Doing Good and Doing Well

A recent piece by the New York Times' conservative columnist, David Brooks, caught my attention while I was working 12-hour shifts in a chemical plant. He posits that our society, like British society 100 years ago, is transition from an industrious one to a more "genteel" one, concerned with the finer things in life but not with making money. Along the way he highlights the opinions of Corelli Barnett (cited in the provocative and thoughtful The Post-American World) and our own first lady, Michelle Obama. In her own words:

“We left corporate America, which is a lot of what we’re asking young people to do,” she tells the women. “Don’t go into corporate America. You know, become teachers. Work for the community. Be social workers. Be a nurse. Those are the careers that we need, and we’re encouraging our young people to do that. But if you make that choice, as we did, to move out of the money-making industry into the helping industry, then your salaries respond.” Faced with that reality, she adds, “many of our bright stars are going into corporate law or hedge-fund management.”

There's no doubt that good teachers are essential to thriving society, and the same is true for community developers (though the contribution of community organizers is more questionable). But there is a tremendous folly here. It's not the derision towards business and industry, the dismissal of the value contributed by those who actually make things, or the arrogance of a multimillionaire who proclaims that she chose to "move out of the money-making industry": all of that could be expected from the Obamas. What is truly shocking about the First Lady's quote is that it represents an immense ignorance of the American tradition.

As British historian Paul Johnson observes at the outset of A History of the American People, the two great ambitions of Americans have always been "to do good and to do well." These twin drives arose out of the Reformation and arrived on our shores with the Puritans. Their descendants in New England lived out the same values. The top two occupations of leaders in the Abolitionist movement were pastor (no surprise) and... entrepreneur.

There is, in fact, a fascinating tension here that forms one of the central narratives of American history. What happens when doing good and doing well collide? Once again, slavery is a case in point: Southern landowners did well (though not as well as we imagine), not only because of slavery, but because Eli Whitney (of Connecticut) invented the cotton gin, thus making their product profitable. What happens when profit and reform collide? Can you always get rich by changing the world? During the 1990s tech boom, companies often recruited skilled engineers by claiming that their work would "change the world." There's no doubt that many technical innovations have - but have they truly changed it for the better? Or, "Is Google Making Us Stupid?"

The First Lady, who like her husband is supposedly intellectual, could have explored this tension. She could have urged her audience not only to teach, but to take a stronger set of ethics and moral leadership into the corporate world. After the greed and stupidity of the last few years, the arena of the marketplace is as in need of change as any segment of society. Instead she relied on stale "us vs. them" political talking points. Perhaps it is too much to expect First Ladies to write their own speeches, but could she at least not plagiarize hers from a teacher's union?

But Brooks assumes the First Lady's erroneous dichotomy and perpetuates it in his own musings. He takes it for granted that there is an inherent conflict. Perhaps my own experience is unique, but growing up in Kansas it was not uncommon to see the same families produce teachers and missionaries as well as engineers and executives. In my experience in the evangelical world, across multiple states and a few foreign countries, I encountered world-changers, ambitious achievers, and sensitive aesthetes with regularity. We had our inevitable conflicts but we were brothers and sisters. We never imagined that we were at war with each other.

The solution is not to accept this false dichotomy, but to toss it out in favor of something far older. One of the themes of the Reformation was the view of all work as spiritual valid and a form of service to God. In the Middle Ages, "secular" work as often denigrated in favor of "spiritual" work such as serving in the church. Mrs. Obama is essentially advocating a Medieval approach to vocation - except that teachers, social workers, and government employees have now replaced priests, monks, and nuns as the "sacred" workers. In contrast, the Reformers viewed Christ as Lord of all areas of human endeavor. When Martin Luther advocated for the "priesthood of all believers," he didn't mean that everyone should be a pastor; he meant the mechanic was a priest in his shop, the banker in his office, and the mother in her home. All vocations were to be pursued with a religious devotion, "working unto the Lord and not [merely] for men." I believe it was primarily this emphasis (and not agony over predestination) that led to the "Protestant work ethic."

