In 2009, there is a renewed opportunity to tap into something that has been paid less and less attention in recent years: Max Weber’s good old Protestant work ethic. Finding appropriate ways to leverage it constitutes the fourth problem you can solve next year for fun and profit.

No. 4: Lending

Problem: Tight lending and poor investment returns
Asset: High levels of personal savings in our region

Credit has dried up. When banks are reticent to loan to each other, what makes you think they’re going to loan to you?

Yet again, there appears to be a viable solution in localizing. While national banks are hurting, local banks in Central PA like Fulton, Union National, and Susquehanna are running strong. Their balance sheets look good (people actually keep money in those banks, as opposed to just borrowing from them), and corporate lending is active.

A profitable way of solving the problem by using the assets at hand may involve local financial institutions. Then again, they may play only a peripheral role.

Make this man proud. Hook up local hard-working folks with interest on their savings by lending to other local hard-working folks.

Here’s the deal: We live in an area where personal savings rates are high. People are earning precious little interest on those savings. The fact that other people need to borrow money isn’t a problem, it’s a huge local opportunity.

As of 2007 (the most recent year that data is available for from the Bureau of Labor Statistics), residents of the Northeast U.S. save, on average, 6.6% more of their income than residents of the rest of the U.S. Here in the Northeast the average household puts 23.5% of its annual income ($15,816) into savings, as opposed to 16.5% in the Midwest, 19.1% in the South, and 15.0% in the West.

It’s worth noting that in the Northeast, an average of $1,730 (9.2%) of household income came from investments (including interest, dividends, and rental/property income).

OK, so narrowing it down to the Northeast is cool and all, but how can I say the strength of this asset (personal savings) is particularly high in Central PA? Here, I have to rely on the same rationale Forbes used when they named Lancaster the tenth best city in which to ride out the recession: the equity people have in their homes.

As of September, according to Zillow real estate market reports,  Lancaster County homeowners who made their purchase in the past five years have a median equity of $40,000 in their homes. That’s 30% of their home’s value.

Compare that with the median equity held in nearby Philadelphia (26%) or Baltimore (23%).  In Boston, which edged us out in the Forbes list, it’s 21%. To see how bad it gets, observe the staggeringly negative 20% in Stockton, CA.

What’s more, in Lancaster, homes have only declined 4.9% in value since their peak (which was in the second quarter of 2007), versus 6.4% in Philadelphia, 10.2% in Baltimore, 16.6% in Boston, and 49.0% in Stockton. Elsewhere in Central PA, State College is rocking—where prices still haven’t peaked—and York-Hanover isn’t doing too poorly—home values there are down 10.7% from their peak.

With that evidence, the opportunity here is obvious: people in our area have savings. The savings are real, too—they’re not about to burst in a housing bubble or a Madoff Ponzi scheme. But the savings aren’t earning much interest. And if those savings could benefit the local economy while earning at least decent returns, that’s even more attractive. We have talented and resourceful individuals and entrepreneurs who could use some loaned capital. Put two and two together, and make a profit off this. Ready? Go.

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Read Part II – Journalism
Read Part III – Continuing Ed

5 thoughts on “11 Problems You Can Solve in 2009: Part IV – Lending

  1. Paul, I’m a blogger in need of suckers, so thanks. As for the man in the pic, it’s Max Weber (German, so it’s “VAY-ber”). He’s one of the fathers of sociology, and the person who identified the “Protestant work ethic”–good Protestants (traditionally) work hard but don’t indulge in materialism, so their savings tend to pile up. That leads to both problems and opportunities.

  2. Another asset we have locally is a strong entrepreneural spirit. Unfortunately, those entrepreneurs are Amish, and for obvious reasons, their enterprise is primarily geared towards making money of the local population and tourists.

    I’m not knocking Lancaster County’s economy. Forbes says this is the 10th-best place to ride out the recession. On the other hand, everything I know about enterprise, I learned from my father, a farmer. Admittedly, some of the things I learned were things to do, and other things were things not to do, but planting seeds now to harvest later is one of the biggies on the “to do” list.

    One of the larger local industries is printing, and it’s going away. No, not nearly as fast as the newspaper industry, but it’s still going away. People laughed when the computer people talked about the “paperless office”, and then paper sales boomed, but what has happened is that people are no longer entering data on preprinted forms, and they are printing reports on demand instead of printing up a bunch of them and shipping them where they go.

    When recession hits, the companies that survive are the ones that are cheapest and those that are best. Customers for the best products don’t need to scrimp, but customers for the broad middle go downscale, and customers at the bottom go without.

    In the past, the cheapest products have been mass-produced, but that’s no longer true. Something that’s custom produced for your needs is less expensive to produce than in the past, because of computers, and may be the cheapest way to go. That’s a threat to big companies, and all the people who work for them.

