Neighborhood Economics: Redefining Financial Success Through Community-Centric Investing - Part 2

Unlock the secret to enriching your community and your portfolio simultaneously as Michael Shuman guides us through the untapped potential of local investing. Our enlightening conversation debunks the myths surrounding the necessity of big banks and shines a spotlight on the myriad of ways to invest right where you live. From supporting small businesses to funding community projects, we uncover the social and financial benefits that are often overlooked. Michael's insights, combined with inspiring success stories from the Main Street Journal, illuminate a path toward a more connected and resilient economy that begins at our very doorsteps.

Venture with us beyond the familiar territory of Wall Street as we redefine what it means to diversify one's investments. We challenge the stock market's status as the ultimate financial haven, revealing how local endeavors like solar projects and property ownership can provide stability and impressive returns. With a candid analysis of historical data on the stock market's performance, our discussion encourages listeners to consider the broader implications of their investment choices, highlighting the often hidden costs of fees, inflation, and market volatility. This episode will inspire you to think creatively about your investment strategy and the impactful difference you can make within your community.

As we wrap up, we focus on the future, where community-level initiatives and the notion of 'locopedia' lay the groundwork for a globally connected yet locally empowered world. The conversation at the Neighborhood Economics Conference in San Antonio exemplifies this spirit, bringing together a diverse group of investors, entrepreneurs, and community leaders, all united in the mission of fostering local economic growth. Join us on this journey to a more equitable and sustainable financial landscape, where your money does more than just grow—it strengthens the very fabric of our neighborhoods.

https://mainstreetjournal.substack.com/
https://www.cuttingedgecapital.com/
https://leadthechange.bard.edu/blog/author/michael-h-shuman-faculty-bard-mba-in-sustainability

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Transcript

Joel: 0:33

You're listening to a special neighborhood economics edition of the Mindful Marketplace.

Michael: 0:37

And now the rest of the conversation with Michael Schuman.

Joel: 0:40

What if investing in each other could change the world? I'm Joel Schien with bizradious, and this is the Mindful Marketplace.

Joel: 0:54

Yeah, I think that's definitely you know, as someone who's been in financial services now for you know, almost 10 years. There is a bit of a misconception out there, especially, I think, from Wall Street, the stock market, the bond market. You know these large institutions, that, and the big banks that you need us in order to survive, and I think that what your work shows is that there are ways actually that we can take our financial power back into our local communities, and this is definitely one of them. And that's not to say that you know, no one, like none of someone's money, should be in the stock market or the bond market. But you don't have to do it all, and you also, like you said, it doesn't have to be just in local businesses. There's also things like real estate, like you know, like friends and family loans. There's a lot of creative and innovative ways that people can do local financing and get both a financial rate of return, but also that social and communal rate of return as well.

Michael: 2:01

Yeah, and so I've. About two years ago, I started this newsletter called the Main Street Journal.

Joel: 2:09

Yeah, I was going to ask you about and to tell everyone about that. I have a. I have this thing called the balance sheet that I do as my monologue usually where we call, I call, we go over the assets, liabilities, debts and investments towards a more mindful marketplace, and I pull so much information from the Main Street Journal for my assets and investments column. I have to tell you it is it's. Without it I don't think I could do that each and every week.

Michael: 2:36

Well, that's wonderful to hear, Thank you for that information.

Michael: 2:39

But you know, I what I found, just personally, is I was drowning in information and it was silly for me to get this information and not find a way to share it with others. And so the Main Street Journal has been my way of getting all of these examples out there of clever ways that communities are beginning to invest locally, and it varies a lot from community to community, varies a lot internationally, and so every week I'm just kind of it's a fire hose of innovation that I find really exciting, because you know, yeah, I think, I think it's probably the case that 20 years from now, most of us will be investing in instruments or techniques or projects we've never heard of.

Joel: 3:37

What do you mean?

Michael: 3:39

Well, I'll give you. I'll give you an example Like there may be. So now we have land trusts.

Michael: 3:48

Community land trusts are really important pieces of strategy in dealing with affordable housing, and a great example probably the greatest example of a community land trust in the United States is in the 1980s, an obscure mayor from Burlington, vermont, bernie Sanders, raised $100,000 in municipal bonds and put it into the Champlain. What became the Champlain community land trust. Today that land trust is worth $100 million and provides housing for 2000 people in Burlington affordable housing. Now, that was not a local, I mean. Yes, he used municipal bonds as a way of supporting this, but it was not grown through local investment and one could easily imagine creating a fund on top of the community land trust that allowed grassroots investors to put money into the land trust so they can accelerate their acquisition of properties and grow the affordable housing for more people. So that's what I mean, that kind. You know it's hard to find an example where that's happening right now at scale in the United States, but I think in 20 years we'll see a lot of examples of that.

