo is serious about generating sustainable private-sector growth, he must be vigilant about keeping finance capital within institutional constraints. A good place to begin would be to commit 10 percent of the Upstate Revitalization Initiative funding to the endowment of a network of regional banks like these, constrained to lend within particular places. These should be tied to the Regional Economic Development Councils the governor established in 2011.
When Pope Francis recently visited New York, he scolded Wall Street for “subjecting people to mechanisms which generate greater poverty, exclusion and dependence.” New York cannot escape that truth. Any serious reflection on reviving the upstate economies must confront the centralizing tendency of capital and seek to constrain and preserve it while renewing traditions of value and virtue within the economy. Throwing good money after bad is not a solution. That is why the endowment of a network of new regional banks is New York’s only credible route out of the snake pit of “exclusion and dependence.” These are the lessons of the crash.
Bryn Phillips is an adviser to a Labour Party member of the United Kingdom’s House of Lords and a writer for the New Statesman.