Why personal relationships and trust are the heart of credit.
Credit is not quite like a slaughtered chicken. We certainly hope there’s less evisceration involved. The most blood you’re likely to encounter at a mortgage broker on any given Wednesday is a paper cut. But lending and poultry do share one critical characteristic: both are built on trust. And in both cases, this trust has been removed from the context of human relationship to be replaced with something much less personal in the mainstream North American marketplace.
Michael Pollan uses an unapologetically visceral illustration to make the connection between trust and slaughtered chicken in his influential book The Omnivore’s Dilemma. Pollan has shaken many eaters’ trust in North America’s industrialized agriculture systems by showing—sometimes in graphic detail—that the same scale and complexity that make possible the end of feeding billions also remove the means from the consumer’s view. One of his most memorable stories is his explicit (read: gruesome) account of processing day at Polyface Farm, an alternative farm, which slaughters its chickens in the open air—a “glass abattoir.” The chapter doesn’t make for easy mealtime reading; killing animals is a violent, messy business. These days, however, most of us are insulated from the blood, stench, and general unpleasantness that always accompany slaughter. We can pick up a pack of chicken thighs without having to even think about evisceration.
No matter how large and complex our lending systems, credit, like quality chicken, ultimately boils down to trust.
The point of Pollan’s relentlessly gory details, and why chicken evisceration matters for talking about credit, is to draw his readers’ attention to trust and the moral power of transparency. All of us buy our meat on faith that the messy process of butchering was carried out in such a way as to make it safe and good to eat, even if we’re not consciously aware that this is an act of belief. At Polyface, customers are welcome to not only watch the way their dinner is killed but also to poke around the farm, check out the chicken coop, ask the farmer questions. The farm’s glass walls keep the farmer accountable to the consumer. It’s a strong basis for trust.
Presented in contrast is the supermarket chicken. Trust still matters in the poultry aisle—the customer buys the chicken believing it’s safe and good to eat. The basis of trust, however, is not a relationship with the farmer or processor. Instead, a package label offers customers the assurance that their dinner was raised and slaughtered according to government agri-food requirements. But as Joel Salatin, head farmer at Polyface, points out, regulation is a poor substitute for accountability based on human relationship: “You can’t regulate integrity.”
Finding the Credo in CDOs
No matter how large and complex our lending systems, credit, like quality chicken, ultimately boils down to trust. Historian Niall Ferguson reminds of this often-overlooked fact in The Ascent of Money, a history of credit and debt in Western society. The basis for any lender’s offering credit to a borrower is faith that the debt will be repaid. “It is no coincidence that in English the root of ‘credit’ is credo, the Latin for ‘I believe,’” Ferguson writes. In the early days of credit, this trust was tangibly personal. Taking out a loan required a face-to-face conversation with a local lender. Think, for instance, of Jesus’s parable about the unmerciful servant. Debtors may still have had to show evidence of their ability to repay, but this would only have underscored the fact that the transaction was predicated on a relationship of trust with the creditor.
Today our financial system is much different—larger, less personal, more complex. The relationship between borrower and lender is obscured by a dizzying array of new credit tools. We’ve repackaged the promise to repay into collateralized debt obligations and credit default swaps. Yet the bedrock of the financial system—buried though it may be beneath the towering skyscrapers of Wall Street—is still trust. The faith between lenders and borrowers remains the premise of our participation in this system: store clerks accept a swipe of plastic in exchange for their goods because they trust our credit cards; we sign the mortgage papers trusting that we’ll have a roof over our heads. It’s just that this trust is less concrete, harder to pin down, increasingly disconnected from particular human beings.
When the source and effects of our borrowing are largely removed from view, we are not confronted with any reason to question our tacit trust in the way our loans are produced.
None of this is meant to condemn complex, globalized systems as such. Industrialized agriculture doesn’t just mean factory farms—it also includes the Haber-Bosch process, the synthetic production of fixed nitrogen without which more than almost half of us would have long since starved to death. The fact that credit unions and retail banks have been able to offer dirt-cheap (by historical standards) credit in part by scaling their operations has been a boon for countless borrowers. The absence of financial institutions is also much more problematic for the poor than their presence. Someone without access to a bank account—and, importantly, to secure, affordable credit, on which more below—will have a harder time breaking the cycle of poverty than someone whose only option in a cash crunch is the local loan shark. Nor should we romanticize the days of walking down to the local family lending operation on the cobblestone streets of centuries past, when financial services were disproportionately provided by ethnic and religious minorities. Their creditor status, as Ferguson points out, often exacerbated the hostility and suspicion they experienced from local borrowers—take medieval European caricatures of Jews as rapacious financiers, for instance.
