Catherine Fitts – Relocalizing Economics

A fascinating thinker (Catherine Austin Fitts) in conversation with Chuck Marohn of Strong Towns:

Chuck Marohn, Strong Towns: A little bit about Catherine Fitts, who’s our guest today. She’s formerly managing director and member of the board of directors of the Wall Street investment bank, Dillon and Company and Federal Housing Commissioner at the U.S. Department of Housing and Urban Development in the first Bush administration. She was also the president of Hamilton Securities Group prior to that. I’m really excited to continue our conversation and be the one asking the questions this time. Catherine, welcome to the Strong Towns podcast.

Fitts: Thank you Chuck. It’s really a privilege. You know sometimes I feel when I talk with you, all I can do is say “you’re right, you’re right, you’re right.”

Strong Towns: That’s very kind. I’ve been listening to more of your stuff since we chatted. I don’t know if everybody in my audience here heard our interview we did on the Solari Report. I want you to, if you don’t mind, talk a little bit about your time at HUD and maybe we can start with the conversation about affordable housing.

Fitts: Well, when I first got to the Department of Housing and Urban Development, I spent the first month being lobbied by mortgage bankers, home builders, various people interested in credit flowing into communities. And I developed a free-floating anxiety — I’m a very intuitive person – “Something is wrong. something’s wrong, something’s wrong” and finally what I realized was, if you look at how our financial system is currently organized, everybody could get their stock to go up by doing something that increased production, whether it’s housing or consumer goods. But nobody could make money, or there are very few people could make money in the stock market by making communities more wonderful.

And I said, you know, there’s something really wrong — everybody’s looking at the Dow Jones Index and I came up with something called the Popsicle Index to express the well-being of a community. And I thought, well, you know, how can we rebalance the financial system so that we could have a positive relationship between the health of communities and the financial markets and financial investors and equity. So I went to work and I found out that there were a couple of obstacles.

One was, and I would say this is the biggest, is that the federal government money pouring into communities — and I should just step back and say I look at America as, sort of, 3,100 counties. So if you look at our federal budget by county for 3,100 counties, what you discover is that government money has what I call a negative return on investment. It’s really funny. It’s basically coming to very similar conclusions as you did. But I’m using financial terms and you’re using engineering terms. But people were putting money into stuff that made the economics worse.

And so the question was OK well how do we turn that around?

And so the first thing I discovered was you had an infinite number of constituencies who were financially dependent on the current model. And that was number one.

Number two was that there was very little transparency about the government money. You and I can go to the White House budget and we can download lots of information that shows us how the money works everywhere. But there’s no what I would call actionable intelligence, because we can’t see what’s going on in our neighborhoods. So I decided, you know, I’ve had it with this. When I left HUD, I started an investment bank and I said “I’m just going to take my own business money, the money, the profits my companies generating, and I’m going to build a software tool that will allow us to take all the publicly available data from the federal government, by agency, by program, from OMB, downloaded into — relational databases have come along, so suddenly this is possible — and I’m going to look at how the money works by neighborhood so that we can get actionable intelligence. And one of the things that happened, we got hired back on competitive bid to the department to be their financial adviser and adviser on about $12 billion of loan sales. We did about 10. And then when we got hired back, it gave me an opportunity to download and look at all the mortgage data. HUD is the richest depository of mortgage data on the United States, in the United States. And we download it all when we started to look at it by neighborhood.

And what I discovered was that we were that HUD was spending $250,000 per unit to build or rehab public housing in neighborhoods where $50,000 could buy and rehab a single family property in the FHA foreclosed property. And if you look at optimizing the housing stock and credit and mortgages that the federal government owned by place, not just FHA, but VA, Farmer’s Home, Fannie, Freddie. . . . You know, if you looked across the board at everything the taxpayer was paying for by housing by place, there was enormous opportunity to improve the economics. Why spend $250,000 to create one unit of housing when you can create four or five.

So I’m an optimizer and I very much wanted to sort of optimize the budget. So the story that you mentioned was I went to the assistant of the person who ran the program that was doing the $250,000 and I said “Look, look at these numbers you know look at in Chicago, New Orleans, all these different places. You know if we just re-optimized the money to get the best local results for the place we could generate four or five times the amount of housing as now,” and the total numbers were profound.

