This is the downside of regulations, enacted after the Great Recession, that made banks safer than ever. Unfortunately, those same regulations also caused banks to focus on mortgages and publicly traded loans, rather than lending to growing private companies. This dislocation may explain why the economic recovery since 2007 has been the most tepid in the past 50 years.

Middle market companies in the U.S., defined as companies with between $10 million and $100 million in revenues, account for 24.6 percent of all U.S. jobs and almost $6 trillion in total revenues. These 351,148 companies have been left behind by requirements that banks hold larger reserves against potential losses. This effectively penalizes banks for providing customized loans to private companies which must be retained on their books, and encourages banks to engage in activities that can be bundled up and sold to investors. Banks today will also lend to companies owned by private equity firms, because they are deemed to be less “risky” since they are under the control of professional investors, who have become huge players in buying control of middle market companies.

So when you operate a firm independently or family-owned and without a major financial sponsor such as a private equity firm, you fall under the category of “non-sponsored.” If you’re “non-sponsored,” banks won’t lend you enough to grow to seize the emerging opportunities in the economy.

The result: while large corporate behemoths like General Motors and Apple are sitting on piles of cash and still raising more with cheap debt, their suppliers and partners—smaller private companies that make car seats or manufacture iPhone accessories—don’t have financing for working capital or capital expenditures to keep up with growth.

Banks are required by regulators to hold a minimum amount of cash in reserve and they can lend the rest to borrowers. Under Basel III rules adopted by the Federal Reserve, banks are required to hold at least 8 percent of cash against the simplified measures of risk in their loan portfolios as determined by the regulations. Prior to Basel III, the minimum was 2 percent. The result? A giant chunk of money that could be going to borrowers is now sitting idle, in bank reserves. In 2011, bank reserves zoomed to $2.6 trillion, from just $55 billion in 2008, according to the Federal Reserve.

It gets worse. For loans to small and medium-sized businesses, banks must hold up to five times more in cash reserves than for rated public debt to larger companies. If a bank makes a loan to a small business, it must hold the equivalent amount of cash in reserve in case the business defaults. In contrast, if a bank provides a commercial mortgage or a large company loan, it only needs to hold 20 percent of the value it lends. That is because those loans can be packaged and sold by the bank in large bundles to the public markets, (For those of you who have read or watched The Big Short, this process is called securitization). And for the biggest banks, which account for 95 percent of the industry, Basel III requires those institutions to maintain double the ratio of cash reserves to their total potential losses.

As a result, banks avoid unrated and highly customized middle market loans that can’t be bundled up and securitized. Instead, they now focus heavily on the syndicated loan and public bond market, where the loans range from $100 million to $1 billion. Bank lending peaked in 2000 at $500 billion in quarterly volume and remains below that level today.

In contrast, corporate bond issuance has grown from $2 trillion quarterly in 2000 to $4.5 trillion quarterly this year. Banks prefer to take lower returns from potentially risky bonds and syndicated loans because they don’t have to maintain the same level of reserves to cover potential losses. Banks can buy five times as many of these readily available bonds and syndicated loans with lower operating costs than is required to maintain a national network of loan underwriters and the required reserves.

These realities have made the local community bank an endangered creature; the number of banks in the U.S. fell from 15,000 to 5,000 over the past 30 years. The shrinking number of institutions has been driven by consolidating branch networks, community bank failures, and by the rise of non-bank finance companies specializing in consumer mortgages, once the bread-and-butter for local banks. Adding to the problem is the Dodd-Frank legislation. Named after its co-sponsors, Senator Chris Dodd and Congressman Barney Frank, the act aimed to curb the financial risk that led to the meltdown in 2008, but it has had multiple unintended consequences, among them additional costs and compliance pressures on community banks, forcing them to engage in further consolidation.