All of which is to emphasize not a rosy nostalgia for a simpler, smaller past but rather that the depersonalized nature of today’s lending systems presents new challenges. Problems themselves are nothing new, of course; every credit system developed by sinful, fallible humans is going to have its weaknesses and structural injustices. But perhaps the distance between most borrowers and these problems is one of our current system’s new challenges. William T. Cavanaugh puts it well in his discussion of injustices hidden by extended supply chains: “Most of us would never deliberately choose our own material comfort over the life of another person. . . . We [participate in such an economy] not necessarily because we are greedy and indifferent to the suffering of others, but largely because those others are invisible to us.”
When the source and effects of our borrowing are largely removed from view, we are not confronted with any reason to question our tacit trust in the way our loans are produced. The opacity of distance allows practices that might make us queasy to persist unnoticed. Slaughter practices that might make us reconsider our fried-chicken sandwiches are hidden behind the concrete walls of the industrial abattoir. Exclusive and predatory lending practices—subprime mortgage rates, crippling annual interest rates on credit cards, racial discrimination in small-business loans, investment in arms manufacturing, bond purchases in countries that flagrantly violate human rights—are obscured behind algorithms and triple-A securities. In some ways, it is more difficult for uneasy consumers to sniff out rancid practices in finance compared to agriculture: crops are grown and livestock raised in the open air (or at least should be), while interest accumulates on confidential balance sheets and deposits are held secure behind locked doors. The reek of a factory farm curdles our stomachs from miles away, the stench impossible to ignore, while thousands of mall customers bustle past payday-loan outlets without a second glance. Balance sheets are simply less visceral than slaughterhouses.
Which leads into another new challenge: the tendency of our sterile, data-driven lending system to obscure questions of moral responsibility with numbers. We quantify risk with credit scores and debt-service ratios, plug the numbers into a formula, and let the calculation decide. A data-based system offers the seductive opportunity to abdicate responsibility for difficult questions about vulnerability and mercy to the supposedly impartial rule of math. It’s much more difficult to feel the full ethical weight of a loan when you’re evaluating a string of numbers rather than a human being. But as our friends at Theos remind us in their excellent report on debt, the assumptions behind borrowing and lending are always undergirded by moral questions. How is responsibility distributed for the risk and repayment of debt? What obligations does the lender have to the borrower, and vice versa? When is offering a loan to someone in need an act of mercy, and when is it an act of exploitation?
The temptation is to allow the state—one of the few institutions that can exert power over massive lending corporations—to handle these questions for us, trusting governments to ensure loans are fair and honest. It’s a temptation we should resist. This is not to suggest our trust in regulations is entirely misplaced. The supermarket chicken is, after all, safe to eat; the digits displayed on our online banking portals do translate into bread on our tables and fuel in our cars. Preserving justice and safety is the proper role of the state, and regulations are a useful means to that end—especially when so much of what happens in farming and finance takes place beyond customers’ view. Salmonella and the 2008 credit crunch are compelling arguments for the FDA and cash asset ratios. We can, and should, debate the limits and extent of fair government regulation, and its structural implications (many, for instance, argue that it was government intervention that contributed to the 2008 crisis), but few would argue that they should be eliminated altogether.
But despite policy-makers’ best intentions, there are limits to what regulations can do. The virtuous habits on which just borrowing and lending practices rely—trained dispositions of honesty, prudence, generosity, faithfulness, and wisdom—are beyond the jurisdiction of the state. Not that the state has no role or stake in the moral behaviour of its citizens—it does. Regulation can even be a legitimate means to such ends when used to develop structures that support virtue. The glass abattoir is a prime example of how such structures work—it encourages diligence, honesty, and care in slaughter practices by creating conditions of strong, relational accountability.
Indeed, one of the current lending system’s challenges is that it is not structured to be trustworthy. The depersonalization of accountability and lack of transparency, for example, enable the erosion of integrity. But even when structures do nudge participants toward virtuous ends, no state has the power to compel all of its citizens to make moral choices all the time, and only a totalitarian regime would try. Even the most aggressive government intervention (and stationing federal overseers at every bank till would hardly make for a healthy society) cannot force citizens to behave virtuously. “You can’t regulate integrity.”
When (not if) state protections fail or fall short, it is typically the poor and vulnerable who suffer most. Lending is no exception. Those who live on the margins of society are more likely to lack access to safe, affordable credit. While this problem is related to a lack of financial capital—without assets or a strong credit score, commercial credit products (such as a credit card or line of credit) from mainstream financial institutions like banks are out of reach—a lack of social capital is equally significant: one-third of Canadians cannot say with certainty that they have someone they could count on for money in a financial emergency. Without access to bank or natural community loans, vulnerable families can be forced to turn to expensive, often predatory options like payday loans or loan sharks in a crisis. For those denied the trust of the lending system, the cost of credit is very high indeed.
