Refuge in a Time of Crisis

By Paul Hazen, President and CEO, National Cooperative Business Association

What caused our current economic crisis? It was greed, deregulation, predatory lending, so popular thought goes.

Mortgage lenders and Wall Street are guilty of many of these accusations. But there's one major flaw in the logic of this finger-pointing: these are symptoms, not causes, of our financial system. In other words, it's the nature of the beast.

Investor-owned businesses, pressured by investors' beckoning for higher returns, place the highest value on profit. An unsatiated pool of investors can flee, destroying a company's primary source of capital and bankrupting the business. For business leaders, this is clearly not an option.

Investor-owned businesses can also find that their employees' or consumers' interests are at odds with those of the investors. That executives often hold large amounts of company stock creates an even deeper conflict of interest.

This high-risk, profit-first model has, in many ways, failed. While it made our country affluent, it also left us vulnerable. People want to know where we go from here, what sort of business model could have averted the crisis. The answer is simple, and decidedly American.

We need to invest in business cooperatives.

Structurally, cooperatives are distinct from investor-owned businesses. Those who use a co-op's services actually own an equal share of the business. There are no majority shareholders or single owners, and fluctuations on Wall Street exert only an indirect influence on business.

Following the Great Depression, credit unions—another type of cooperatively owned business—grew exponentially. Experts, including Ivy League finance professors, agree that credit unions will most likely see a similar surge in the near future.

Credit unions have remained stable in the current wave of bank failures. George Hofheimer, Chief Research Officer of the Filene Institute, a nonprofit think tank that studies credit unions, said that they'll attract members because they haven't had to tighten their lending standards. Credit is flowing as freely today as it was a year ago.

That's because credit unions don't answer to investors. Because every member is an equal owner, there's no incentive for anyone—President, CFO or CEO—to try to manipulate stock price. No single person stands to gain more than another. Consequently, they've made less risky moves. The excesses of AIG simply couldn't have happened in a co-op.

This makes for business with a face. Because revenues stay local, credit unions' gains represent gains to the community. And as an owner, each member has a say in the business' governance. This creates a culture of transparency, a far cry from the culture of many investor-owned corporations.

What draws members to credit unions—strength, good deals, self-reliance, community focus—also draws people to other types of cooperatives. Food co-ops, housing co-ops and purchasing co-ops have blossomed in recent years. There's no such thing as an invulnerable business model, and certainly co-ops feel the stress of a weakened economy. But as the Great Depression showed, business cooperatives can help stabilize an economy in turmoil.

By working cooperatively, Americans will regain the trust in each other, and in the economy, that recently has been so severely damaged.