And she turned bright red got really angry and said “But how would we generate fees for our friends?”

Strong Towns:  Yeah, I just wanted to hang there for a second because it is such a profound statement.

Fitts: What you’re saying is I want children to be homeless so our friends can get fees. Now I just have to step back and bring up a new factoid that I didn’t have when I spoke to you last. I don’t know if you saw this, it just was published this week, John Stanton, who I’m a great admirer of, he’s got something called the Stanton Foundation, he said “Look, the Gates Foundation is publishing all these great global health care statistics, but if we’re going to be in integrity, we need to look at our own backyard. And he funded $300,000 to do an analysis of health data within just the immediate Seattle area. And what it shows is the life expectancy spread between the wealthy neighborhoods and the poor neighborhoods was 14 to 19 years. Now that’s what I call actionable intelligence.

And what I will tell you is if — we built a software tool that the federal government seized and destroyed — but if you had Community Wizard or a tool like that, and you overlaid it, what you would see is there is a direct correlation between the amount of subsidy that the federal government is pouring in and life expectancy

Strong Towns:  And that subsidy is inverse, or directly?

Fitts:  Both. Both. So it’s a very complex equation when you get down to seeing how it all works. So, for example, one of the big subsidies is quantitative easing, and trying to bring that down on a place basis is a very complex thing. Now of course you can pro forma for the population, how much per person, but you know so it can get very complex when you get out of concept very fast.

But the reality is it’s incredibly important to look at our government investment by place, and at a level where a neighborhood can take action. But, more importantly, I think it’s really important if you’re as interested as you and I are turning that government investment into a positive return on investment, because that’s really what we need to do, we have to grapple with how can we make sure all of our friends generate fees based on performance. The problem is right now they’re generating fees, but it’s not based on a metric that improves the economy. And that’s what. We want our places to be wonderful. And so part of that is setting up, whether it’s a governmental process or a private sector process, that says we’re going to allocate capital according to performance as opposed to privilege.

Strong Towns: I wanted to drill down on that, the friends thing, and the notion that you were, as a newcomer, deeply lobbied in advance. My days doing engineering work, I was on the other side of that. We had really good compelling narratives as to why the money should continue to flow, essentially to us, because you know we were taking care of these cities, building these engineering projects. How does this come about? I’m assuming that these are not you know evil self-centered greedy people. What is the mechanism that happens, you think, that gets us to a point where the fees for our friends becomes a real narrative that we’re concerned about?

Fitts: This is a complex phenomena but let’s just dive into one example. Let’s take a community thirty years ago, and let’s say that community has a hundred small businesses making a million dollars in revenues each at a 10 percent profit margin. So you have 100 million revenues in the in the town and 10 million in profits and all the equity is owned locally or regionally.

And so if these are all private businesses they’re not publicly traded. And if we were going to appraise them and buy them, if somebody is going to come in and buy the local dry cleaners, let’s just say that they’re that they’re trading in a multiple of five times earnings. So we would value their business if they’re each making a million dollars. We would value their business at five million. And so, you know, so the total equity value business equity value in the place is 50 million. OK so I’m a senator, and I’m a senator from that state, and let’s say I’m real close to the chairman of a company and that company let’s say it’s a restaurant franchise. That company’s stock is trading at 10 to 20 times earnings and let’s say of those 100 businesses, 10 are restaurants. And so they’ve got a million dollars of restaurants. So basically, let’s say that 50 million of equity, 10 million of it is restaurants. If I can get that $10 million moved over to these to this publicly traded company, their value doubles or triples.

Strong Towns:  Right, because instead of five times earnings you’re now at ten times earnings.

Fitts: Right. Basically if I can engineer rules and regulations, zoning, all sorts of state, local, and federal stuff, and get those revenues and that income flowing through a high P/E company, then that company can afford to fund my political campaign.

Strong Towns: Wow.

Right. Now it gets even better so. So let’s look at these small companies. Let’s go back to our hundred small businesses. All of them are required by law, or encouraged by law to put a percentage of their earnings in 401(k)s and IRAs for their employees. and employees are doing IRAs they’re doing 401(k)s, or defined benefit plan.