Joel: 5:20

Hmm, that's, that's exciting. I mean I was familiar with community land trusts but I did not know that about Burlington. That's an incredible success story, and I know that with the Main Street Journal you've come across a lot of other success stories. Do you have any other more recent ones that really stood out to you?

Michael: 5:40

Well, I'll tell you. To me the most impressive success story is a smallish one in Port Townsend, washington. So Port Townsend is a small town, 10,000 people, about two hours drive north of Seattle, and you're Bellingham or something.

Michael: 6:05

Yeah, no, it's kind of in that direction, but it's more inland. And Port Townsend in 2007 set up a club they called Lion local investment opportunity network and the idea was that they would have a potluck dinner that brought together local investors and local businesses completely informally, because it turns out that if you formalize certain presentations and so forth, you start skating on the edge of what's permissible under securities law. So no format and nothing in securities law can stop people from forming relationships. Well, just that act of forming relationships has led to a million dollars per year going into local investment in a 10,000 person town, and this was so impressive that the Washington State Department of Commerce has been pouring money into spreading lion across rural communities in the state. I think there's a dozen. They have a slightly different name. What is it? Local investment networks, lins, but to me, you know, it's a small scale success story, but what it shows is that sometimes what is necessary to move the ball is something so trivial like putting relationships together in a potluck dinner.

Joel: 7:49

That's incredible and I think that it just goes to show that if you're just willing to think creatively and willing to kind of drop the illusion that there's only one way to gain a return on money, that there's only one way to invest, that there really are unlimited ways that we can impact our communities, impact our families, impact our own futures or the better in the process. I am curious because I'm sure that you know, obviously I think there's a lot of times when we talk about investing, the tendency is to always want to kind of compare that to the stock market and to what is kind of business as usual as it is right now. You actually have an entire section in your book called Beating the Street where you sort of break down that comparison, and I would love for you to sort of start and unpack some of that with this quote that I wrote down here from you, where you said let's question the premise that the stock market is the right benchmark for success.

Michael: 8:55

Yeah, and the reason for that is because, as we talked about, there are so many investment opportunities around yourself getting yourself out of debt, getting your kids out of debt, putting solar on the roof, buying a house instead of renting that are going to deliver unbelievable rates of return, much higher than Wall Street. Now I think that Wall Street has become the kind of a gold standard of success for whatever set of cultural reasons, and the thing is is that if you listen to bad radio on AM in your car I think many of us still have that you drive around on Saturday and Sunday and many of the shows you're likely to tune into are these kind of dime a dozen financial advice shows, and what they will tell you is that if you leave your money in Wall Street long term, you're going to get 10%, 12%, 20% rate of return. And I will just tell you all of these numbers are made up. All of these numbers are cherry picking the entry and the exit point in Wall Street. They are also cherry picking by giving you inflation, written numbers rather than real rates of return. Here's how you can actually look at how Wall Street has performed, which is go to the website of Robert Chiller. Robert Chiller is a professor at Yale. He wrote a wonderful book called a Rational Exuberance. His personal website has the rate of return of the S&P 500 every month since the S&P 500 was invented more than 100 years ago, and he also gives you the inflation rate of the month. He gives you the dividend rate of the month that's typically being paid out, and if you put those numbers together, the best number you will come up with is about seven or eight percent. Now, seven or eight percent is a pretty damn good rate of return for most people.

Michael: 11:35

Here are the caveats. So, caveat number one all of us pay a transaction fee. That transaction fee in our mutual fund is probably close to about one or two percent, depending on your fund choice. So knock that off the top. Caveat number two is that it is exceedingly difficult to choose the right point of entry and exit. You cannot possibly know when you're going to need that money, and so all of us in our wonderfully imperfect lives are going to choose poorly, and so you're never going to get that maximum rate of return. So if you're pretty smart and pretty lucky, maybe you'll get closer to five percent rate of return. Alright, five percent is still a pretty decent benchmark. But then you know if you are looking at five percent as your target rate of return, there are lots and lots of local investments that can match or beat that.

Michael: 12:56

Oh yeah, and that's what I encourage people to think about.

