Week 1: Banking as if Society Mattered > Overview > Introduction to Week 1
- This course is about money and banking, and how both can address and perhaps solve some of the most pressing social and ecological problems in the world today.
- This course was developed by a group of researchers here at MIT Community Innovators Lab that includes Phil Thompson, Lily Steponaitis, myself- Katrin Kaeufer, a group of fellows, the Mel King Fellow group of 2015, and a wide network of community banks, social banks, green banks, especially the Global Alliance for Banking on Values.
- The purpose of this course is to open up this black box of what banking is and ask the question, what impact can banking have? Is it just the negative impact or is there potential in banking in general? So why do we want to open this black box? It’s because banks are crucial intermediaries… And banks actually make decisions about which ideas and which ventures to fund.
- The other side of banking, and what we want to address in Just Banking, are ways in which banks can take into account not only profit, but also the world we live in, the ecology, and social problems, and intentionally support ideas in ventures that address people, the planet, and profitability.
Week 1: Banking as if Society Mattered > Voices From the Street > Voices From the Street
- I think of banks where you put your money, and it’s safe.
- I think of high fees that are charged to the public, which I think that they should not be charged for having your own money in the bank.
- When I think of banks, probably mainly the financial crisis and in some ways, definitely that there is a level of mistrust and of some things happening behind closed doors.
Week 1: Banking as if Society Mattered > What is Banking? > What is Banking?
- We are encouraged to put what little we earn in a piggy bank or a shoebox and to save it for a rainy day.
- As we get older, some of us open bank accounts and do the same thing, but on a larger scale.
- Which bank gives me the best rates? Are there any fees? Is there a branch nearby? Regardless of which bank we choose, we feel safe knowing that the bank will take our money and lock it away in their vaults, right? Not exactly.
- Banks are allowed to take a portion of the money you deposit and use it to make more money by spending it in the economy.
- If you deposit $100 in a bank that has a 1% fractional reserve rate, the bank can take $99 of your money to invest or loan out to other clients.
- The full amount of the deposit is available for the depositor to withdraw at the same time that the bank has loaned out $99 to whoever got the money as a loan.
- What if everyone who deposits their money in a bank decides they want to withdraw it at the same time? Because the bank only has 1% of the depositor money in reserve, they would not be able to pay every depositor back in full.
- In general, this lending and investment activity is also how banks make their money.
- The difference between the return on investment and the interest you receive is the net interest income for the bank.
- As a customer, you usually don’t know what your bank does with your money, except for what you can learn from websites or annual reports.
- There are retail banks, commercial banks, investment banks, and central banks, all specializing in different types of transactions and client groups.
- Despite these different specializations, what all banks have in common is that they are regulated by local, national, and international authorities.
- The goal of this regulation is to provide oversight and manage the risks banks are taking with your money when it’s out of the vault and circulating in the economy.
Week 1: Banking as if Society Mattered > The Crisis of Finance > Financialization
- Yeah, and so this is a very powerful position in the economy.
- There’s been a massive financialization of the global economy, which is essentially the growth in the size and the importance of the financial sector, relative to the real economy and relative to the overall economy.
- For a long time, the political consensus seemed to be that this was actually a good thing, that growth in this sector would then sort of trickle down to the rest of the economy.
- So this is the mental model of what’s good for Wall Street is good for the rest of the economy.
- A crisis creates a downward spiral for the rest of the real economy.
- What is not often discussed is that there are other negative side effects of this growth, of the speculative financial economy in relationship to the real economy.
- So if you are operating in the speculative financial economy, you have chances to create returns of 15%, 20%, 25%; And to create these returns in the real economy is almost impossible.
- Now they compete with a return of 10%, 15%, 20% in the speculative financial economy, and that’s a real issue.
- So in the US, that was about $700 billion worth of taxpayer money to bail out these banks, because the fear was if they collapsed, the whole global economy would collapse with them.
Week 1: Banking as if Society Mattered > The Crisis of Finance > Guest Faculty: Simon JohnsonV
- Well, on the global level, obviously, we had a big crisis in 2008 that had massive negative implications in United States, in Europe, and in other countries.
- Some of our biggest banks, they might look OK on the surface.
- Well, the biggest challenges are that some of the banks are extremely large at this point.
- When things go well, the people running these bigger banks get the upside.
- I spent a lot of time studying the details of various policies, trying to address the issues of risk in banks and in global mega banks in particular.
- There is a risk of another debilitating crisis, or maybe a crisis that’s worse and has more negative implications.
