In principle, I’m a fan of giving grants to microfinance organizations to help them scale up and become self-sustaining. I think it’s a much better model than investing equity capital and then extracting dividends when the bank becomes profitable.
But Whole Foods is conflicted about giving money to microlenders. Technically, that’s what it’s doing. But it goes to great lengths to try to ensure that all of it is used directly for “on-lending,” so that donors can be told that their money was lent out to poor borrowers somewhere. (The main criterion for qualifying for one of these loans is that you’re poor, or, better yet, “the poorest of the poor.”)
The result seems to me to be a gratuitous step backwards: rather than leverage the power of fractional-reserve banking, Whole Foods essentially insists that the lenders it backs lend out pure capital.
Wouldn’t it make much more sense for the lender to use the Whole Foods money as permanent capital and then fund itself in the domestic wholesale markets? Or, better yet, from local microsavings? Possibly it might. But then it becomes harder for Whole Foods to send out the simple message that your dollar is donated directly to a needy borrower.
Salmon views this as entirely a marketing effort—something to make Whole Foods customers feel a more direct connection between their donation and the loans they fund.
I’m not so sure this is entirely a marketing effort. John Mackey, the founder of Whole Foods, is a noted libertarian. He has cited the work of Austrian economists as being the best explanations for the business cycle. Could it be that Mackey’s political and economic views are at work here?
Many of those influenced by Austrian economics are deeply distrustful of the kind of banking Salmon describes here—using deposits to fund loans. The idea is that many depositors believe that their money is down at the bank, readily to be redeemed in cash at any time. But banks which use their deposit base to finance lending—what’s known as fractional reserve lending—are essentially promising the same money to multiple people. That's something Austrian economist Murray Rothbard regularly referred to as a swindle.
In the US, bank deposits aren’t generally put at risk because of fractional reserve banking. FDIC insurance means that if the bank cannot pay off its depositors when they demand their cash, the government will step in with a check. From a depositor's point of view, this makes banking relatively safe.
But there’s no equivalent to the FDIC for much of the world, which means that deposits are at risk. Allowing the donation of Whole Foods shoppers to go to capitalize fractional reserve banking in the developing world would be participating in this “swindle.” What happens when a microcredit fractional reserve bank experiences a run that eats through its Whole Foods capital, leaving depositors with losses? Would Whole Foods have to bail out the bank?
I haven’t spoke with Mackey, so I’m not sure if the structure of the Whole Foods campaign really is related to the Austrian view of fractional reserve banking. But it's at least possible that Mackey is just trying to keep Whole Foods from becoming the central banker of microfinance.
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