So they take a portion of their profits they put it into those vehicles, or they pay taxes and then the local municipality, you know, puts a portion of that money, that tax money, into pension funds. So, between the private retirement and the public retirement, those businesses are funding a whole series of different retirement funds directly or indirectly, that are then required by law to only put their investments into the 10 to 20 P/E multiple companies. Who are then going to come in and take over their business, thus generating more cash for that part of the economy.

So my profits are financing a machine that’s destroying me.

Strong Towns: Let me tell you a story. And then I would like you to give me your reaction to it, because I suspect again will be very similar but with different backgrounds and understandings.

We don’t have Dunkin Donuts here in Minnesota until two years ago. And when Dunkin Donuts came to the state they said we’re going to open 50 franchises in Minnesota. And if you want to be an owner one of these franchises “Here’s what you need to have.” Now, before I tell you what you need to have, note that there’s no simpler business than a donut shop. If you’re a local young kid who wants to get started in something, you’re not maybe not going to go to college, or maybe with college and a business degree — you need a deep fryer or a counter and a cash register. Really, it’s that simple. This is a pretty low capital type of thing. And when we think about people bootstrapping themselves and getting things something started and starting with nothing and building up to something, a donut shop is a pretty easy. But in order to start a Dunkin Donuts, to get a franchise, you need a half million dollars of net worth, and half of that quarter million dollars has to be liquid net worth, so cash sitting around.

I looked at that and I said “Why would anybody start a donut shop? Why would anyone in their right mind go out and take on their own risk of starting Katherine and Chuck’s donut shop? Why would you ever do that? Because as soon as Dunkin Donuts comes to town, they’re going to get the tax increment financing subsidies, they’re going to get all the stuff that the local governments do to get them in. They’re going to be on the federally subsidized frontage road, and you’re going to get wiped out. Tell me the financial the other side of that. What am I either missing or not grasping, or what else is there?

Fitts:  OK, so here’s the other side of that. When I left that serving as Assistant Secretary of Housing I started Hamilton Securities Group. Having looked at this exact phenomenon, I said, “Look now with the Internet you can create a venture pool for a community.” So, I’m a big believer in A share, B share plans. So you create a governance structure of the local leadership. OK so this is just like the Harvard endowment or the Yale endowment does it. You have a private corporation. It’s a self-perpetuating board. So let’s say we choose 12 people from the local economy, you know, knowledgeable about the local economy and active in it, to be our shareholders. And they put money in for the B shares. And the money’s in the B shares, the non-voting shares, and then they have voting shares because we want strategic leadership.

We are not just trying to make money, we’re trying to make our place wonderful so we need people who can think long term and strategically. So they put money in for the shares and then they turn around and do a community offering. OK. And so everybody in that county or that community, however you define that your area, can invest stock. Because one of the problems with Dunkin Donuts is when everybody shops at Dunkin Donuts and buys donuts at Dunkin Donuts, their equity doesn’t go up there, they’re not getting a piece of the action, the equity on their own purchase. So now we sell stock and then we turn around, we work with the local banks because the local banks are very helpful and important in this. We work with the local banks to help the small businesses get the kind of equity capital they need to get better, at the business of the business.

You know business is three things. It’s the business. It’s the business of the business, and then it’s financing the business. Generally small business is better at the business. They’re not as good at the business of the business, which is CPAs and systems and lobbyists.

But if we, as a neighborhood, aggregate and share business of the business, like the CFO or CPA functions, we can be as smart as the smartest guys in the world. Not only that, we can solve the number one economic drain on most communities, and that is all the talent is we’re paying to raise and educate the talent and the talent leaves, and goes off to the big cities and we don’t get the benefit of those young people coming and taking over and leading the businesses. And so we can create an options program that makes sure that we have this deep bench just like the top corporations for our place and our businesses. OK, so now lets say we created an exchange where everybody who owns the stock can trade it if they want.

