Investing local money in the real economy frees up capital for community business

150 150 Marc Nemanic

Thursday Night Market in Chico, California (Photo: CSU, Chico)

Editor’s Note: The following comes from the California Economic Summit Capital Action Team’s “Report on the Access to Capital Initiative – Butte Region.” You can read the full report here.

When it comes to growing regional and local economies, it’s becoming clear we should be encouraging our citizens to put their money in institutions that invest locally as an alternative to the current competitive model.


The Federal Reserve Bank of Richmond just issued an Economic Brief called “Explaining the Decline in the Number of Banks since the Great Recession.” The authors of the article note that the Great Recession substantially altered the banking landscape.

Historically, from 1960-1980 there were somewhere around 12,000-13,000 independent banks in the U.S. Beginning in the 1970’s, states began to relax regulations that limited branch offices doing business across state boundaries. Prior to that time, the regulations created a banking system that was made up of thousands of small, independent banks clustered in each state. The deregulation process continued through the 1980’s & 1990’s. This led to consolidation of smaller or weaker banks by larger or stronger institutions who took advantage of economies of scale. By the year 2000, commercial banks dwindled to less than 7,000.

Up until the mid-1980’s, new bank growth was very strong, generally averaging 100-250 new banks per year. During 2002-2008, new bank formation averaged about 100 per year. From 2007-2013, the Great Recession culled the herd by 836 banks, equaling about 14 percent of the total. Equally telling is that this drop was heavily concentrated in small community banks with assets of less than $50 million.

In fact community banks saw their numbers drop by 41 percent. Since 2010 only 4 new banks were formed nationally. The article states “This collapse in new bank entry has no precedent during the past 50 years, and it could have significant economic repercussions.”

Capital access for small & medium-sized businesses has been permanently impaired by the Great Recession with no substantial relief from the State or Federal governments. There are a number of programs through the SBA or the State Treasurer’s office in terms of loan guarantees or loan loss reserves. These programs and inducements to capital flow are important.

But the problem is much deeper—the dwindling distribution system (where pooling unused money and redeploying it into local loans and investments) points to a real problem in generating sustained local wealth creation. 

Crowdfunding and other on-line lenders are too small and too narrow in their scope; and they tend to take money from one place and invest it somewhere else. So the places that generate the cash aren’t the ones who benefit from the investment and wealth created by those investments.

Federal and State economic development programs have become more complicated, exclusive, and expensive to access. In the past, portions of funding from these programs were allocated as annual grants to organizations and intermediaries whose purpose was to nurture local or regional long-term economic development. But now, more funding is put out in competitive events where the strongest and biggest organizations (mostly urban) are getting the greatest share of the dollars. Many times these stronger, bigger organizations have the capacity, the reach and the outright mass that funders are looking for. Average funding rates (the rate of proposals funded as opposed to those applying) range about 15-30 percent; this competitive system works against smaller, non-metropolitan areas that lack capacity and mass.


A new paper by the Roosevelt Institute announced their new project to explore how the “financialization” of the economy has broken the link between the financial realities facing large corporations and the realities facing regular people. J.W. Mason, an assistant economics professor at John Jay University who wrote the paper, notes “The health of the financial system might matter less for the real economy than it once did because finance is no longer an instrument for getting money into productive businesses, but for getting money out of them.”

The Roosevelt Institute paper delves into the facts of the situation. In the 1960’s, 40 percent of earnings and borrowing by major corporations flowed into investments. But by the 1980’s, investment fell to less than 10 percent, and it hasn’t risen since that time. Instead of investment, borrowing is closely correlated with shareholder payouts. These payouts have nearly doubled as a share of corporate assets since the 1980’s.

Since the Recession, large corporations have had more incentives to dispense cash rather than invest in business growth. So these large corporations take low-priced credit, buy back their own stock, boosting their share price and keeping their investors happy. But this merry-go-round does nothing to create value or growth, nor help create jobs or reward current employees who have been doing the heavy lifting with wage freezes or wage cuts. The “financialized” economy no longer has a reliable link between credit availability and real production or job growth.

We need to consider how we pool and invest local money in the real economy that creates financial and social return on investment. Sometimes that may mean a local fund will be the initiating trailblazer, or it may work in tandem with a public, private, or non-profit partner to syndicate investment that will have long-term impact. In either case, there is a clear role for an honest broker to encourage and bring together interested parties to do what is needed most to get a ball rolling.


1. Public investments will move away from programs and use incentives, subsidies, and tax credits to leverage private investment to fund community development.

2. In other words, private investment for public good.

3. Community development investment will flow through intermediaries or conduits fashioned for these purposes. The era of vast bureaucracies is fading away—they cost too much and they suck the power of change away from communities. Problems are best solved at the source by those most vested in eliminating that problem.

4. There will be a rise in performance-based community development investments where we search for successful models with reach and impact. And these solutions will need permanent means of addressing problems through endowments and other assets designed for long-term sustainability.

5. Communities have to be both persistent and prepared. Nobody will help a community who wallows in victimhood unprepared to do its part in addressing its problems.

6. Communities have to be good at defining and knowing their problems. From that understanding, then solutions can become more evident and investors can see a path to resolution. Certainty greases the skids for action.

All these themes point to more informal networks of concerned citizens teaming with other private, non-profit, and public organizations addressing community issues. Teams, networks, collaboration, and consensus are the drivers in the New Reality. Social investment, philanthropic approaches and public private partnerships will begin to loom large in addressing reoccurring problems or needs.

Marc Nemanic is Executive Director and Chief Credit Officer at 3CORE and a Summit Capital Action Team co-lead.


Marc Nemanic

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