We talk with a long-time mental health service provider who works with vulnerable citizens about the state of mental health care, progress made in recent years and the way forward.
Guest Host: Paul Brown
“Buy local” is a mantra many embrace. But when it comes to investing bigger sums, most people turn to big-name stocks, bonds, and treasury bills. Author Michael Shuman argues that investing locally not only helps your community–it can pay off. And a new law will soon make it easier to put money into local businesses and organizations. There’s even a movement to create local stock exchanges. We explore ideas for shifting your money from Wall Street to Main Street.
- Trexler Proffitt Assistant professor of Business, Organizations & Society at Franklin & Marshall College
- Michael Shuman Author, "Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity;" fellow, Cutting Edge Capital, the Business Alliance for Local Living Economies (BALLE), and the Post Carbon Institute.
MR. PAUL BROWNFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your community with the world. I'm Paul Brown, sitting in for Kojo. Coming up later this hour, investigative journalist Barry Estabrook on what it takes to put tomatoes in your supermarket year-round. But first, when we hear the buy-local mantra, we think farmers' markets, neighborhood shops perhaps. But one man's got his eye on a bigger pot.
MR. PAUL BROWNAmericans have a lot of money invested in major financial institutions -- the Dow Jones, NASDAQ, pensions, bonds, treasury bills, around $30 trillion. But not even 1 percent of that touches local small businesses, which account for half of the economy's jobs, a major opportunity missed according to Michael Shuman, who's with us today. So how can you invest in Main Street? There are a growing number of options. A new law now opens the door to crowd funding, lots of people investing small amounts of money in a business or startup.
MR. PAUL BROWNAnd another idea may be taking root: local stock exchanges. And joining us to discuss this, of course, Michael Shuman, he is the author of "Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity." It's published by Post Carbon Institute. Michael is also a fellow with the consulting firm Cutting Edge Capital, the Business Alliance for Local Living Economies and the Post Carbon Institute. Michael, thanks for being with us.
MR. MICHAEL SHUMANNice to be with you.
BROWNAnd as you're thinking about the questions we've been asking here, I hope you'll join us by calling 1-800-433-8850. That's 1-800-433-8850. Or you can email us at email@example.com. You can also get in touch with us through our Facebook page or by sending us a tweet, @kojoshow. So, Michael Shuman, we have a lot of questions here. We've had conversations about buying American, buying local.
BROWNWhat are the big challenges for people who want to invest money in today's climate? There have been some real ups and downs in national investment markets. We've seen brokerage houses go bust. We've had a total financial meltdown. There was a housing boom and bust. At one point, people were, you know, flipping homes for investment the way people used to buy and trade maybe used cars or baseball cards, but we're talking about homes. What do you see as the next step in investing?
SHUMANI think the short summary is is we have to bring our investment home into the businesses, into the other investment opportunities that we really know and really trust. I think it's the passive behavior of our putting our money into companies and funds and into projects that are thousands of miles away that we know very little about is where we've gotten ourselves in a lot of trouble.
SHUMANAnd the good news is that the laws that stood in the way of small investors -- that is, the 99 percent of the American public that are so-called unaccredited investors, these walls stood in the way of our putting money into -- frankly, it's not just half the economy. It's 99 percent of all firms are small, local business. And we couldn't do so because the disclosure requirements of these laws just were extremely demanding. It would cost, even to take $1 from an unaccredited investor, something like 50 or $100,000 of lawyers' bills. And, obviously, no small business is going to do that.
BROWNWell, let me ask you here, what -- help us understand. What is an unaccredited investor versus an accredited investor? What does this mean?
SHUMANDuring the Great Depression, we passed a series of securities laws for really understandable reasons to try to protect the little guy. But one of the things we set up was what you might call a system of investment apartheid. And the 1 percent, the richest 1 percent, people we regard as having enough money that they can afford to lose everything -- and they also are presumed to have knowledge of what they're investing in -- they're allowed to invest in anything, anytime, anywhere with no questions asked.
SHUMANThe other 99 percent have to have this information. Now, what sounds like it's being really protective wound up being a protection gimmick for Wall Street because when you ask your listeners where are their pension funds, as you said in your introduction, all of our pension funds are in Fortune 500 companies or government bonds.
SHUMANAnd none of it is touching local small business. So that's how significant these apartheid walls have been. The good news is, as you said in your introduction, is that the Jobs Act signed by President Obama a month ago creates a hole that allows small businesses to get money from small investors that's relatively light on regulation.