- Well, the banks are a very powerful lobby- the big banks.
- After they’ve finished working in government, they go back to work for the bank.
- So there is a circle of people who are convinced that the big banks are good for the society and good for all of our economies.
- I don’t think it’s for me to judge that this is a good idea and this is a bad idea.
- Big negative spillovers have negative effects on the rest of the financial system and the rest of the economy.
- So I want us to have that caveat and that concern more clearly in mind for the financial sector.
- Well, if we’re talking about powers in the sense of regulations and rules that could be made, I would limit the size of the largest banks in the United States.
- I would also require that banks here and in other countries fund themselves more with equity and relatively less with debt.
- Banks have developed a taste for funding themselves with a little bit of equity and a huge amount of debt.
- Of course, not many people agree with me who work in those big banks.
- Look, I think banks and also other companies absolutely can and should take on a wide range of issues.
- I think the way to do is to explain to your customers and your investors what you’re doing and why and let them choose with you to invest in certain things, to build certain things, and to avoid other kinds of activities.
- Not just the people running the banks, but their customers and the people providing them with funding are going to want to be aware all the impact of everything they do.
- So the Independent Community Bankers of America were kind enough to name me one of their Main Street Heroes.
- I don’t work for anyone except MIT and one independent think tank in Washington.
- In that perspective, I think there is a bright future for smaller community banks because they’re connected to the customers.
- They believe in what many of those community banks are doing.
- I think there is much more suspicion and hesitation to trust the larger global banks, in part, because consumers and investors have been trampled on by those banks in the past.
Week 1: Banking as if Society Mattered > The Crisis of Finance > The Global Financial Crisis
- What ended up happening is they devised a system in which smaller banks sold the mortgages to Wall Street banks, which then bundled the mortgages into packages and the shares of the monthly income from the packages were sold to investors.
- Issues started to arise when just about everyone who wanted a mortgage and would normally qualify for one already had one, but the investors still wanted more.
- It eventually reached the point that, in some instances, all that was needed to qualify for a mortgage was a stated income and money in the bank.
- Small banks were taking out loans from larger banks to buy mortgages and selling them to Wall Street banks.
- These banks were often highly leveraged, often 20 to 1, which means they were able to borrow up to 20 times the cash that they actually had. When the bubble burst, housing prices began to plummet and nobody wanted to buy these mortgages anymore.
- The whole system came crashing down, which affected not only Wall Street, but also the people who had taken out the mortgages and the entire global economic system.
Week 1: Banking as if Society Mattered > A History of Exclusion > Exclusion from the Banking Sector
- We saw predatory lending, and other really harmful activities that were part of the daily activity of these financial institutions.
- This kind of exclusion creates a lot of negative effects on these individuals and on these communities.
- Yeah, and so talking about exclusion on the global scale can seem very abstract.
- So certain neighborhoods were outlined in blue, and that was a good investment.
- Certain neighborhoods were outlined in red, and that was seen as too risky.
- Red neighborhoods were often black or minority neighborhoods.
- What happened is this essentially became a self-fulfilling prophecy, where these neighborhoods that were redlined, because they couldn’t access finance, they couldn’t get mortgages or really develop their communities, it led to a really steep decline in a lot of these urban neighborhoods.
- In our economic system, where money and finance plays such an essential role, being excluded from financial services basically excludes this individual from society as a whole.
- So this open market is used by financial institutions that use the vulnerability and the difficulty of the situation to sell products that are basically toxic for the recipients of these products.
- What we want to emphasize is that access to finance and access to banking is absolutely essential for developing well-being in a community.
Week 1: Banking as if Society Mattered > A History of Exclusion > Interview with Brian Argrett
- I’m Brian Argrett, CEO, President and CEO of City First Bank of DC, which is in Washington DC. The way City First was founded completely impacts and sets the course for what we do today.
- To really be the control shareholder, the founder of the bank, and to this day, that nonprofit is the largest single owner of the bank.
- So what does that mean on the ground? It means that the heart of this for profit bank in Washington, City First Bank of DC, we really have the history, and the essence I say, a nonprofit spirit kind of flows through our veins.
- So there’s really a sense of wanting to, and needing to, and being put here to really benefit those underlying communities.
- For where capital has flowed has flowed, and where it hasn’t.
- We have been very active in really caring about it, and investing and lending in, what we call the east of the river, southeast Washington DC. And have been fortunate to be able to participate with other actors in the community.