And lets say the stock is trading at$10. What happens if we do a series of things that cause the Popsicle Index in our neighborhood to go up? Stock goes up. What’s going to happen if we do things to you know reduce the environmental pollution in our neighborhood? Stock goes up. What’s going to happen if we bring in new energy technology that radically reduces the costs of energy? Stock goes up. And so now what we’ve got is we’ve got the consumer, the business person, and the community all in the business of making our place more wonderful, because it makes them money together.

So, right now, you’ll see very ruthless competition between small business and a place. But, frankly, if I’m in a venture pool with you, and you do better, you lower my cost of capital ,so I have a vested personal greedy interest in helping you do better.

One of the powerful things about it is you create an intelligence system where the consumer in that place has a reason . . . . They’re a shareholder, so they march in and say “Hey, you know 30 miles down the road, Wal-Mart’s doing this, and you’re not paying attention. You need to get with the program because I don’t want Wal-Mart to get all the business because, you know, I own shares.” So you’ve got you’ve now got an intelligent network trying to help you make money.

Strong Towns:  My solution to this has been to look back at the way cities were built 100 years ago and try to understand the economics. It seems like what you’re describing is basically a modernized version of a local economic ecosystem. You know people invested in the local bank and the local bank had boards of directors and . . . Is it essentially that?

Fitts:  Yeah. Basically you had an ecosystem that was cycling intellectual and equity. So the intellectual capital and the financial capital were cycling around the economy in a system where people did better by improving the productivity of intellectual and financial capital.

So let me give you one more example before we bring it back down home. So we created programs at the federal level that would allow banks to basically get guarantees for mortgages. So let’s say I’m a small bank, I issue a thousand mortgages in the place and they’re on my balance sheet: I care tremendously about the health and enforcement and the quality of law and law enforcement in that place. I don’t want any crimes or shenanigans going on because it’s going to hurt my balance sheet. But now, if I can issue mortgages and just guarantee them, sell them into Fannie Mae and bring them back on my balance sheet you know the place goes to hell in a handbasket, it’s not losing me money or, I’m just selling them into Fannie Mae. So I don’t really care. Now what does that mean?

That means you can bring narcotics trafficking and mortgage fraud into a community and rape a place, and the bankers are going to make more money because, one, they’re protected on the mortgages, and two, they’re making money on all the activity from the drugs and the money laundering. OK. So you create a model where crime pays.

Strong Towns:   Let me try to state it a different way. And tell me if I’m right or wrong. We essentially created a financial model based on transactions, not on equity and wealth creation at the local level.

Fitts:  No. You’ve created a economy which makes money from centralizing control. The problem is, as you centralize control, you suboptimize the total economy. So you use a negative return on investment to the taxpayers to fund a process that centralizes control as it shrinks the pie.

And so government debt continues to go up-up-up. War continues to go up-up-up. The economy continues to centralize and you’re shrinking the pie, because you basically are marginalizing or destroying a great deal of the intellectual and financial capital that is productive. And frankly you’re destroying human productivity.

So let me just say one thing, there’s a wonderful chart in Fortune magazine that shows that, from 1955 to 1995 when we created the World Trade Organization, the Fortune 500 revenues and the USA GNP sort of track together. You know they basically went up very close alignment. And then suddenly in 1995 until 2015 the Fortune 500 revenues skyrocketed at about 4000 percent. And the GNP stayed rising at about 2 to 3 percent. And what that was was a giant sucking sound, engineered very much with government capital, and government securities, and government enforcement of the economic flow, into large publicly traded corporations.

And what happened. One of the things that facilitated that process was that political contributions were being engineered from the capital gains, both on the publicly traded companies and the real estate.

I should just mention, I did, to help people understand this phenomenon, Chuck,. I discovered in the 90s, after this was started to take off and the game was sort of afoot, I discovered people really didn’t understand the financial engineering that was really centralizing control and this giant sucking sound, neighborhood by neighborhood, county by county.

So I wrote a case study called “Dillon Read and The Aristocracy of Stock Profits” and I went through the creation and funding of a private prison company and showed exactly how the financial engineering worked. And it was designed, in fact, for a professor who needed literally a case study to show how this worked and how it was destroying the economy. Because it had such a positive return to the corporations, but was being engineered at a deeply negative return investment to the taxpayers, and if you looked at it on an integrated basis it wasn’t economic, bet you had to be able to see and look at all the financial engineering. So that’s up at url and it’s called Dillon Read and the Aristocracy of Stock Profits. It’s in Spanish and French as well as English. If you want to understand this phenomena it’s a great just case study.