Joel: 13:00

So another piece of this. I went ahead and brought this up here so you can see it too. Can you see this?

Michael: 13:08

Yes.

Joel: 13:09

Because a lot of times what people don't realize, what I just for the listeners here but I just brought up is the real S&P index since 1913 and the length of real downturn in the market. So one great example of this is that I'll make it bigger here. One great example of this is most people think about 2008 as this great downturn and obviously it was. But the thing is that in 2006 and 2007, the market had not actually gotten back up to where it was after the downturn back in 2000 with the dot-com bubble. We didn't actually get out of the dot-com bubble downturn until 2015.

Joel: 13:52

So that means that if you had your money in the market in the 90s, you then had downturn for 15 years before you actually got back your money. The same thing there was a this one over here is from 1929 to 1958. That's almost a 30-year downturn and then 1968 to 1992. We're talking another 25-year downturn. And so when people think of you know of local investments as being these big, risky things, wall Street typically doesn't talk about that the fact that their up cycles are about seven years on average, but the downturns are in between 15 and 30 years.

Michael: 14:37

Yeah, that's a great chart and I noticed Robert Schiller was one of the sources on it.

Joel: 14:41

Oh, really, that's great. Well, there you go. I didn't even know that we should great minds find similar sources, I guess.

Michael: 14:51

Yeah well, but they're honest sources. That's the thing there. You know, schiller's not trying to sell you anything, he's just trying to point out what the real returns of this are. And look, there are lots of people who lose lots of money on Wall Street. And the point is, you know, everything we were just talking about was in balanced index funds. The truth is is that most financial advisors underperform the indexes every year. Like two thirds underperform and that one third that overperforms over a five year period is diminished down to about 5%. So it's, you know. I mean, I understand people's attraction to gambling, but let's not call it community economic development. It is gambling.

Joel: 15:47

Yeah, and when you think about just the vast amount of fraud and rule breaking that happened in the 2008, you know, in the lead up to the 2008 crash, and then you think about how things really did not change. I mean, in 2015, these hedge funds started using these bespoke tranche opportunities, which are just collateralized debt obligations, all over again. And then, just two weeks ago, I saw a Wall Street Journal article about how banks are unloading their risks, unloading their their risk through synthetic risk transfers which, when you look into it, look a whole lot like credit default swaps. And so none of that stuff really has changed or is doing anything. And I, you know, I like to make the joke. You know what's the difference? You mentioned gambling. What's the difference between Vegas and Wall Street? Is well, vegas is really well regulated.

Michael: 16:39

Yeah, but that's, that's a fair point. You know I teach about a third of my time. I teach at Bard College has a business school, a green MBA program, and I teach the introductory economics class to all students, and I have my students watch the documentary inside job about the collapse of Wall Street after the 2008 crisis, and one of the one of the assignments that I give to my students is say, okay, pick one significant cause of the financial crisis and just do do an hour of internet research to see what has changed in that cause in 20 years and what what they come up with is. It's just staggering, is very it's same as you. Very little has changed. We have the same problems, except they're dressed up in different ways.

Michael: 17:46

So, yeah, here's. I mean let's, let's simplify this problem for your listeners. We all know that diversification of your portfolio is valuable. Wall Street convinces you that if you diversify your portfolio with so called small cap or big cap stocks or bonds, value or growth stocks, that this is going to provide diversity. No, because all of these things are interconnected like a Rube Goldberg terror machine. Okay, if you want diversification, invest in yourself, invest in your community, invest in things that are really disconnected from this larger group Goldberg machine.

Joel: 18:40

Yeah, I couldn't agree more. It doesn't make. Yeah, that's like saying, trying to think of a good analogy, but yeah, that's like saying invest, you know, diversify your real estate portfolio because of, you know, rising sea levels, and so you just buy another property that's also on the coast, you know.

Michael: 18:58

it's like it doesn't, we'll get it.

Joel: 19:00

Yeah. So I know, when it comes to actual, like process, ways that people can go about doing local, you know regenerative, sustainable, catalytic, investing. You know there's a lot of different words that people are using for eliminating that two pocket thinking where money has to only be. You know, this pocket is for making lots of money and this pocket is for giving a little bit, and that's just there, though never the two shall meet. I know that to get more information on that, people really should go to the Main Street Journal. I think it's one of the best resources. There are other ones, like Impact Alpha. There are other groups and communities that are doing lots of things, and I wish we had the time, honestly, to just go through all of that stuff and all the ways that people could do local.