- The way we like to look at them is catalytic projects, that will start something that the community and other capital providers can help to, I won’t say finish, because your work’s never finished, but to continue to urge along.
- Yes it’s a really interesting question, because you really have to be engaged and not, from afar, kind of throwing in benefits or throwing in opportunities.
- It’s focused completely on east of the river, and we’re bringing together all of the stakeholders who might be involved in and might be interested in, and are interested in, a more equitable economic development east of the river.
- So this is a community in Washington where economic development is coming, and the question is, as it comes, how can we make sure that resources are more fully shared by the community.
- Including the city government, the residents, and the nonprofits that are working within that community, the for profit developers who will have an interest in the commercial corridors, and housing, and the nonprofit providers , as well as other financing sources.
- Talk about the tough issues, everything from gentrification, to job creation, to entrepreneurialism within a specific community, and come out of that with hopefully stronger connections, better insight, maybe a little bit of a policy paper to be able to decide how we should encourage this on a go forward basis.
- Of course, for ourselves, greater clarity on where the needs are and how they might be bridged.
- It’s been interesting for us because where the bank is located is at the corner of 14th and U Street in northwest Washington, which was an area, when we first located, that had been in our target area.
- In the early years we were focused on really creating housing, rehabilitating physical structures for use, putting them back in service.
- Because now, in a market where the values have risen, you are creating some real dilemmas for will how will folks be able to stay and enjoy that.
- I think as a community development organization and a values based bank, our job is to try and really figure out how to fit into that and make a difference, but also be flexible enough to recognize that those needs may change over time.
- Be it, for example, land banking, that might be used for the city to acquire significant real estate within a community where it’s going to appreciate, and then be able to use that in trades, or in development, for more affordable uses when you know down the line that’s where you’re going, I think the first thing that has to be in place is intentionality.
Week 1: Banking as if Society Mattered > Introduction to Just Banking > Introduction to Just Banking
- The purpose of this week was to look into how banks operate, and the challenges of the financial system, and the challenges with banking.
- Just banking means to look at banks and their potential.
- Banking becomes a tool to address social and ecological challenges.
- In our research around the world where we looked into different banks that operate that way, we found a few criteria that define just banking, and those criteria I would like to share here.
- The first characteristic of just banking is that banks use finance as a tool to address social and ecological challenges.
- In order to do this, it’s important for banks that operate in that way, that they’re transparent, because that’s their core business model.
- They also want to reconnect the money that depositors bring to the bank to the impact and the loans they give out.
- So transparency is a core descriptor here for just banking.
- The third criteria that’s important is that just banking means you have to move away from standardizing your financial products.
- For banks, it’s much more efficient and effective to standardize their products.
- If you operate in the mode of just banking that requires you to really understand the clients and customers’ needs, you are interested in increasing the well-being of the client.
- Then as a result of that, I think everybody can easily conclude that just banking means that you’re really focused on the real economy, and you’re not focused on the just the financial economy.
- So derivatives and speculative banking business is not part of just banking.
- The question that we get right away is how do you know the bank has an impact? And this is very individual.
- If you’re a community bank, you have a different impact than if you’re a green bank, and your main focus is on regenerative energy.
- I think there is a way to describe what type of impact just banking can have.
- So one form of impact- and we don’t call this just banking yet- is that you have a few green and social projects sitting somewhere in your banking business, but it’s really not core to what you’re doing.
- Just banking begins in the moment that it becomes core of your business model, and then you can have several levels of impact.
- The purpose of this clip was really to introduce you to what is just banking, how does it distinguish itself from mainstream banking, and where is the impact.
Week 1: Banking as if Society Mattered > Introduction to Just Banking > Just Banking in Context
- Well, the labor groups I work with, and the community groups I work with kind of view banks as the enemy.
- Historically in the US, there have been movements going back for more than a century for what we would call just banking.
- There have been movements around farmers cooperative banking.
- So you’ve got this really ugly history, here, that’s embedded in people’s mind.
- So you talk about mental model, banks symbolize to them that all oppressive structure of basically indentured servitude.
- In the black church historically, when people didn’t have banks to go to, per se.
- The board of trustees were business people who also were strong community citizens.
- They were given a role of honor within the church, and they helped manage the finances of the church.
- Because they were in this privileged position, people also trusted them to manage their personal investments and personal finances.
- People would not only talk about God, they’d also talk about their investments, and their future, in their burial fund, and their insurance fund, and their this fund, and their that fund.