Strong Towns:                                                          It felt to me a little bit like mercantilism here in a small town. I looked at one city that I worked with once as an engineer and the major income category that people in the city had was Social Security, essentially government benefits, money flowing in. But all the money flowed right out again. There was a dollar store and a couple of national chains, and it seemed to me like all these people existed fot, in the eyes of macroeconomists, was just to generate a growth number on a GDP charge by generating these transactions. We send them money, they spend it at this place, and it gets sucked right out.

Fitts: If you go through the continuum, which I’ve done since 1995, all the players in the mix, what you will discover is many of the different players in the whole circle of this are chasing fees.

And if you go all the way to the very top what you’ll discover is the people at the very top want to centralize control, and one of the reasons they want to centralize control is they want to compete successfully on the global stage. So if you’re competing against China that has 1.3 billion people and India that has 1.2 billion people and you want to compete up against that and win, you want to centralize as much control into the big players as possible so they can compete successfully in the world stage.

That’s kind of the theory. I don’t necessarily buy all of it. The problem is that it’s a highly uneconomic model and it requires massive government subsidy, much of it invisible and secret. And that has caused the debt to skyrocket and the model requires more and more force to force everybody to take dollars or treasuries and to use them. And of course at some point I just think you can’t run a whole planet based on force, although we see we seem committed to trying.

Strong Towns: Right. We’re going to test — we’re going to test that theory.

Fitts: We’re going to test the limits.

And, frankly, you know, a lot of this comes down to weaponry. And both space weaponry, a lot of invisible weaponry if you look at the history of the development of the invisible and very powerful weaponry, it’s definitely, you know impressive, what has been created, if you want to work on a force model. But I think, what I would argue is that nothing this economic can last. So I think what we all need to do is, at the at the neighborhood or county level, take a look at the model that’s working now and start to grapple with “OK, how can we start, incrementally, day by day, week by week, month by month, as a practical matter get this going in a more positive direction.” And one of the things we need to grapple with is we need to create a model that provides fees for our friends you know their model provides fees for our friends. Our model needs to provide fees for friends because, ultimately, we need to empower the most productive players in the local economy, and the way to do that is to shift the cash flows in their direction. So how can we take the local 401k plans and IRAs and make them eligible to invest in venture pools or REITs that build up our place?

You know, right now, I can take my entire net worth and spend it on the lottery or go drive a few miles down the road and spend it on illegal narcotics.

But if I invest it in securities in a local small business, the small business owner and I can go to jail. So part of this is how do we grapple with the extraordinary complex regulatory structure related to circulation of capital within a place.

And how do we start getting the intellectual capital and the financial capital circulating in our place, and I would I think the number one way to start is to say “OK, let’s get a group of small business owners, let’s get the local community bank, let’s get the local community college or tech center, maybe the high school principal, you know people involved with kids education and business, and let’s see if we can’t start to create an apprentice program where kids can cycle through the different businesses. And let’s see if we can’t create a Shark Tank that over time, can start to offer to finance the kid either buying the businesses of people who want to retire or start their own businesses. So let’s get in the business of taking the young people and creating opportunity for them on Main Street in a way that gives us a deep bench and reverses the strain of intellectual capital. I think you’ve got to start with the people.

Strong Towns:   Just listening to you describe this, it seems to me like there is a tension between what I see is a kind of a fragile national construct: The idea that if we don’t have GDP growth in excess of certain amounts, if we don’t have inflation at certain rates, things are going to start to go bad on a macro scale in a way that is just going to wash over everything.

Fitts:  Chuck, things have already gone bad on a macro scale.

Strong Towns:   I feel that too right. It seems to me there’s a tension between what the people at the macro level say which is needed to keep it all going just fine and what is actually good for our neighborhoods and our cities and our families and our small businesses.

Fitts:  OK, so let’s look at it this way. So let’s look at the U.S. budget.

