Co-ops Going Big ... Falling into the Capital Trap?


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GEO has posted entries on two stories in the past week with the same underlying story line. The co-op borrows money on the public equity market (sells bonds) and then finds it can't pay the loans back and has to restructure. This is what is happening at Fagor Electronics and the Co-op Bank. The parallels are quite clear. The stories try to place the blame on fat-cat financiers (like our cartoon friend to the right). But that's not helping us understand what went wrong.

Both of these co-ops, at some time in the past, decided to grow their operations faster than their current revenues could support. They went to the public equity markets and sold commercial bonds under various terms to raise the funds they needed to support their growth plans. The terms of those sales established the framework for the problems both of these co-ops have at this time. This is the equivalent of the homeowner taking out a mortgage in good times and then suffering the embarrassment of a foreclosure in bad times. Just like the homeowner, the co-ops found that their income wasn't good enough to cover the payments. Over-optimistic assumption of debt is risky. All too often, such optimism leads to failures like this.

The outcomes for both of these co-ops are unattractive. Fagor's workers will be buffered by the Mondragon Corporation to the extent the larger enterprise can do so. The Co-op Bank will transition to a new form under its new "owners" and the co-operative movement will need to decide how to fill the void. The lesson for the movement is one that was well understood by the Rochdale Pioneers and is all too often ignored. You take on debt, particularly to the banks and speculators, at your peril. More bluntly, when you mortgage your future, you run the risk of being forced to turn over all your sweat equity and goodwill to the financiers with nothing to show for all your work. That's what's happened here. If you bootstrap, repaying early loans quickly, and build on the profits of your own production, when times get tough, you can still recover whatever value is left in the plant and inventory and you don't contribute to the enrichment of the financial community. That should be the take-away, not that the problem is the creditors or the "global free market."