- Maybe around affordable housing, or something else that people value.
- It’s not, it’s just something that’s been created in our modern society by political institutions and banks.
- It actually is a nonsensical separation that we just tend to take for granted.
- Ultimately, the only way to change banking and finances politically: to re-regulate.
- I think people have to have some vision or goal that they’re trying to achieve through regulation.
- Helping to give people an idea through practical examples, as well as education and discourse.
- One of the things I’m trying to do now in practice is I’ve been going around to labor unions, showing them that if they invested in affordable housing for their members, that they could actually increase the monthly income of their members much more than they can at the bargaining table with firms.
- If their job is really to help improve the lives of working people, then why do they just limit it to bargaining at the workplace? Why wouldn’t they just take a much more expansive view? What are all the resources and capacity that they have, and how can they be put to better use to help workers economically? Well that’s a whole, radical rethink of a union.
- Then people begin to get it, to get a different a image.
- Then the financial people can- even if they want to do the right thing, there has to be something they can put the money into.
- You actually have to get in there and help fashion that thing.
- That’s a radically different framework for these organizations.
- It’s kind of a chicken and egg thing, in a way.
- Because… and I think that’s why education, and dialogue, and communication are so important.
- If they know that there are people who actually might, if they have a good idea who actually might invest in or listen to it, then they’ll be more willing to go out and try things, and venture.
Week 1: Banking as if Society Mattered > Ego To Eco-system Economies > Guest Faculty: Otto Scharmer
- The core idea is that to address the challenges we face as society, we need entrepreneurs and business to develop business models around these challenges.
- We were wondering, what we are seeing there, is this an isolated phenomenon, or is this something that you see in your work? And how would you describe what’s happening right now in our economic system and society? Well, I definitely see it as part of a bigger pattern.
- Another way of business that we haven’t quite figured out yet, but that we can already see in small beginnings, is about to happen and take off.
- So what would you describe as Just Banking, and the financial industry, can be also seen- if you look and if you move to other sectors, you see a whole new breed of entrepreneurs emerging.
- While in the past we had business on the one hand, and NGOs, mission driven entities, on the other hand, we now see a whole breed of enterprises that really operate like a business, but with a social mission, business with a social mission to basically make the world a better place.
- In other words, using the power of business, and also the power of money and investment, for positive social and environmental impact.
- Let’s go into the old world, the old business, the old global tech, and traditional business companies.
- Because most of them today, when they talk about strategy, and leadership, and innovation, they use the term ecosystem.
- That’s why they had no other chance than taking care of the entire ecosystem, improving the way business is done in the entire ecosystem, that includes all the suppliers, that includes all the customers and users, that includes all the other departments, including the social and environmental context.
- So what does it mean to act from an ecosystem awareness and ecosystem perspective? How would you describe that? What does it take? Well it’s a very good point.
- So in terms of practical skills, and if you look at- so here’s another word where more maybe in mainstream business, this is coming across.
- That’s the problem, right? And more than 50% of all change management today in bigger, more complex, organizations, deals with moving from a silo perspective way of operating, which is what we call egosystem awareness, to the more ecosystem awareness mindset, that includes the impact that I have on the other stakeholders.
- So economic theory argues that ego, so myself interests, is the driving force for our capitalistic system, and this is where our creativity sits, and that’s the dynamic element in our society.
- If we take your thinking around ecosystem, how would that translate in the economic or the larger system perspective? Well I actually think that at the core, and maybe the unseen, and maybe most exciting and interesting, and part of the- we all feel we are part of a transformation, or a moment of disruption, whether it’s a transformation, we will figure out, right? So it could move us forward, backward, we don’t know.
- The first operating- and each operating system creates a new response, how to deal basically with division of labor, which is the key to productivity, and to progress, in our economy worldwide.
- Now its markets and competition, as the second coordination mechanism coming into play, huge growth, huge success, huge wealth created for many, and huge problems in the form of negative externalities, poverty, inequity, and environmental destruction.
- That has led to basically evolving the regulatory framework around these key externality issue areas, through a whole set of institutional innovations, which includes the Federal Reserve System, Social Security, standards for labor, the environment, and so on, and so forth.
- What we believe is that these three mechanisms that we have, central planning, market and competition, and then basically, stakeholder groups negotiating with each other, needs to be complimented with a fourth mechanism.
