Shifting investments from Wall Street to Main Street is surprisingly simple—and highly lucrative.
As the U.S. emerges from the long shadow of COVID-19, cities big and small are facing agonizing fiscal decisions. Caught in the vice between escalating needs and plummeting revenues, America’s mayors are being forced to lay off or furlough city employees and make devastating service cuts that would have been unimaginable just six months ago. (Things are so bad that the U.S. Conference of Mayors recently launched a fiscal pain tracker.) And while most are hoping for help from Uncle Sam, such aid sadly may never materialize.
Assets in private equity and venture capital strategies have seen significant growth in recent years. In comparison, assets in the hedge fund industry have experienced slowing growth rates. Q2 2021 hedge fund letters, conferences and more Over the six years to the end of 2020, hedge fund assets increased at a compound annual growth rate Read More
Shifting Investments From Wall Street To Main Street
But there is a surprisingly simple and highly lucrative alternative: Cities can boost their economy locally at little to no cost. How? By mobilizing residents to shift their pension savings from Wall Street to Main Street.
My book Put Your Money Where Your Life Is shows how two well-established but little-known investment tools—self-directed IRAs and solo 401ks—can enable anyone to begin investing their pension savings locally, just as thousands of Americans have been doing for years.
To be clear, investing locally means more than just investing in local businesses. For instance: You can get yourself or loved ones out of costly credit card debt. You can pay your mortgage off faster. And you can even help your place of worship or favorite nonprofit acquire their own building and lower their operating costs. What’s more, such investments are not only low-risk; they also pay significantly higher returns than Wall Street.
But, to be sure, cities should also encourage residents to invest in locally owned businesses—the lifeblood of every community. Indisputably, they are economic engines—providing, depending on how you define “local,” 60% to 80% of a community’s jobs and output. Moreover, as social anchors, they also play a vital role in residents’ safety and well-being. In fact, there’s compelling evidence that communities with thriving local businesses have lower rates of crime and poverty, and conversely, higher rates of giving, volunteering, and voting. Yet, at this moment, whether in large urban centers or small towns and villages, America is on the verge of losing millions of these essential enterprises.
Today, U.S. households hold $56 trillion in long-term investments in stocks, bonds, mutual funds, pension funds, and insurance funds. And in a healthy capital market, 60% to 80% of Americans’ long-term savings would support 60% to 80% of our cities’ local businesses. But not even a tiny fraction of those trillions of dollars does.
Protecting Grassroots Investors From Fraud
The explanation isn’t sinister. After the Great Depression, the U.S. constructed securities laws to protect grassroots investors from fraud. Yet by requiring high levels of legal disclosures around any securities offering, the country also wound up discouraging smaller businesses from seeking capital from grassroots investors.
Flash forward, however, and there’s good news: Following the 2008 financial crisis, both federal and state legislatures began fixing the system by legalizing investment crowdfunding. And since 2016, more than 400,000 grassroots investors have used these legislative reforms to put some $340 million almost entirely into local businesses.
Still, we need to go further: By moving at least 60% of $56 trillion from Wall Street to Main Street, every community in America would enjoy around $100,000 of additional capital per resident. Take the metropolitan area of Baltimore, for example. Currently, with more than 2.8 million residents, the area would have an additional $28 billion to invest in their small-business sector.
But who needs perfection? As a starting point, even shifting a small percentage of our long-term investments—all the way down to a bare-bones 1%—would generate an unprecedented boost in our cities’ economies.
Also, while much can be done privately, city governments can work to speed things up. For starters, they can educate struggling business owners on new ways of raising grassroots capital. They can also advise local investors—who are currently down about 10% in the stock market—on the particulars and upsides of investing locally. And, again, they can mobilize residents to help both themselves and the city by moving their retirement savings from Wall Street to Main Street, whether using the solo 401k (for self-employed individuals) or the self-directed IRA (for everyone else).
Unlocking The Stimulus Opportunities
And it doesn’t have to stop there. Here are even more ways that cities can unlock the stimulus opportunities of local investment at little to no cost.
- Create local tax credits for investing locally. The state of Michigan, for instance, is currently considering a bill to enact a 50% statewide tax credit.
- Move some or all of the city’s banking accounts into local banks or credit unions. (In Arizona, both Phoenix and Tucson have made such moves.) This not only boosts local financial institutions, but also keeps more money recirculating at home.
- Publish a list of all the local investment opportunities on the city’s official website. While this would just be for informational purposes, it could also help local investors and businesses find one another for private deal-making.
- Issue municipal bonds for critical local projects, such as expanding renewable energy capacity, and then enable grassroots investors to buy such bonds.
- Set up economic development funds, perhaps around food startups or affordable housing, that are run by the city but capitalized by grassroots investors.
- Lobby the managers of the city’s public employee pension funds to invest money into local opportunities like municipal bonds or land trust loans.
For cities across America, there’s hope and help. Shifting investments from Wall Street to Main Street is surprisingly simple—and highly lucrative. And at little to no cost, mayors can’t beat the price tag to generate billions of dollars of growth, especially now when they desperately need a boost.
About The Author
Michael H. Shuman is an author, speaker, economist, attorney, and entrepreneur, and a sought-after expert in economic localization. His new book is Put Your Money Where Your Life Is (Berrett-Koehler, 2020). He blogs at michaelhshuman.com.