BROWNThe Jobs Act has been somewhat controversial precisely because it eases up on some of the disclosure requirements, and there have been some objections to that. Some people have said that, look, if we ease up on disclosure requirements, we risk more skullduggery by businesses, investment banks, that sort of thing if they're not required to tell us enough about what they're doing. Where do you come down on this, and how does that affect a small investor wanting to get involved in a smaller business?
SHUMANWell, I think there's two clarifications that are important here. The first is is the Jobs Act was actually six pieces of law, and there are some pieces of law that changed around what are called emerging growth companies, which are actually pretty big businesses that have much lighter disclosure requirements. And I actually am quite nervous about that. The provision that I'm excited about deals with crowd funding -- many people putting small amounts of money into small businesses.
SHUMANAnd on that, it is true that the disclosure requirements are a little bit less demanding. On the other hand, I think what you're going to see is that people are going to face two kinds of investment opportunities. One are things they get through the Internet from companies they've never heard of hundreds or thousands of miles away and say give $50 to my little, you know, sewing business. And those, you will be very smart to just simply delete the messages and do nothing with them.
BROWNAs we've all been told to do. Right.
SHUMANThe smarter investors will look at local companies, and so what I like about the crowd funding bill is it legalizes the one kind of small investing that can be smart.
BROWNAnd what is that?
SHUMANAnd that is to actually put money into a company you know, whose products you actually can put in your hand or whose service you can experience, whose CEO you can step into the office and talk to, whose employees will tell you what the workforce is really like.
BROWNWhat's new about that, Michael? I mean, haven't people been able to do that all the way along?
SHUMANThey haven't, and that's really been the great fault of this securities law edifice we created 80 years ago. That is, for local investors to put money into even businesses that were in their backyard, they could not do so without...
BROWNSo a local business owner, a small business owner was basically forced to go to a bank or another lending institution for investment...
BROWN...or a professional fund that might specialize in making loans or underwriting new businesses.
SHUMANAnd the reality facing most small businesses is much more limited than that. All right.
SHUMANIt really is, you know, for -- in -- over the last 10 years, it was people who financed businesses on their credit cards or second home mortgages or retained earnings or the so-called three Fs -- friends, families, and fools. But beyond that, small businesses have very, very few options for financing. And this opens up a whole new domain for them.
BROWNDo you have a comment on this? Have you thought about starting a small business and wondered how you would put the funding together? Do you have people in your family or circle of friends who would have been happy to invest with you in a new business but were not able to until recently because of the laws that Michael Shuman here is talking about? Give us a call. Let's find out about it. I'd love to know.
BROWN1-800-433-8850 or you can email us at firstname.lastname@example.org. We have, I believe, Trexler Proffitt. He is with us from Franklin & Marshall College in Pennsylvania as an assistant professor of business, organizations and society. Trexler Proffitt, welcome.
PROF. TREXLER PROFFITTThanks, Paul. It's great to be with you...
PROFFITT...and also with you, Michael.
SHUMANNice to be with you, Trex.
BROWNThank you so much. So, Trexler, I understand that you are very interested in the creation of local stock exchanges. You know, every hour I'm on the air in the mornings, and as we come up to a time post, I may have the latest figures, the Dow Jones Industrial Average, the NASDAQ, where are all these things going. I've never been able to say, here's what's happening on the Lancaster stock exchange.
PROFFITTThat's right. It's a -- and, you know, in the end, it might be more interesting to many radio listeners to hear what's going on in their own communities than to hear, you know, the latest outsourcing news or what's collapsing in another country. To some extent, you know, this is an idea that's really very ancient in its origins. You know, we've had stock exchanges as we would recognize them since about 1600. So, you know, the real question isn't, you know, should we have local stock exchanges. It's rather, why don't we have more local stock exchanges?
BROWNWhat's keeping us from it?
PROFFITTWell, there's been a trend -- you know, I think Michael did a great job of reviewing why, you know, we've gone kind of overboard to protect people from themselves. I mean, I can go out and get drunk. I can join the Army and get shot. I can go out and vote a lot easier than I can do local investing. And that's sort of weird because, you know, who is most likely to benefit from my local investing? It's going to be my neighbors, my community. It's going to be, you know, folks giving jobs around me.
PROFFITTAnd so it's actually much more in my interest, from a multiple bottom-line point of view, to be able to, you know, maybe get a return on my investment better than what's going on in the crazy stock markets I don't understand. But then, you know, also, there's this huge benefit in my community where, you know, I don't want a whole bunch of unemployed people around me looking desperate. I would prefer that, you know, I could, you know, give $1,000 or $10,000 to a local business I know and then (unintelligible)...