If you look at that money coming into the U.S. budget and going into, let’s just pick any county, I’ll do Hardiman County where I live. You have an enormous number of people in a Hardiam County dependent on things working the way they work.

So they’re getting disability checks they’re getting Social Security checks. They’re getting community block development grants. They’re getting HUD vouchers. And they’re all living paycheck to paycheck or check to check on that money. You know if you cut that money they’re scared to death.

Strong Towns:  You’re in Tennessee right?

Fitts: I’m in Tennessee. You don’t want to start me on agriculture in the U.S. budge and how that destroyed agriculture. That’s really a good conversation.

Anyway, if you look at all the money it’s got a negative return on investment now. You know, let’s say that you owned a mutual fund that had a negative return on investment. And so every year it went down in value, and every year your adviser called you and said “Look, it went down, so you need to put more money in.” At some point you’d say, well wait a minute, let’s turn it to a positive because you know I need my money to be making money for me not losing money.”

You know the problem is, to turn it to a positive, you have to have a serious conversation with everybody about how it’s working now, and everybody’s going to have to change. All the people getting checks, all the people getting fees are going to have to grapple with, instead of getting the kind of money they’re getting now, how to get that money in a way that has a positive return, OK, so that’s problem number one.

Let me describe problem number two.

Problem number two is that since fiscal 1998 18 trillion dollars has disappeared from the U.S. government. This is $18 trillion of what’s called undocumentable adjustments which is an accounting term, you know, and for all you and I know it could be two trillion, it could be $40 trillion, we have no way of knowing, and I can assure you that it’s with securities fraud you can steal 40 trillion.

So we know that the US federal accounts are operating significantly outside of the law. And the problem is, if you run a negative return on investment system and you run it outside the law, there are no solutions to that problem. In other words you have to get the finances compliant with the law which is the Constitution and the financial management laws.

And that includes proper disclosure. So that’s at this point and this is not including the bailouts, that’s even more. But for a family of four this is $200,000 which has disappeared.

Now I can’t I can’t run a healthy county system if every 20 years or every year ten thousand dollars disappears. Because not only is that — on average in Tennessee, say we’re paying $5000 a year in federal taxes. Suddenly it’s all the money spent in taxes plus my debt liabilities going up by five thousand. So in other words, you have a federal financial mechanism that has reached a level of corruption which is completely unbearable.

Now you know the reaction of the Washington establishment is to just double down on going the way it is. Can’t work.

Back to you and me in Hardiman County, what do we do?

Really what you need to do is you need to find the five to ten percent of the people who are willing to look at this and see if you can’t bring about incremental change. I go back to the question of who you’ve got in a local place who’s willing to start to say “OK, what’s our talent here and what can we do and how can we start to circulate more capital locally and start to build this up?” And how can we do it in a way that protects us from pressure from the governor’s office or you know the senator’s office to bring in more Dunkin Donuts.

Strong Towns:  What I call this is we’ve got to build our own local wealth. Your popsicle index I think is so good at this. And the description you gave earlier. What we have done is we have taken a system where quality of life and really our own individual prosperity in a community of people who are becoming more prosperous was reflected in our wealth by our balance sheets. And we’ve gone into a system now where our balance sheet, or at least the way we’re accounting it, is not at all correlated with our quality of life or how we’re doing better.

Fitts:  Well, let me give you a couple of metrics. So we’ve gone from a world of family wealth to corporate wealth, and the reality is families traditionally, particularly within a place, if you if you go into a place, the thing that makes a place wonderful is usually about 20 families who have taken an enormous leadership role in not only building one or more businesses but in using a portion of their capital to make sure their kids are raised right.

Their parents are taken care of, but also invest in the local civic infrastructure. And a lot of them are the ones that finance the new small businesses and circulate capital locally. And so what we want to do is we want to preserve and build up family wealth. Because family wealth is not about being greedy or making money, it’s about making sure your kids have enough money to go to college without getting raped by student loans. It is making sure you have enough money so you know your grandmother has a decent life if she lives beyond the age of 80. It’s the money to make sure that our quality of life is there.

And that’s why I say if you look at the Seattle study there is a very direct correlation between who has capital and financial resources and life expectancy.