Joel: 19:56

You know, whether it's crowdfunding, whether it's community funds, whether it's also working with a values based or a local advisor, they do exist. There's not a lot of them, and that's one of the big barriers that I see right now in the ecosystem is that there's not a lot of properly trained advisors. Because you go to most advisors and you say, hey, I want to invest locally, they're going to look at you like you're crazy, like you're cross-eyed and they're just going to send you out the door or say, well, you can't do that here. I guess you know I'm curious. What do you see changing right now, or what do you see coming up on the horizon that you are excited about, that's going to make this more accessible for your average person, but also like we can talk about what are the real barriers that still exist and that need to be overcome for that to be a reality, where it is as convenient for you know, someone working a job and wanting to save for retirement to do so in a regenerative, local and impactful way.

Michael: 21:01

So I'll give you three examples of things that are happening right now that I think are exciting and harbingers of people, and I think that's one of the things that I think is exciting and harbingers of the future.

Michael: 21:17

So one is that the National Coalition for Community Capital, also known as NC3, they have come up with a design of the Community Investment Fund called the D-SET Diversified Community Investment Fund, and it's kind of it's a modified real estate company is really what it is. It's most of the capital goes into real estate, some of it goes into local businesses link to or sitting on the real estate, and it's a very clever design of a fund that greatly reduces the cost of setting it up, because they found a nice exemption, set of exemptions within the Investment Company Act and so they've got. I don't know, at this point there's probably half dozen communities around the US that are setting up at various stages of setting up DCIFs, and if this continues, if they are successful, it invites every community to do this. So that's one great thing. Second example where I am, in California, about three years ago the state passed a law enabling communities to set up public banks.

Michael: 22:33

Now, public banking I'm not going to. We could talk a long time about it. The short definition of public banking is not necessarily where the state or the city takes on banking activities, but rather when a state or a city is managing its budget. They collect money from taxpayers, they collect money from federal transfers, and then they have to do something with that money before they spend it. Usually they'll put that money into Chase Manhattan, and then it goes internationally. What public banks do is put that money in local banks or credit unions and uses it to enhance local lending to local businesses. So we now have, I think, like four or five communities in California that have serious public banking initiatives underway, and so we'll see those operating fairly soon and I think those will spread. Third example state of Michigan is on the verge of passing a 50% tax credit for local investors.

Michael: 23:51

And what's been so interesting about this bill is we got this bill to be introduced by Republican legislators two years ago. They then got thrown out of office, so we got the same bill now introduced by Democrat legislators and I think literally in the next week or two this thing is going to be law. Now you don't get 50% indefinitely. There's a ceiling of about $3,000 or $4,000 on it, but still that is a huge incentive. It's very much akin to the kind of incentive that I pointed out in Nova Scotia 20 plus years ago, and if this begins to work in Michigan as an economic development tool, you will see 30 other states quickly follow.

Joel: 24:45

Yeah, that's incredible. I had heard brief rumblings about that that bill in Michigan. I moved to Western North Carolina from the Detroit area and have a big heart for that scrappy, beat up state and to see so much of the regenerative work around this come out of there whether it's from what Revalu is doing where Angela Barbash, who we had on the show, or what the other people in that state are doing so that warms my heart on several levels. I wanna let the sociology student and me come out for a second and ask you what effect on broader social problems like inequality and all the things that go along with inequality, what effect do you see this? Do you see local investment having on those issues?

Michael: 25:39

Huge, and I'll give you a couple of pieces of evidence. There is a study that was done by the Federal Reserve in Atlanta in 2013, looking at counties across the United States, and in those counties with the highest density of thriving locally owned business, there was the highest per capita income growth rate. So if you wanna grow income and reduce inequality, supporting local businesses turns out to be your best ticket for doing so. Another example the crowdfunding history that we've had since 2016,. And I mentioned before million and a half people putting $2 billion into 7,000 companies. Well, the disproportionate beneficiaries of that have been entrepreneurs who are women and people of color, because crowdfunding has cracked open a capital marketplace that historically was redlined and unavailable for women and people of color, and makes it more available to them. So I think the early signs are very positive that this will be good for reducing inequality.

Joel: 27:12

Yeah, I mean, I assumed it would, but I wanted to double check with you, obviously. But also, just, I can't see a way in which it wouldn't when, instead of extracting wealth from communities, we are reinvesting and recirculating that wealth within communities. How could it not do things like raise median wages? How could it not do things like allow cities to have better environmental standards, because they know that that company's not just gonna get up and take off because of it?