BROWNWell, let's get in with a listener here for a moment and talk with Emmanuel from Anne Arundel County in Maryland. Emmanuel, how are you? You're on the air, and tell us what's on your mind.
EMMANUELYes. First of all, thank you very much for taking my call. And I just wanted to chime in and say I thought it was a great idea. And I think he was about to allude to what I was thinking of. And I would be more inclined to invest in a local business, one that I would probably have a direct either benefit from or to be able to gain from, be it financially, or to see that my community would benefit from it.
BROWNHave you had that chance yet, or have you...
BROWN...wanted to and not been able to?
EMMANUELThis is the first time I've heard of such an idea, and I think it's a great idea. It kind of gives us a more hands-on approach as it relates to investing. I mean, when you think of investing, you think through the big conglomerates, like Fidelity and so forth. But if things were much more local, I think that would be worth taking a great look at, I think, 'cause we would benefit as investors if the business, of course, benefited. But more importantly, you know, or in conjunction with, the community would benefit, and I think that's a great incentive.
BROWNWell, thanks very much, Emmanuel. Thanks for your call. Appreciate hearing from you.
BROWNAnd, Trex, what do you think about that? Is -- does it look as though we're getting closer to being able to do this sort of thing that Emmanuel says he wants to do? And what would it take to actually see some local stock exchanges get started?
PROFFITTYeah, sure, so, you know, the important reason why I like the idea of local securities markets, we might even call them -- 'cause stock exchange has come to me in a very specific legal thing that the SEC regulates. But if we go back before the existence of the SEC, any kind of securities market would help with certain things. And it ties back to an insight that I think Michael brought forward, which is that we used to have a way to run things like this before the SEC started protecting us.
PROFFITTAnd I have nothing against the SEC, you know, shielding people reasonably from dangerous investments. But one of the bad effects of that is that we've forgotten how to do things for ourselves and take responsibility for our own decisions. And so when you think about what Emmanuel is discussing there, you know, he's probably not thinking that he's going to throw all his money into the local securities market.
PROFFITTHe'd like, for example, to diversify among several types of investments, and a market helps with that. He'd also like to be able to get in and out of certain investments when it's time for him to buy a car or a house or send kids to college. When he wants to do those reasonable things, you've got to have a market to sell those securities that you've invested in. And then the last...
BROWNRight, so that your -- oh, sorry, go ahead.
PROFFITTThe last point -- I'll close with this last point, which is just that we're not talking about taking all of our money and putting it into brand-new kinds of investments. I think, you know, the whole idea of a local exchange is that we could maybe take 1 percent of our investments, you know, that $30 trillion that you mentioned.
PROFFITTIf we just were able to allocate a small percentage of our investment so that it was a more balanced portfolio between, you know, emerging or international markets, the national blue chips and, you know, the bigger companies that we already know and love, and then something more interesting and local that, you know, with which we have a personal relationship, then that would seem like a much more balanced kind of investing.
BROWNIt's basically another type of diversification, is what you're saying here.
BROWNMichael Shuman, what options are out there nowadays for local investing? We've talked about this idea with Trexler Proffitt of local or regional stock exchanges. But what else is out there? If you did want to invest locally, what could you do?
SHUMANWell, there are a bunch of options, such as joining a cooperative, lending money to the cooperative. That's a form of investing. There are some banks that are issuing special kinds of certificates of deposit that support loans, local business. You can buy municipal bonds that might be connected with specific local development projects that you like. There's...
BROWNYou know, there are bond funds. That actually brings up a question for me. There are bond funds that you can buy online, say, if you work through an online brokerage or you have an investment advisor. But say that you lived in Montgomery County, Md., and, as you say, there is a big project underway -- maybe it's a road building project or maybe a project to build schools or libraries or work on infrastructure -- and you wanted to invest in that.
BROWNHow could you do that specifically? Because, normally, you'd go through a fund or something, and you might not have much control over exactly what it was you're investing in.
SHUMANRight. So it depends a lot on the bond issue. But there are many bond issues that just -- you know, like using E-Trade, you can go online and purchase small shares of. The important point here, though, is that most investors are investing through their 401 (k) s or IRAs. And there are something like 7,500 mutual funds out there of stocks and bonds that you might choose from...
SHUMAN...and not a single one contains any local businesses, not a single one of them. So the way you have to do it right now is roll over some of your money into what is called a self-directed IRA. You basically hire somebody to serve as your custodian, pay them a couple of hundred dollars a year, tell that person where you want your money placed, and then you can put it in all kinds of local investments.