Finally, there’s the Volcker Rule, which is nested inside of Dodd-Frank. First put forth by former United States Federal Reserve Chairman Paul Volcker, the rule clamps down on banks’ ability to make speculative investments by prohibiting them from engaging in proprietary trading activity.

This rule led to the dismantling of large proprietary trading desks at major banks, which engaged in both private equity and private debt activity. That means fewer avenues of financing for mid-sized firms.

That’s why I left a career in private equity, where there is an overabundance of capital and talent chasing a handful of big ideas and too many small ones. Instead, I started a firm, Lateral Investment Management, that addresses the growth capital needs of growing and independent companies that have no private equity sponsor.

The company is built on the belief that there is a huge opportunity to partner with great owner-operated private companies that want to stay independent. Opportunities abound for growth amid upheaval in the healthcare industry, the rebirth of domestically oriented manufacturing firms, and pressing needs for infrastructure upgrades. For investors, non-bank lending to the most successful middle market companies may be the most compelling investment opportunity available today.

While the stock market continues at all time highs, the U.S. economy sputters along and struggles from the bottom up. There’s no question that the U.S. banking system is much safer than it was in 2007, but the price tag of the solutions cobbled together by the Bush and Obama administrations, Congress, and the Fed may have been more expensive than we can afford. The American ideal of the successful and thriving independent proprietor business—which has traditionally been an important engine of growth for the U.S. economy—is at risk.

The post Why Your Bank Wants No Part of Your Business appeared first on Zócalo Public Square.

Inside the union hall and behind the big room used for banquets is a library named for Edward Tchakalian, an Armenian-American labor activist who uncovered a statewide scheme of paying janitors sub-minimum wages for long hours of work within the Ralphs, Albertsons, and Vons/Safeway grocery chains.

When I visited the hall recently, I met Juan Estrada, a shy man who’s worked as a janitor in Universal City for 18 years. He and six of his coworkers participate in what’s called a cundina. It is a lending circle, and a method to build savings. A cundina, also known as a tanda, which translates roughly to “taking a turn” or “doing a circle,” is a worldwide phenomena for poor people whose access to capital is limited. In Korean it is called kye, susu in West Africa and the Caribbean, juntas in Peru, and hui in China.

There are many variations of cundinas, but the easiest way to do it is to pool your resources. Typically each cundina takes contributions from at least six and as many as 12 people. Each participant contributes a certain amount monthly, from $50 to $200 or so. Then, you draw a number from 1 to 12. You receive the whole pot for the month that corresponds to the number you drew.

Estrada told me that he participated in a cundina back home in Guatemala. But this cundina was different for two reasons. First, it was established through Building Skills Partnership, a partnership between building owners, employers, and the union. And second, it’s connected with a bank called Mission Asset Fund. The bank reports the savings of the cundina members to credit agencies and allows the participants to build credit. (The participants also attend a credit class and learn about their credit histories). And the bank arranges things so that the cundina contributions and disbursements are automatically drawn and maintained through each of their bank accounts.

As a modern updating of an old tradition, the cundina epitomizes the union hall where it operates. “Union hall” may sound archaic, like a place where men in coveralls sit around and wait for their number to be called before heading to Walgreens for a malt. But SEIU-United Services Workers West is a different sort of union. It’s relatively young, forged by janitors who organized in L.A. office buildings in the 1980s and ‘90s. Today, its members are 40,000 security officers, janitors, and airport workers across the state. For this union, serving members means offering classes and training that allows them to build skills and gain power.

I’ve been spending time in union halls since I was a teenager who, having grown up in L.A.’s foster care system, was trying to find a voice and do something different. I’ve worked for unions, and even drove around the country visiting union halls. But I hadn’t encountered a union hall with programming quite like this.

Members of the cundina. From left to right: Dolores Santa Maria, Juan Estrada, Ana Velasquez, and Nynor Galindo.