If I was going to pick any one number that you could look at only because the centralizers use it tremendously is life expectancy. So I agree. to me this is not about money. But whether it’s intellectual wealth or financial wealth.

Ultimately the source of all financial wealth is either natural resources or human capacity. Unfortunately, the centralizers are looking increasingly at humans as though they’re natural resources which they’re not. But there is a balance between living equity or human equity and financial equity. And ultimately, when you look at how quality of life or wealth works, they’re one thing.

Now we’ve grown up in an educational system an economy that tries to separate them out, which of course if you’re a centralizer and you want to harvest people like they’re natural resources, you try and keep it disassociated. Our job is to integrate it and keep it deeply associated, at which point there’s absolutely no balance. So you know all financial wealth is going to within a place is going to come.

The key driver of financial wealth and family wealth within a place is going to be intellectual capital. So one of the things I rail about is diet and nutrition, because if you look at the diet and nutrition of the U.S. population, you take one look at what we’re eating. There’s no way we’re ever going to be prospering.

Strong Towns:  I could not agree more.

Fitts: But it it’s very efficient, for that 4000 percent increase in corporate wealth. But I come back to, taking responsibility here, because if you look at the amount of money we’re spending on a hard narcotics, if you look at hard narcotic sales in many counties, a lot of that is just low-cost replacement of pain killers that you can’t get from the pharmacy because they’re too expensive. But we’ll deduct that out.

If we look at hard narcotics trafficking, an excess of alcohol an excess of tobacco, and how much time and money we spend watching TV or entertainment and also on the lottery, we have within our own command from those sources, enough money to really start to circulate and build up the local businesses and the local civic institutions and make things work again.

And the beauty of doing that one of the reasons I so appreciate your work. The beauty of doing things is when you use that private local capital to circulate and build, what you get is you get the right balance between investment and private activity. You don’t invest way beyond what the private activity can justify in terms of income and maintenance.

Strong Towns:  I feel like I’m viewing a different world sometimes because I look at these distortions here — how can you have this strip mall for example be vacant for 10 years? It makes no sense yet they’re building another one a quarter mile up the road. Like how in any functioning world does that happen? It only happens when the people making the decisions have no clue about the local ecosystem.

Fitts: Well, here’s the thing. I come back to an equities system. It’s not my business to do this anymore so I’m sharing ideas — if you want to do a local venture fund in your neighborhood. You know, we’ve got lots of material and ideas on how you might do that, but you’re going to have to figure it out.

You’ve got to build alignment locally between you know the providers and users of intellectual equity and financial equity. And so you’ve got to build an incentive system. You know it’s really funny because when I was at the top of Wall Street or Washington when people wanted to engineer something they didn’t engineer it. They said, OK, how can we engineer the financial incentive so everybody makes money? You know we want everybody to go to Rome, we’ll just financially engineer it so everybody makes money going at Rome. It’s the same thing with how we do the local economy.

And let me explain the beauty of this. Let’s go back and say we’ve created our local venture fund where the stock is trading among the members. We’ve got a membership exchange. It’s trading among the members at $10. We’re in negotiation with the state and local pension funds to bring in money. You know they’re interested in playing, and we’ve got it liquid to the point where an institution might be interested in investment, things are really going.

Now there is a theory in the world that you need consumption to keep the economy going. But in fact, if we do things that improve our local economy and make people better off that reduce consumption, our stock goes up, and now people can make money on reducing the cost of energy, reducing the use of fossil fuel, reducing consumption, so reducing consumption can make money. And making things environmentally healthy can make capital gains. It’s back to we’ve created a model where you know that the people who invest in the Dow Jones index can increase the value of their stock by doing things that cost the popsicle index to go up.

One of the things that most irritates me about America is I think teachers are seriously underpaid. What’s interesting is if 3100 counties financed with local place-based equity, what you would discover is the way you could get your local equity to go up is by getting the best teachers. So in one of our first prototypes we had a stock option plan and the governance board could allocate options to the teachers to buy them away from the next county.

Strong Towns:   Yeah. Imagine there s a competitive marketplace for the best teachers? Yeah right. Yeah. It would be incredible. Right.

Fitts: And the pressure would be on to have the education be wonderful.

Continued Next Week