But articulating a comprehensive Biblical worldview might be too much for the Obamas, or even for our "genteel" society. In an age where most states run lotteries and "Desperate Housewives" earns top ratings, calling for a return to the Protestant work ethic and the Christian-inspired sense of vocation may be setting the bar too high. The First Lady, and Mr. Brooks, could start by simply encouraging their listeners to be more American.

The Failure of Impersonal Finance

Over the past 3 months, a small financial storm that kicked off in October 2007—with a spike in subprime mortgage foreclosures and the evaporation of $800 million in assets in two Bear Stearns hedge funds—gradually mushroomed into a Class 5 hurricane. A free-fall in home prices, and an avalanche of foreclosures on homes worth less than the outstanding amount of the mortgage, cost investors hundreds of billions of dollars and began piling dead weight onto the entire economy. Then, Lehman Brothers, a 158-year-old firm that had survived the Great Depression, declared bankruptcy and its $600 billion debt now trades for 3 cents on the dollar. The government nationalized the world’s largest insurance company, AIG, and the nation’s two largest mortgage companies, Fannie Mae and Freddie Mac, just to prevent a catastrophic collapse. As banks refused to lend even to each other, a wave of failures prompted the Federal Reserve to take the unprecedented step of actually investing directly in the America’s 8 largest banks. The stock market lost half of its total value and the credit markets seized up like an engine without oil. The $700 billion Troubled Asset Relief Program has provided just enough liquidity to get markets moving again – but not enough to rescue investors or homeowners. As of now, the entire world is heading into recession. In the continuing fallout of this financial meltdown, one of the most asked questions is not merely “Why?” but “Who (or what) is to blame?” Fingers have been pointed in every direction, some more credible than others: government meddling in mortgages, lack of government oversight, a failure on behalf of debt rating agencies, the invention of and then the resulting boom in credit default swaps, the excessive indebtedness of American consumers, or plain old greed. The government has been blamed for doing too much and for not doing enough, investors for being too greedy and then for being too conservative, and borrowers have been portrayed as both villains and victims. All of these approaches have their merits, yet miss the real root of the problem. I call it “the failure of impersonal finance.” Once upon a time – and sometimes still today – a person wanting a loan went to a local bank. He described his need to the banker and layed out his financial situation. The banker listened, analyzed the numbers, then went and looked at the house or business. He looked the borrower in the eye and decided whether or not he was trustworthy. He looked around the neighborhood and judged whether the house would hold its value. He visited the business and rated its prospects in his own mind. And if he made the loan, the borrower sat in front of him and signed a promise to repay it, knowing that both the job of the banker (whose kids attended the same school) and the viability of the bank (upon which many in the community depended) were predicated upon his ability to repay. And if he didn’t, it would be the banker himself who came for a visit. It wasn’t merely a transaction between autonomous self-interested parties. It was the beginning of a relationship based upon mutual interdependence, a relationship entered into with personal knowledge of the risks and rewards. Fast forward to the first decade of the 21st century. A young couple with a credit score below 500 picks out a 3000-square-foot house, which they intend to buy with no down payment, and are directed to a mortgage broker. The broker doesn’t know how much they make—although it’s almost certainly not the $200,000 a year they claimed—or where they work. He drives past the house once, in a newly-built suburb, but has little knowledge of the area – or concern if it later goes bust. Their poor credit history is not his problem. The mortgage broker makes a fee from putting the transaction together, then walks away with his money. A finance company bundles this mortgage together with thousands of others – once loans made to individuals, but now nameless and faceless numbers in a bond prospectus. An investment bank 1,500 miles away (such as Lehman Brothers) issues a security backed by the mass mortgages, then chops it up into slices of varying risk called “tranches,” each insured via credit default swaps to a different degree by an insurance company (such as AIG) based upon the risk judged by a debt-rating agency (such as S&P, Moody’s, or Fitch), which are then sold to all manner of institutional and individual investors – none of whom have ever met any of the borrowers or seen any of the houses. Most of these players make their money either from fees or from trading various derivatives – such as the credit default swaps. While dependent upon the overall market going up, none have any direct attachment to the borrowers. The net result is that the lenders – i.e. the investors – are loaning money to complete strangers. Most