BROWNAnd does this person have to be a financial advisor? What does the person need to be?
SHUMANThe person has to meet the qualifications of a custodian and has to file certain reports every year. But I've talked with credit unions and banks around the country that are so interested in this idea, they're now training staff people to become custodians for their members and their customers.
BROWNSo that's where you might go to find that person. Let's check in with Angelo in Maryland, and, Angelo, you are on the air. What's on your mind?
ANGELOWell, as someone who has run businesses, had partners in businesses, who is a very avid stock investor, this whole idea of just being able to knock on the bar down the street's door and say, hey, I really like your bar, I want to invest $10,000 in it. Will you become a business partner with that person? And the reason that you have stock, the reason you have a regulation, the reason that the whole system is set up the way it is, is so that -- there are -- it's more of a commodity.
ANGELOAnd there are rules that have to be followed. If the idea that you're going to be able to just circumvent all that without buy-sell agreements, without limitations on dilution -- I mean, to the unsophisticated investor, there are so many ways that they can get completely ruined.
BROWNLet's get a little reaction from both Trexler Proffitt and Michael Shuman. Trexler, what do you say about that?
PROFFITTWell, Angelo's right. I mean, that's an important reason why we're advocating an institutional framework that's a little bit more than just two people meeting on the street and throwing some money back and forth. A securities market and a platform to offer and trade securities, of course, will have to, in order to be trusted, exert significant scrutiny and due diligence on whatever's going to be appearing on its platform. And that's why we like the idea of this intermediary. But, at the same time, technology today allows that to be brought to the very local level.
PROFFITTWe've calculated, for example, that with an operating budget of $800,000 and five staff, we could run an offering and trading platform that has that kind of due diligence built into it. Now, you don't often get the exact same kinds of documentation that the SEC might require, but, nonetheless, we can take significant steps at an institutional framework at a local basis to make sure that Angelo's fears are at least mitigated to a large degree.
PROFFITTPeople will still have to have a, you know, buy and beware kind of attitude in this until five or 10 years down the road. But, you know, in principle anyway, that's why we don't just throw it open to the Internet and say, hey, you know, invest in whatever crazy stuff you can find. There's got to be a process in place to make sure that the businesses that get on the exchange or get on the platform have really followed a set of procedures that reassure the public and that are, you know, to some degree auditable. So, you know, that...
BROWNAngelo, does that ease your fear a bit?
ANGELOWell, it's not -- I don't really have a fear because I probably wouldn't, but...
BROWNYou wouldn't do it anyway, right?
ANGELO...I was hearing other people -- I was hearing the other callers, and I think the presentation so far within this topic has been a much more casual kind of, hey, invest local, like, you know, going to the farmers' market and buying your vegetables. And, you know, investing in a company and becoming a business partner, basically (word?) the company is being an owner -- when you buy stock, you are an owner. It's not trivial matter. And so I think that what he's just added kind of changes the flavor of what I've heard so far because...
BROWNFor the better?
ANGELO...much -- yeah, for the better because it's not as casual. And the only thing I also would say about the bonds, you know, just before you took my call -- you were talking about bonds. I mean, it's very easy. If you want to invest locally, it's very easy to get a Maryland bond fund. There are several of them -- T. Rowe Price, Fidelity. Almost any major brokerage firm has Maryland bond funds, and they have the tax benefit of being tax-free in Maryland as well, as well as federal. So...
BROWNMm hmm. Let's...
ANGELO...if you want to invest locally too and you want to invest in infrastructure, schools, roads, any local community, you can always, you know, invest in a bond fund.
BROWNFigure out a way to do that, sure.
BROWNLet's go to Michael here. Michael Shuman may have something to say.
SHUMANWell, I think that the crowd funding law actually answers most of Angelo's questions, that is, that it doesn't allow anyone to put $10,000 passively into a business. For, you know, many -- many incomers, it would be less than $2,000. And the only way that you can put money in that security is if it has been vetted by a SEC-licensed crowd funding site.
SHUMANBut the important point is is that rather than having $100,000 legal price tag on doing this, it maybe will be a couple of thousand dollars for a business which means it's a whole new ballgame for people having the ability to reach out and put money into properly vetted local businesses.
BROWNAnd you are also, I take it Michael and Trexler, talking about being able to invest or drill down even more locally than, for example, the type of Maryland bond fund that Angelo was referring to. You seem to be talking about really locally organized markets or opportunities to be much more specific in your investments.