On the day I visited the union hall, a group of janitors was taking an English as a Second Language class from an instructor from Los Angeles City College. They practiced vocabulary amidst some foldout tables, a low-hanging chandelier, some intricate curlicue molding on the ceiling, and, embossed on the walls, residual imprints of the funeral parlor. The union also offers computer literacy classes, citizenship classes, nutrition classes, a green janitor education program that teaches people how to clean in ways that produce less waste, and financial literacy classes.

The union’s emphasis on financial literacy, and its support of cundinas, is designed to counter payday lenders that are all too prevalent today, especially in poorer parts of Los Angeles. Dr. Steven Graves, a professor of geography at California State University, Northridge, has mapped the prevalence of payday lenders across L.A. Low-income areas with a high percentage of African American and Latino residents have many more payday lenders than other neighborhoods. Graves has mapped 50 payday lenders just in South Los Angeles.

The long-term consequences of the quick cash offered by these lenders can be severe. According to the Center for American Progress, one in five title loan borrowers will lose their car, one in four online payday loan borrowers’ bank accounts will close, and four out of five borrowers will need to borrow multiple times just to stay afloat.

Traditional cundinas are not always a beneficial alternative, however. Some people have shunned them for fear of getting scammed or someone taking off with their money. Dolores Santa Maria, another union member who participates in the cundina, told me, “I’ve never believed in a cundina before. There are many other people that leave with all the money. I always figured I can work on saving by myself.”

But she tried this one, and noticed that, as she built credit, she started to get offers of credit cards—she mentioned Best Buy—“because people can see I’m a responsible borrower and my credit is going up.”

Nynor Galindo, a now-retired janitor, participates in the cundina in part because there are no fees or interest payments. In response to every point made during the cundina gathering, Galindo would chime in, “And zero interest!” With the cundina, he and his partner Ana Velasquez were able to pay off all of their credit card debt 18 months earlier than expected and avoid high interest payments.

The collaborative nature of the cundina can make the difference. Estrada said when his family had an emergency in Guatemala, he was able to switch numbers with a friend in the cundina so he could collect his money in an earlier month and send it to his relatives.

Now with the help of the union’s cundina and financial literacy courses, Estrada is thinking far beyond payday—he’s saving up so he can buy a piece of property back home in Guatemala.

The post Inside a South L.A. Union Hall, a Tool for Saving Money—and for Fighting Predatory Payday Lenders appeared first on Zócalo Public Square.

A few weeks ago, I finally finished paying off almost $60,000 in student loans.

According to the to a recent analysis of government data by Mark Kantrowitz of the college-planning resource Edvisors, the class of 2015 owes an average of $35,000 in loans per graduate. American students past and present now owe almost $1.2 trillion, which could buy 333 billion slices of my late-night spinach Sicilian pizza from Pinocchio’s. Even after paying off my loans, those numbers are still daunting to me; finances are not my forte.

Fair warning: This isn’t a sob story. I know friends who paid loans off five years early, friends who’ve pulled every trick in the book to defer and extend payments, even friends who have defaulted. In contrast, I was slow and steady. By setting clear expectations of my quality of life, I mastered my debt through a combination of frugality, unwavering progress, and head-in-the-sand ignorance.

I come from a solidly middle-class family: parents still married, two kids, a tract house on a cul-de-sac in a good school district. Mom was raised on a farm in Montana; Dad’s an Air Force brat from Arizona. Both have degrees in the sciences from large public universities, and both have been near-continuously employed from college through retirement. My plans were similar: I thought I would attend UCLA, pay in-state tuition, eat the occasional slice of pizza, and become a pediatrician or veterinarian—for the work, not for the money. Already prudent as a teenager, I’d heard tall tales of inescapable student loan debt, and thought a state school was a good bet.

These neat ambitions soon veered off my intended path. When a set of twins a year older than me got into Harvard and told me about its need-blind admissions program, I decided to apply. Need-blind schools promise to provide as much financial aid as necessary to any admitted student, through a combination of scholarships and loans. When I was accepted, the financial aid package wasn’t as generous as other schools’, but I took a leap of faith and thought I could make it work.