    John DeLorean tried to produce expensive sports cars on a small scale, and he failed, primarily because he couldn’t build demand for them as fast as he needed to, but there are hundreds of guys out there making tricycle motorcycles have succeeded, because they have flexible production facilities, unlike DeLorean’s “think big” factory in Ireland.

    So what if three guys got together and decided to build electric taxicabs? Spacious, comfy cabs like the old Cheker? You design it with an easily-swappable battery pack, so you’re charging up multiple battery packs in your garage while the car is on the road 24 hours a day. The taxi has great acceleration because you have smaller battery packs that don’t add a lot of weight. You don’t use any power when you’re stopped at a red light, or at a taxi stand. You build the car mostly using off-the-shelf components, often heavy duty components like truck brakes, to minimize maintenance. There aren’t drivers sitting idle, waiting for a tuneup or for valves to be ground. Fleet owners can expect a million miles. Taxi companies should really love a vehicle that’s intended for their particular needs instead of having to buy cars that are designed for other needs.

    What’s more, you’re not trying to set up dealerships all across the country. You sell direct to taxi fleet operators, and build to order, instead of maintaining inventory.

    That is the kind of enterprise we need in Lancaster County. The value-added is regionally exported rather than being a matter of local people taking in each others’ wash.

    Taking in each others’ wash isn’t as bad as it sounds. During the gold rush, there were clipper ships hauling laundry across the Pacific to be cleaned at real Chinese laundries. It does just as much good for the local economy to eliminate an import as it does to create an export.

    But when we build a new supermarket that employs 150 people, and they take enough business away from existing supermarkets that they reduce employment by 150 people, we haven’t gained much. Presumably, the new supermarket owner has done his homework, and it’s able to serve us better than the old stores, so I don’t oppose retail growth. And in some cases, retail is helping to promote tourism, which does boost the local economy.

    But retail is not nearly the economic engine that the manufacture of regionally exportable goods is. We’re going to be losing much of the dead tree printing business over the next ten or twenty years; we need to be planting seeds for the manufacturing industry to replace it.

  3. Thank you for such a thoughtful and detailed response, Harl. It’s exactly the type of civil discourse I dream of facilitating with this blog, far from the screaming nonsense of the newspapers’ TalkBack forum.

    Your thoughts dovetail beautifully with what I was going after in this post–that local entrepreneurs have good ideas that need funding. It’s unlikely that anyone with a mindset based on an obsolete economy is going to want to invest in new and untried ideas. So if we do want to foster new ideas and new enterprise, we do need to find new money to fund them.

    I do hope someone brings locavesting to Lancaster soon and in an effective way. And as for those taxis, I look forward to riding across town in one.

  4. Your thoughts dovetail beautifully with what I was going after in this post–that local entrepreneurs have good ideas that need funding. It’s unlikely that anyone with a mindset based on an obsolete economy is going to want to invest in new and untried ideas. So if we do want to foster new ideas and new enterprise, we do need to find new money to fund them.

    It’s not the funding that’s in short supply. And it’s not that the ideas are new and untried. The shortage is, here and elsewhere, good people to turn those ideas into good businesses. There are a lot of sharp people out there with no experience. There are a lot of people out there with experience but lack the creative genius. And even if you have sharp, creative, experienced people, they need to work together as a team.

    The “taxi” idea is one that would work better in Indiana or Michigan, where you have people with the manufacturing skills. It has a major problem in that the federal government has added so darned many restrictions that don’t exist for motorcycles, that the team needs a lot of legal work before the first taxi rolls off the line – which means a lot of extra capital to get started.

    But there are a lot of good ideas that can be started part-time by one person, with relatively little investment. For instance, there are a lot of people around here with expertise in chocolate. Making sinfully-rich versions of popular cheap candies – say, a gourmet peanut butter cup – could be a fairly good business for a family.

    They’re talking on the Food Network all the time about “creme fraiche”. Not available in local stores. It’s fairly easy to make, sorta like making yogurt. Big enough demand to be worthwhile for a family business, not big enough demand to be worthwhile for someone like Rutter’s or Turkey Hill.

    The rabbit chow sold in pet stores is for raising rabbits for feed. It puts on weight fast, but if you have a pet rabbit, you want it to live for a long time, so you should feed it oat hay. Oats are cheap to grow: they don’t take any fertilizer, any herbicide, or any pesticide. You could make a deal with a local farmer to raise an acre of oats for you, and bale it. You’d need a warehouse or several garages to store it. You’d need to split up the bales into 6″ slices, shrink wrap them in plastic, then sell direct to rabbit owners online, or wholesale the slices to pet shop owners. Invest $2,000 and over the next year, you should be able to make $100,000 in sales. And the only labor you need is your family!

    I like micro-businesses like that. You don’t depend on Janet not getting pregnant, or Tim not getting a great offer from some big company, and you don’t need to borrow money. They say “you need to invest money to make money” but most of the people saying that, haven’t made much. The more you invest, the more you’re likely to lose.

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