Americans would not loan $10,000 to a stranger on the street, for a project they know nothing about, regardless of the interest rate. But package it in enough of a sophisticated manner and put some big Wall Street firms behind it, and people will loan their money to people they’ve never met to buy houses they have never seen in places they have never been. Even in banking, the picture these days is only slightly better. Consider the case of a small-town banker whom I know. He formerly made all loan decisions himself, or in consultation with the other officers of the bank. His personal knowledge of customers and local markets, and his first-hand evaluation of businesses such as farming operations, enabled him to make profitable loans that others may have judged too risky while avoiding untrustworthy borrowers with whom others would have dealt. In over 20 years he lost less than 1/10,000th of all the money he loaned, while his bank generated a return on assets greater than that of its peers. But when his locally-owned bank was bought out by a large regional bank, nearly all actual loan decisions were shifted to a committee in a city several hours away. The loan committee members may have graduate degrees in finance and years of experience in number-crunching. But they have never met the loan applicants in question. Their knowledge—if any—of regional markets is limited to their own urban area. Their analysis is based entirely upon a small set of numbers – numbers generated by someone else. They are ultimately making or denying loans to strangers in strange places, for purposes which they learn only second hand. The result is that a bank that was once among the most profitable in the nation is now average, despite a vastly greater workload for the loan officers. Customers who once obtained loans – and would have repaid them – are often turned away. At least this particular regional bank is known for being conservative, so they err on the side of caution (and denial of credit). But everybody—the less-profitable regional bank, the demoralized local employee, and the rejected customer in the community—is worse off because of the depersonalization. Some may argue that this analysis fails, by pointing to the success (in general) of the stock market as a financing mechanism. After all, why would anyone who believes in free markets, and even invests in them when equities are concerned, disparage their use in debt financing? There is nothing personal about the stock market, is there? But there is a huge difference between a stock and a mortgage-backed security. Every share of a particular stock is exactly the same as any other share. All represent equal ownership in a company whose financial statements are made public and must be transparent, whose leadership is visible, and whose products are available in the marketplace. Investors know exactly what they are buying and whom they are trusting. Although not “personal,” there is a public relationship of trust and accountability, similar to that between any political or institutional leader and his or her constituents (except that in this case “citizens,” i.e. shareholders, can vote with their feet at any time by selling their shares). But every mortgage-backed security is different. Each securitizes mortgages to different people, collateralized by different houses, in different places. A mortgage in San Diego is not the same as a mortgage in Riverside, CA: the former housing market is stable whereas the latter has completely crashed. A loan made to a nurse making $50,000 a year is far less risky than one to a GM autoworker making $50,000 a year, because the former is a more stable profession. Every borrower is an individual, and while numbers are very helpful in categorizing borrowers and providing a general estimate of risk, they cannot tell the whole story. It’s true that the financial sector is bloated right now and jobs will continue to be shed. But while we need fewer people in mortgage companies and investment firms, we need a lot more working locally and meeting the financial needs of real human beings, making loans to people who live where they do on the basis of personal knowledge. Whether those loan officers work for locally-owned banks or nationwide banking giants is of little consequence. Nor does is matter if the community in question is a small town or an urban neighborhood. What matters is what the actual business relationships are based upon. We need to get back to an economy based upon personal relationships, upon mutual trust and respect between individuals and families, in the context of communities. People are not just consumers or producers, assets or liabilities. They are made in the image of God, and created to know Him personally and relate personally to one another. They have intrinsic worth and value. They make moral choices, for good or bad, which affect not only themselves but others as well. We are more than what we buy or earn, we are human. Our current financial system – at least in the credit markets – has dehumanized us and cut us off from one another in the name of profit. But the profits are gone. Now firms are hemorraghing red ink, asset values are in free-fall, and we are all winding up poorer. It’s time to rehumanize our financial system. It’s time to get personal.