In my first week on campus, I walked into a cramped lecture hall to sign promissory notes I didn’t understand. Since financial aid offers only apply to the current school year, I didn’t know that I would end up borrowing roughly $18,000. Even the first year’s loan (about $5,000) was daunting to someone who’d never handled money in such large sums. My largest purchase to date was my first car, a used Toyota Celica that cost a tenth of that.

These loans and scholarships covered tuition, housing, and a full meal plan. On my own, I was responsible for textbooks, clothes, entertainment, and other incidentals. So I bought used books, shopped for vintage winter coats at the aptly named Dollar a Pound, and rarely went out to eat; those slices of late-night Noch’s pizza were a special treat. I did occasionally splurge on my passion of watching live theatre.

While other students had more expensive clothes and hobbies, I never felt I was missing out. College fit my expectations: still comfortably middle-class, just with warmer clothing. After the first couple of months, neither daily finances nor future promissory notes seemed scary. The loans were easy to ignore; I only saw statements once a year, when signing new promissory notes. I didn’t have a plan for how to pay them off, just confidence that I would, once I got a real job.

After graduation, three former professors asked me to be their teaching assistant, so I delayed applying to medical school. Responsible for my own room and board, I shared one floor of a triple-decker with two roommates and learned how to cook simple meals. I easily handled rent and utilities, so when loan payments kicked in after a six-month grace period, they just seemed like another check to write. I chose the standard plan of equal monthly payments for 10 years rather than the gradated plan where payments increase every month; I didn’t really understand the finances, but thought that identical checks seemed easier to write.

A year after graduation, my former undergrad dorm invited me to become a resident advisor, so I could live and eat for free. This financial freedom helped me rethink my life goals. Instead of medical school, I enrolled in grad school for architecture in 2002. The Graduate School of Design at Harvard offered me loans and summer work-study, but no scholarships. I was able, however, to continue teaching chemistry and serving as an RA. For three and a half years of school, I only took on an additional $40,000 in loans, much better than friends who took out over $150,000 in debt. Again, I set my expectations differently; I thrived with multiple challenges, while other classmates focused solely on school, and were willing to take out more loans to do so.

After I graduated, in 2006, I returned to Los Angeles. Even with about $54,000 in loans, I looked for jobs based on the design experience I would gain, not the paycheck I’d earn. Having paid my loans previously, I was sure I could do it again. I found an amazing firm that specialized in designing theatres. My starting salary, just over $40,000, was much lower than it would have been at a corporate firm, but I was able to turn a passion into a career.

I didn’t stop living frugally. I shared an apartment in a charming fourplex with a college friend, cooked most meals at home (including bringing lunch to work), and limited myself to two drinks on a night out. I swapped out Dollar a Pound for Jet Rag and Target. My infrequent vacations were road trips, staying with friends and family rather than in hotels. I didn’t feel like I was missing out on anything, because this was how I’d set my expectations: simple, relaxed, middle-class.

My student loan debt taught me that regular, progressive finances work for me. Even in my first job, I made small contributions to a retirement plan. After five years and a few raises, I increased my student loan payments and began to save for a down payment for a house. Steadily paying back tens of thousands of dollars in student loans helped give me a high credit rating, and I easily qualified for a mortgage. In 2013, I bought a duplex with a good friend, and we’ve been slowly renovating.

This September, when I paid off my loans, it was actually underwhelming—no champagne, no nothing. To put my loans in perspective, my half of the mortgage is about $220,000 of debt. But even that doesn’t seem scary when spread out over 30 years. I’ve slowly increased my standard of living within my means. I may still have a roommate, but I do eat out more frequently—and still long for that spinach pizza from Noch’s.

The post My Secret to Paying Off Student Loans appeared first on Zócalo Public Square.