- So in a way, what I believe is that if you look at the evolution of the global economy and of economic thought, you can see that that evolution is an embodiment of an evolving human consciousness, basically from ego to eco- from egosystem awareness- something we still teach in business schools- to the ecosystem awareness, something that you need to master, that you need to practice in order to deal with reality today.
- So in a way you could say what we see in leadership in business today is that, to be a good leader, you need to be aware of, and literate in terms of the global externalities, that you as a company are dealing with.
- That’s why the MOOC and the topics, and the examples that you are exploring in this MOOC, are so vital, are so central for evolving the economy as a whole.
- How? Well by operating more from this ecosystem awareness that is inclusive of all its participants, and not just organized around the well-being of a few.
- So I expand my awareness, and thinking, and the money following consciousness, and channel money into these new ideas.
Week 1: Banking as if Society Mattered > Ego To Eco-system Economies > Ego to Eco-system Economies
- The core idea is that to address the challenges we face as society, we need entrepreneurs and business to develop business models around these challenges.
- We were wondering, what we are seeing there, is this an isolated phenomenon, or is this something that you see in your work? And how would you describe what’s happening right now in our economic system and society? Well, I definitely see it as part of a bigger pattern.
- Another way of business that we haven’t quite figured out yet, but that we can already see in small beginnings, is about to happen and take off.
- So what would you describe as Just Banking, and the financial industry, can be also seen- if you look and if you move to other sectors, you see a whole new breed of entrepreneurs emerging.
- While in the past we had business on the one hand, and NGOs, mission driven entities, on the other hand, we now see a whole breed of enterprises that really operate like a business, but with a social mission, business with a social mission to basically make the world a better place.
- In other words, using the power of business, and also the power of money and investment, for positive social and environmental impact.
- Let’s go into the old world, the old business, the old global tech, and traditional business companies.
- Because most of them today, when they talk about strategy, and leadership, and innovation, they use the term ecosystem.
- That’s why they had no other chance than taking care of the entire ecosystem, improving the way business is done in the entire ecosystem, that includes all the suppliers, that includes all the customers and users, that includes all the other departments, including the social and environmental context.
- So what does it mean to act from an ecosystem awareness and ecosystem perspective? How would you describe that? What does it take? Well it’s a very good point.
- So in terms of practical skills, and if you look at- so here’s another word where more maybe in mainstream business, this is coming across.
- That’s the problem, right? And more than 50% of all change management today in bigger, more complex, organizations, deals with moving from a silo perspective way of operating, which is what we call egosystem awareness, to the more ecosystem awareness mindset, that includes the impact that I have on the other stakeholders.
- So economic theory argues that ego, so myself interests, is the driving force for our capitalistic system, and this is where our creativity sits, and that’s the dynamic element in our society.
- If we take your thinking around ecosystem, how would that translate in the economic or the larger system perspective? Well I actually think that at the core, and maybe the unseen, and maybe most exciting and interesting, and part of the- we all feel we are part of a transformation, or a moment of disruption, whether it’s a transformation, we will figure out, right? So it could move us forward, backward, we don’t know.
- The first operating- and each operating system creates a new response, how to deal basically with division of labor, which is the key to productivity, and to progress, in our economy worldwide.
- Now its markets and competition, as the second coordination mechanism coming into play, huge growth, huge success, huge wealth created for many, and huge problems in the form of negative externalities, poverty, inequity, and environmental destruction.
- That has led to basically evolving the regulatory framework around these key externality issue areas, through a whole set of institutional innovations, which includes the Federal Reserve System, Social Security, standards for labor, the environment, and so on, and so forth.
- What we believe is that these three mechanisms that we have, central planning, market and competition, and then basically, stakeholder groups negotiating with each other, needs to be complimented with a fourth mechanism.
- So in a way, what I believe is that if you look at the evolution of the global economy and of economic thought, you can see that that evolution is an embodiment of an evolving human consciousness, basically from ego to eco- from egosystem awareness- something we still teach in business schools- to the ecosystem awareness, something that you need to master, that you need to practice in order to deal with reality today.
- So in a way you could say what we see in leadership in business today is that, to be a good leader, you need to be aware of, and literate in terms of the global externalities, that you as a company are dealing with.
- That’s why the MOOC and the topics, and the examples that you are exploring in this MOOC, are so vital, are so central for evolving the economy as a whole.
- How? Well by operating more from this ecosystem awareness that is inclusive of all its participants, and not just organized around the well-being of a few.
- So I expand my awareness, and thinking, and the money following consciousness, and channel money into these new ideas.
Week 1: Banking as if Society Mattered