Overcoming the Collateral Barrier to Capital Ownership for Every Citizen
Through the Capital Homestead Act, access to credit for acquiring productive capital — which today helps make the rich richer — would be enshrined in law as a fundamental right of citizenship, like the right to vote.
Through a well-regulated central banking system and other safeguards (including capital credit insurance to cover the risk of bad loans), all citizens could purchase with interest-free capital credit, newly issued shares representing newly added technology and structures. These purchases would be paid off with tax-deductible dividends of these companies. Nothing would come out of a citizen’s or worker’s pocket or reduce the income they use to put food on your family’s table.
Within a relatively short period of time, each citizen would become a full owner of his or her shares. For the rest of a person’s life, that citizen would receive a decent and regular income from the earnings of the capital he or she accumulates over the years. That citizen would have income-producing property to pass on to his or her children.
Capital Credit Insurance: A Substitute for Traditional Collateral
A major barrier to extending access to meaningful capital ownership among the poor and middle class is the collateral that lenders require from borrowers to protect against losses from defaulted loans. This creates a “Catch-22” situation where “you need money to make money” — new money and credit for growing the economy and creating new capital owners is virtually inaccessible to those who do not already have assets to serve as collateral.
As a substitute for traditional collateral requirements, Congress and the Federal Reserve could encourage under Capital Homesteading the establishment of commercial loan default insurance and reinsurance pools (like FHA mortgage insurance), funded by the risk premium portion of service charges. In contrast to the handling of the savings and loan crisis, the full faith and credit of the Federal Government should not stand behind these bank loans or insurers of capital credit in the event of default by companies issuing expanded ownership shares. (In order to encourage responsible lending practices by member banks, capital credit insurance might cover only 80% to 90% of a defaulted loan.)
Other capital credit insurance components of Capital Homesteading would include:
- Capital credit insurance companies competing for assessing risk categories of newly issued, Capital Homestead-qualified shares from growing enterprises, would pool risk premiums paid as part of the debt service payments on CH loans and pay capital credit insurance to lenders on loans in default.
- Capital credit reinsurance companies competing for the CH credit market would spread further the risk of the growing capital credit insurance industry.
- One or more bundlers of bank loans, acting like Fannie Mae or Freddie Mac to help establish standards and uniformity among bank lenders, would take syndicated CH loans to the discount window of the regional Fed for monetizing expanded bank credit for financing regional growth through CHAs.
The Capital Credit Reinsurance Corporation and Commercial Capital Credit Insurance Companies
A Capital Credit Reinsurance Corporation (CCRC) would be established as a backup insurer of last resort, wholly on a self-financed basis, with no taxpayer funds or government underwriting involved except possibly for start-up organizational funds. Thereafter, its operational costs would be covered by premiums on the insurance programs the CCRC would offer to commercial capital credit insurers of banks and other lenders to ESOPs and other pure credit vehicles.
The major insurance the CCRC would reinsure would be capital credit loan default insurance. This would be similar to that offered by the FHA home mortgage insurance agency and later copied in the private sector by the Mortgage Guarantee Insurance Corporation. The CCRC would charge participating lending institutions an annual voluntary premium-0.5% or higher-to insure an amount between 75% to 90% of their losses on loans offered to borrowers through Capital Homestead Accounts (CHAs), Employee Stock Ownership Plans (ESOP), Citizen Land Banks (CLBs) and Consumer Stock Ownership Plans (CSOPs), and producer and marketing cooperatives.
This would cover the eventuality that companies issuing the shares did not earn enough profits to service the debt. The premium would be included in the annual interest charged by the lenders. Naturally, the sounder the share issuing company, the lower the premium.
Differential risk categories, with adjustable premium rates, could be set up for grouping participating corporations, based on their maturity, their earnings history, the quality of their management, the nature and special risks of their industry, and so on, somewhat along the lines of the bond rating services of Moody’s and Standard & Poor’s.
The CCRC could also offer portfolio reinsurance issued by private insurers, similar to the pension insurance the Pension Guarantee Insurance Corporation offers employers. For an additional premium charged to the new capital owners, commercial insurers would insure assets accumulating in capital homesteading accounts against the “downside risk.” Upon retirement, a worker would thereby be guaranteed a high percentage-say 75% to 90%-of the initial values of all company shares purchased through his ESOP account.
Portfolio insurance would also be useful for offsetting the lack of diversification in most ESOPs. This is a common complaint raised against ESOPs, which by design do not have the same level of diversification as within defined benefit pension plans and other conventional retirement programs (or the proposed Capital Homestead Account). If a company failed, capital credit insurance would protect worker-shareholders against the loss of all their retirement assets before they had a chance to diversify. Commercial portfolio insurance could be kept at relatively low premiums if limited to shares in companies that had been profitable for at least three years. The premium costs to cover shares in high-risk, start-up companies would be astronomical compared to those for mature companies with a solid track record of earnings.
Commercial lenders making loans to CHAs, ESOPs, CLBs, and CSOPs (subject to guarantees of high pretax dividend payouts by companies issuing the new equity), would have the option first to arrange for CCRC loan default insurance on the loan paper. (Otherwise, the lenders would be self-insuring the risk of loan default.) Once insured, the loan paper could be brought to the discount window of the nearest Federal Reserve bank. For a discount fee covering the Federal Reserve overhead in administering the “pure credit” system (0.5% or less), new currency would be issued or the bank’s reserves would be correspondingly increased to cover its expanded liquidity needs. No taxpayer funds, no interest subsidies, and no Treasury borrowings would be involved.
“The Federal Reserve Discount Window,” by Norman G. Kurland, https://www.cesj.org/resources/articles-index/the-federal-reserve-discount-window-by-norman-g-kurland/]
“How Capital Homesteading Would Work,” published on the website of the Center for Economic and Social Justice, at https://www.cesj.org/learn/capital-homesteading/case-for-a-capital-homestead-act/
“The FCIC and CCRC: Managing Risk through Capital Credit Insurance and Re-Insurance,” from Capital Homesteading for Every Citizen: A Just Free Market Solution for Saving Social Security,” by Norman G. Kurland, Dawn K. Brohawn and Michael D. Greaney, Economic Justice Media, 2004, pp. 40-41.
“A Nation of Owners,” by Norman A. Bailey, The International Economy, July 30, 2000, https://www.cesj.org/resources/articles-index/a-nation-of-owners-by-norman-a-bailey/