The virtuous habits on which just borrowing and lending practices rely—trained dispositions of honesty, prudence, generosity, faithfulness, and wisdom—are beyond the jurisdiction of the state.
Wendell Berry for Wall Street
The sustainable-agriculture movement is, I think, most compelling and hopeful not when it’s raging against the abstract evils of “agri-food giants,” but when it makes the case for a positive alternative, one built on relationships of trust with particular people in particular places. It invites us to discover the joy of greeting our local chicken farmer by name, or of harvesting a perfect autumn squash from our own backyard: it invites us to create rather than oppose. What, then, might some such alternatives look like in the realm of lending and borrowing? What are the CSAs and rooftop gardens of the finance world?
One example of highly relational and transparent credit is the lending circle, which offers no-interest, small-dollar, peer-to-peer loans. In a typical lending circle, six to ten people decide to lend each other money—say $1,000, with each member paying $100 a month for ten months. Each month, a different member of the circle receives the group’s payments until each person has had a turn to borrow the pot of money once. Popular among tight-knit immigrant communities, lending circles have started to gain ground in North America as a promising way for those outside mainstream financial institutions to access credit. They provide loans in cases where the lender trusts the borrower to repay, but where the basis for this trust is social rather than financial—the kind of trustworthiness that isn’t measured by a credit score.
Online lending circles facilitated by non-profits have also started to emerge as alternatives to traditional, community-based lending circles. Participating in a lending circle with strangers rather than friends and family does, of course, weaken the social obligation to repay. Some organizations, however, have taken advantage of the more formal structure to offer members the chance to build their credit score—translating borrowers’ trustworthiness into a language that banks can understand. This in turn allows circle members to participate in the mainstream financial market and access affordable credit for large investments like mortgages.
Lending circles themselves are a small, admittedly limited response to the structural challenges facing today’s lending systems. (One of their major limits is their inability to help in case of an emergency—the time it takes to set up and borrow from lending circles doesn’t help payday-loan users, who would benefit greatly from cheap small-dollar loans but need money fast.) The integration of trust and credit they put forward, however, offers enormous potential—as both principle and practice—for our shared economic life. What kinds of renewal might be possible if we increased the circulation and worth of relational trust as a credible currency in our lending systems?
What might it look like, for instance, if those of us who have access to both financial and social capital helped translate trust for our neighbours whose borrowing credibility is in banks’ blind spots? Perhaps it’s co-signing a college loan for a family member whose credit score still reflects mistakes they’re working hard to leave behind. Or maybe it’s a congregation pitching in to make a mortgage possible for the newly arrived family of refugees, whose lack of quantifiable assets makes them look like a terribly risky investment to a bank blind to assets like courage, determination, and honesty.
The (re)integration of trust and lending works the other way as well. Just as trust can be used to build credit, credit—when done well—can build trust. Lending circles exemplify a way of doing finance that facilitates trusting relationships. The personal accountability of a lending circle can make it an effective community of practice in which virtues are forged: when it’s your friends and family who are counting on you to contribute your fair share on time, the incentive to honour the agreement is strong. It’s a kind of lending that requires and builds positive economic habits—discipline, faithfulness, persistence, honesty—that have non-economic benefits.
So what might it look like to engage with existing lending structures in a way that promotes both trust and trustworthiness? As lenders (either individual or organizational), we could resist the convenient comfort of ignorance when it comes to our investment portfolio. Have we put in the work to find out whether the bonds we hold are from countries and companies whose growth is trustworthy—just, fair, sustainable? As borrowers, we could opt for a smaller house or older car, choosing to prioritize humility and honesty over daydreams and desire when calculating how large a loan we can really afford.
In painting these rosy aspirations, I don’t mean to suggest that there won’t also be costs. It might require those with more financial security to shoulder a share of debt’s risk for a neighbour whose finances are less stable. In some cases, it might even ask us to bear the cost of repayment in the case of an impending default. It might mean taking a few points off our investments when we learn—or discover we can’t learn—on whose backs our quarterly returns are generated. But perhaps these sacrifices themselves offer a different kind of value—a way to practice the discipline of simplicity, a habit restraining our impulse to grasp at every available scrap for ourselves, to reap to the very edges of our fields. It is financial growth removed from pre-eminence and returned to its rightful place.
Most importantly, prioritizing trust in lending reminds us that human beings, and relationships between them, remain at the heart of any credit system. When we enter a lending relationship with a neighbour whose face and name we know, we see more clearly our moral obligations in lending relationships with distant and unknown—but nonetheless very real—neighbours. We do not act justly and love mercy in the abstract. So too must a credit system directed by love of neighbour start with recognizing our neighbours, with seeing in the least of these borrowers and lenders the face of our King.Subscribe