SHUMANThat's what people are looking for, is the ability to invest in specific businesses in specific communities that lead to specific job outcomes.
BROWNHow does that sound to you, Angelo?
ANGELOI get it. It all sounds fine until, you know, someone -- investing in business is all fine as long as the business is still in business. So when, you know...
SHUMANBut what the...
ANGELOSo when you, you know, what happens when the business fails? Who has access, you know, to the remaining assets and -- you know, that's why you have buy-sell agreements 'cause buy-sell agreements are for, you know, what happens when the business fails and what happens when, you know, the business gets taken out? How...
BROWNWell, of course, there are structures for that in place for larger companies and for stock investors in current stock markets, for example. And one would imagine that something similar would be in place for smaller markets.
ANGELOSo, like, you know, as long as it's, again, when I think until I heard, you know, this discussion, it was coming across much more casual. So I think...
BROWNMm hmm. Angelo, thanks.
BROWNYeah. Thanks very much for your call. It's good to hear from you. You raised some very, very good points. Appreciate your calling. Let's go to John in Alexandria, Va. John, you are on the air.
JOHNHello. Yes. I was wondering about actually finding ways of investing in local companies. I've thought about doing that from time to time. I'd be more -- much more of an equity investor rather than investing in bonds or bond funds. And, right now, I don't think there's a particularly good way to do that.
BROWNIn order words, to find out where the businesses are local businesses that would want investment. Does either Trexler Proffitt or Michael Shuman have a suggestion there? Trexler, what do you have on this?
PROFFITTWell, thanks for that great question, John, because I think, you know, all of us have been puzzling this through. And Michael's been working at this a lot longer than I have, and I think he has a lot of creative ideas for working within the existing system. The most common folks around in my area who do this are the angel investors. And so there are some angel investor networks who are seeking to make what we would call private deals with local businesses.
PROFFITTAnd, of course, you know, although they are not prevalent in South Central Pennsylvania, venture capitalists will also, you know, assist with this kind of funding. So one way to do it is to join in with these folks. The problem is you better have a lot of money. They really want to, you know, make sure that you're going to be a constructive member of the club. So when you join, you know, you're really talking millions of dollars in the bank, you know, to be parceled out.
PROFFITTI think another really interesting idea for them are, you know, modest means of folks is to band together in, you know, various forms of loan pools, investment clubs and so forth. And I think that's an underutilized technique. So I think there are these really great ways that are out there now, but they're not sufficient because they're not really -- people don't have the time to devote to scrutinizing every investment, you know, from scratch, and they'd like a little help.
PROFFITTSo that's why we want to build some institutions in the local economy that will help view that and help, you know, make it a little bit easier for people to look at things the same way they look at a Vanguard mutual fund online. You know, that you don't just buy any old thing just 'cause it's sitting there. You try to scrutinize it and learn more about it if you can. And so we want to facilitate, you know, so that you don't have to be, you know, a millionaire in retirement with loads of time to really develop close relationships with those you would like to invest in.
PROFFITTAnd although that's kind of a nice effect if, you know, once you start the investment process, that you might actually be able to go and be a customer and, you know, talk to the owners and be a part of their everyday life. But, you know, why should you have to do that in order to, you know, consider the investment? Go ahead.
BROWNRight. Thanks. Michael Shuman, anything to add on this? John, I hope this is giving you some ideas at least.
SHUMANWell, there are two grassroots networks out there that can help find the answer in particular places. One is the Business Alliance for Local Living Economies. They have networks in 80 places around North America, and they're meeting in two weeks in Grand Rapids. And they have a very lively network that tracks local investment. The other is a group called Slow Money, which has about two dozen networks around the country, and they are specifically looking for local food investments. And there are some groups in this area who are affiliated with Slow Money.
BROWNWe have links to these groups also on our Web, and anything that is not there that's been mentioned in the show, we will put up. It's kojoshow.org. So that's great. So some ideas, John? Does that help you out a little bit?
JOHNIt does, actually. Thank you.
BROWNGives you start. Well, thanks for calling, John. This is "The Kojo Nnamdi Show." Been great to speak with both of you, Michael Shuman, the author of "Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street," and Trexler Proffitt, an assistant professor of business organizations and society at Franklin & Marshall College. Gentlemen, thank you both.
BROWNWe'll continue our conversation. We have Barry Estabrook coming in with us, the author of "Tomatoland: How Modern Industrial Agriculture Destroyed Our Most Alluring Fruit." It's coming up after a short break. Stay tuned.
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