All We Need is Just a Little Patience

The title is a line from a Guns N Roses song. Perhaps questions are going off in your head, since the last post included lyrics from a Lil' Jon song. To answer your questions -- yes, I like Gun N' roses AND yes, I listen to their Appetite for Destruction album willingly.

Before bed, something in my senses told me that the world has just turned a small corner. Maybe it was the take out of the pirates; or, the 15-second clip of Obama combining words of hope with some somber reminders of accountability; or, maybe, my senses are just finding that being a “downer” about everything has gotten old. From that, my mind jumped to consider the difference between a loan given to a “poor person” through an MFI and a loan given to a “poor person” from a bank in the US. 20 years ago, it’s likely that neither poor person would have had access to the loan. Certainly, that’s a good reason to smile and think that there has been some progress with accessibility to capital. But, that is where the similarities stop.

Microfinance loans are focused on accountability and an attitude of empowering the borrower. MFIs use Solidarity Loan Groups, required savings accounts, or other support mechanisms to make people accountable for their loans. The borrower is empowered to use the loan to make meaningful changes to their lives, the lives of their children through enterprise to lift themselves out of poverty. These metrics combine to make the double bottom line: the social & financial metrics measured by MFIs. Bank loans to the poor in the US fall under the cloud of being a “hand out.” These banks are required to through regulation to target “less fortunate” demographics. One may think that the higher interest rates compensate, and encourage, banks to work with this demographic. Unfortunately, the banks as we’ve witnessed, have little accountability with the ability to resell their loans to Fannie & Freddie. The clients have only a threat of a lower credit score; and if you’re poor, is this really a threat? And the banks aren’t focused on encouraging the clients to lift themselves up; if anything their financial bottom line focus means that these low $$ clients are sidelined as unimportant business.

This is obviously a gross simplification. But I’d argue that accountability, and thereby trust, are what makes any economy run. For example, I trust that 2x a month my company will pay me for work performed in prior weeks; I trust that my bank will give me my money if I need a withdrawal; and the dry cleaner trusts that I will pay to get my clothes cleaned. In each of these situations, besides having a level of trust, there’s also controls in place to ensure both parties are accountable for both the positive and negative consequences if that trust is broken.

I’d say that the current financial crisis, it is the lack of accountability that is cyclically feeding into a general lack of trust in the financial systems. For example,

• an employee at an investment bank can’t trust whether they will receive their compulsory pay because Main Street has labeled these bonuses unwarranted (why should they then work hard to fix the issue);
• an investment company cannot trust that the standard rules of investment will apply because the government might step in and take a higher position in the debt structure; and
• a mortgage bank can’t trust whether a homeowner will make their payments because the gov’t has created a moral hazard whereby home owner can qualify for a nice restructure package if they default!

Looking around, there is a major lack of trust running around, and with little security on who will and will not be accountable for a financial transaction. Yikes! As much as we are saying that we shouldn’t bail out “Wall Street,” we should similarly be sure that “Main Street” knows that they are responsible for their own financial decisions – both good and bad.

How does this relate to patience?
Although the global financial market has been in meltdown, MFIs have continued relatively good repayment rates. Part of the reason could be that their clients have made purchases of tangible goods -- cows, chickens, goats and pigs – that retain value despite the fluctuations of the CDS, CLO, and MBS markets. However, I think the LARGER reason, and the lesson the so-called developed world should learn from the developing world, is patience. MFIs don’t expect their clients will exit poverty overnight, rather most expect the real benefits will be realized in the next generation. Similarly, we need to have the patience to remember that trust takes time to develop. Trust is built upon the shoulders of individuals being accountable for both the ups and downs that result from any decision – including financial decisions. Unfortunately, in our instant gratification society, I have my doubts that we will develop patience en masse. But I am getting the sense that there are signs of accountability in the air. Partially, that is because we’re running out of fingers to point, and we’re now left with our thumb pointing back at ourselves. Eventually, the cumulative effective of each individual being accountable is that we will establish new norms of what is acceptable. And we can start our running to the next big bubble!