Joel: 27:49

I'm gonna just rant and kind of talk about pet peeves here, but whenever communities put so many subsidies and efforts into attracting some big giant company to come in and create all these jobs, yeah, there's a temporary boom to that.

Joel: 28:04

But if they moved there because your state or your county gave them some great tax break or some great subsidy, what's gonna happen the next time a different state or a different county or a different municipality offers them a better one, they're gone. You know, and you mentioned this being significantly impactful for entrepreneurs and businesses that come from disenfranchised communities, and that is a lot about what the Neighborhood Economics Conference that you're gonna be speaking at and participating at at the end of February in San Antonio is about. It's a wonderful combination of bringing in these catalytic investors who want to invest their dollars into these communities to see that social return, along with entrepreneurs from those disenfranchised communities and the faith groups and other nonprofit groups from those areas to help support in those efforts. I'm curious what you're most excited by by Neighborhood Economics and by this conference that's coming up.

Michael: 29:14

So what I? There are two things that I love about the neighborhood economics contingent, and you know I've been involved in many different local economy groups for the last 30 years. So it's involved in the business alliance for local living economies, bali, and social ventures network and businesses for social responsibility, and I have already mentioned National Coalition for Community Capital. I mean there's a long list of groups. These groups tend to be white and white, upper middle-class, privileged people. I feel like neighborhood economics has really been able to bring in a lot of the traditional community development organizations that are heavily people of color. So that's number one. Number two is a lot of those people are also religiously affiliated, and so neighborhood and economics is brought in kind of the religious social development organizations that are, I think, particularly important in more conservative states like Texas, and and I feel like you know that all of the things that we've talked about are just as relevant to conservative as progressive states. Oh yeah, and as I pointed out with the Michigan example, local investment is equally attractive to both Republican and Democrat legislators.

Joel: 31:12

So I think that the political fulcrum, the ideological fulcrum of neighborhood economics is very much in the center, and that excites me because I think that is a way of moving this entire enterprise faster yeah, and, and even more so than being in the center, what I see is that it has found a catalytic issue that everyone can agree on and forget about the divisiveness and the disagreements for a minute, because there are times where single issues will unite coalitions of people who may otherwise disagree.

Joel: 31:53

And rather than have litmus tests of, you know, ideological litmus tests in order to partnership, being able to partner across other disagreements around something that we can all see is so good for all of us, I think, is such a powerful and unique and really special thing, and I'm really, really excited for that conference and I'm excited to get to hear you talk at it and get to, you know, shake your hand in person there and everything I guess, to go out for the show here. I am, I'm curious if you have a vision. What do you envision the future of community economics to be?

Michael: 32:38

yeah. So I have a project that is kind of in Coate right now it's been in Coate for many years but I'm really just beginning to sort of build it out called the locopedia, and the idea of the locopedia is creating an international open source database of successful small-scale business models and business support systems, and I feel like providing these models of community self-reliance and getting people to work on them is the way we're going to solve a bunch of international problems. So, as we're doing this interview right now, we have, you know, cop X meeting in Dubai. They're not going to get anything done.

Michael: 33:39

I mean, it's a bunch of hot air making declarations, you know it's. It's like the Beatles song you know no, nowhere man making nowhere plans for nobody. And and I feel like if we can get communities across the world and it is happening, but we just need to accelerate it communities to share their best practices on local food and local energy and local manufacturing, we are going to move things along and an astonishing rate. So that's to me the future of the local economy movement. It's making it transnational, it is making it collaborative, it's understanding that every community should become a self-reliance possible and give away its trade secrets to other communities on how they got there.

Joel: 34:40

I love that, as you're talking, I'm it's coming to me and I'm realizing that when I think about history and I think about you know, society, and I think about economics and I think about you know, just in my own life, in my own personal experience, all the best stuff happens together. All the best stuff happens when we are working together and I, I, I'm so grateful that we got to have this conversation. I'm so grateful, just thank you for all of the work and because I'm sure that there's been. This is a long process. You know, angela Barbash and we were talking about this radical change of the way economics are done. She said you know, it took us 500 years to get here. We're not going to get out in 10. It's going to take a long time and but I'm really really grateful for for you. I really truly am, michael, and I'm really really grateful that we got to spend this time here together today well, thank you.

Michael: 35:35

I appreciate the questions, I appreciate the nice plugs and well. Well, I hope we do this again soon.