Is Kickstarter part of the problem?

I recently listened to an interview with one of the head’s of Pimco. Pimco is one of the largest financial institutions in the world, with over two trillion dollars that it manages, and is the world’s largest bond investment manager. They know a thing or two about global trends and markets

One of the questions asked was what caused the financial crisis. The answer given, which is admittedly controversial, is that consumers took on too much debt. This is something that’s been said before, but consumers are supposed to take on debt, that’s part of how the economy grows. The clarification is that the debt they took on was predominantly consumption based, not investment based. People were spending money on nice things, fun experiences, trying to improve their overall happiness, but not investing in methods of improving productivity, or increasing domestic output.

This makes sense to me. One takes on debt with the presumption that it will generate a return greater than the cost of the debt with interest. A college education will generate a higher salary, a car will permit greater choice of living options and careers, etc.

If true, this is both compelling and frightening. Just because people have less money to spend does not mean that their appetite for new things and experience has gone away. If anything, they desire more because they can only afford less.

When the financial crisis really came to bear near the end of 2008, a lot of banks shut down their loan programs to small businesses, much to dismay of many economists. Without loans, these businesses cannot expand or grow their businesses. But something else did show up: Kickstarter.

Kickstarter launched in late April 2009, and it allowed people to ask for money from the public at large to produce things for the purposes of consumption: games, videos, movies, albums, etc. Looking at kickstarter, everyone and their grandmother has an idea for a 3D printer that they want to sell.

Pros: This effectively democratizes the creative process. You don’t have to know somebody in the publishing business to get your new album financed. So long as you have a means of demonstrating your talent and people are excited about your project, you have a decent chance of getting the funding you need.

Cons: This does not address our need to invest in small business capital expenditures that are important for growing the economy. The public at large has been trained by advertising agencies to view opportunities on a more selfish level. A sheet metal fabrication company is not going to have success on kickstarter trying to raise funds for a new stamping machine. It’s not very sexy compared to a new videogame by the creator of Mega Man.

There’s also no accountability. Donating to kickstarter does not guarantee that you will receive anything for your money. If a company fails to produce the good for whatever reason, you’re out of luck. Part of the vetting process for getting a small business loan was demonstrating one’s ability to handle funds appropriately, or at least be accountable if the company failed in it’s mission to generate profitability for those providing the loan. That vetting process has been thrown out the window. Say what you will about rich institutions, they can afford to take risks. The public is now bearing those risks, with less information, nickel and diming away our savings on neat things we may never even receive.

I hope I’m wrong. I’ve donated to a kickstarter campaign, helped a friend setup his own, and have several projects that might be good to bring to kickstarter to help get them off the ground. But is that the right thing we should be doing with our money?