Over the weekend, I heard two politicians make comments that stuck with me. Mike Castle, congressman from Delaware, reported that in recent talks with ING Bank, they are doing very well. The mortgages that they have financed are doing fine, and there’s no problem with the default rate skyrocketing. Then again, they service their own loans. Yesterday, Mike Bloomberg said the City of New York also has a limited mortgage program, and their default rate is also extremely low.
This started to sound like a yearning for the time where the local banker made a personal decision on your credit worthiness, and whether he could trust you when deciding to make a loan. Factors other than a naked credit score metric went into the decision. The social context was everything.
Now, compare these banks who are surviving the financial melt-down on Wall Street with Muhammad Yunus, a Bangladeshi banker, developed the idea of microlending with the Grameen Bank and won a Nobel Prize in Economics because of it. You start to see that the closer the lender and borrower are, the stronger their relationship, the more likely it is that the loan will be repaid. Not everyone may have stellar credit, but even loan sharks know that people will repay a loan when properly motivated. Loan sharks may use force and threats, but often maintaining a reputation and the ability to continue doing business in a community is enough to make sure loans get repaid. This works for small loans, partially because a small boost up is often all a person needs to find their way towards success. Marry that factor with the fact that the loans should be readily repayable- they are not large enough to be risky individually- and you have an easy money out, money in, recycle to another in need system that has helped many people become more self-sufficient.
Dr. Dan Ariely from MIT in his book, Predictably Irrational, talks about how messy things can get when you mix business contracts and social contracts. Sometimes, you just want businesss to be business and personal to be personal. You don’t offer to pay your Mom for Christmas dinner after the meal, because that would be rude. When I buy something at the drug store, I don’t expect the cashier to be forever grateful. But yet…. When you do mix some level of personal social contract with the business contract, you can get some remarkable results. Often messy, but clearly what makes these relationships different from the day to day.
Take my favorite local coffee shop. I love this place because it is like the old sitcom “Cheers”, where everyone knows your name. My favorite barrista, Shane, even draws little Latte Art pictures in the foam for customers, making this a special experience, beyond the day to day. But now Shane is leaving, and moving on to another coffee shop and bar in town, a bit more of a drive away. Will my relationshp with the coffee house stay the same even though the person who makes my day special isn’t there? I don’t know yet. I still love the coffee, but this person- the face of the business to me- was part of what made this a destination more frequently than not. My business relationship- exchanging money for coffee- was enhanced by the social contract and customer service provided by this particular barrista. That made it special and outstanding. Maybe I can “bond” with another barrista, but it will probably take time.
Likewise, we have a private banker at a local bank. If I ever have any issues, I can sit down and talk to them about money issues, investment issues, and they make sure we have our needs taken care of. I feel like a valued customer- the added service and personal relationship makes this more than a fiscal relationship. Additionally, when we were buying our house, our real estate agent became a close friend- (Thank You Mary!) the personal relationship we have extended the business relationship, and made the transaction all that more satisfying.
The point I am trying to make here is this- when financial and business transactions are devoid of all sense of personal attachment and social contract, they are easier are more liable to break and go astray. When business relationships and future business depends on maintaining a social contract as well, both parties are more likely to be morally obligated to perform all the duties under the contract. The secret sauce is the social contract that binds the financial contract.
Much of what has gone astray in the financial sector has been the systematic break down of the social contract. People feel little moral compunction about screwing a big nameless, faceless company, but they feel differently about disappointing their neighbors. This may seem like a quaint idea, but I think the closer the lender and lendee are, the more personal the relationship, the greater the likelihood the transaction will be successful. The more distant the relationship, the less likely the relationship will be successful.
So the next time you are in McDonald’s, ask yourself- do I feel a sense of place here? Or is this a widget, and the people in it as well? Are you more or less likely to correct someone if they give you the wrong change or an extra order of fries? And would you do the same at your local diner/restaurant/coffee shop, where you know the owner? Why or why not? Is it really the principal of the thing, or does it matter more on the social relationship/contract you feel with friends and neighbors?
What do you think? Is this right, or am I totally off base here? Becaue I think the way to solve much of the financial problems these days may be about making things more, not less, personal. And while this is much harder to run efficiently by the widget standard of commerce, it is certainly the way to keep all of us whole, fiscally and emotionally, no matter how inefficient.