Monday, December 15, 2008

The (Economic) Value of Relationship

Here at Fuller, one of the buzzwords that comes up from time to time is "relationship." Generally speaking, we don't mean "dating" when we use this word, but rather the fact that people being in community with each other is a high value here. Naturally, this arises out of our religious values, but this also helps us to see positive implications for strong relational community in secular areas of life, as well, such as in economics. For example, I've heard fellow students argue for years about the need to buy more local produce in order to help local farmers, many of whom they know personally. In turn, they argue, money is kept in the community, creating local growth. Also, because it costs less to ship the produce that shorter distance, the money is spent more efficiently. Likewise, students often argue for the value of living close to one's workplace, providing for closer ties to the people and businesses nearby. Also, this enables a shorter commute—possibly even walking or riding one's bicycle—and therefore using less gas.

I've been intrigued over the past few weeks to hear some secular pundits argue for the value of relationship—actual interaction with people—in the economic arena. This recent NPR news story tells of a mortgage broker in Pennsylvania who deals with the Amish when they need loans to buy land for farming. The Amish tend not to have much debt: they don't use credit cards, and usually deal exclusively in cash. But they still need loans to buy land the same as most of us do, and they will use the local (non-Amish) banks for this purpose. Because they have no credit history in the conventional sense, Bill O'Brien (the broker featured in the article) will ask the potential borrower about his family. Who was his father? Who is his father-in-law? O'Brien is proud to say that in roughly 20 years of lending, he has never had a problem with an Amish borrower failing to pay off his debt. Part of the reason for this is, of course, rooted in Amish values, but it's also an indicator of the relationships O'Brien builds with his borrowers. Apparently, he puts about 1000 miles on his car every week visiting borrowers, and he knows each one by name.

Contrast this with the Fresh Air interview with bankruptcy and commercial law expert Elizabeth Warren, who also argues for face-to-face interaction between lenders and borrowers, noting that "in the old days... if something went wrong... the institution that made the loan stood to lose it all, and they would sit down and negotiate. Because it was one person. One company." The reality these days, she explains, is that banks package, divide up, and re-package bundles of loans into financial instruments, and so now no single institution has an incentive to negotiate. In fact, there is a disincentive to negotiate, because so many entities have an interest in the loan, and negotiation may not favor all of them equally. By getting away from the concept of "relationship" (a word Warren doesn't use, to the best of my knowledge) in economics, we have created some of the very problems we're now facing.

Of course, these banking behaviors came to exist for a reason. There are certain efficiencies in these practices that were (at one time, at least) desirable, and face-to-face interaction can sometimes be slow and inefficient. I don't know that it's practical to suggest that we need to do a full-scale return to "the way things used to be." However, it's clear that some of the "old" values that may have been lost were important, after all, and some reclamation of those values will need to happen. How that will take place, and how those values will be reintegrated into the technology and procedures of today, remains to be seen. But it's a discussion we need to have.

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