Just look at the following article in the Wall Street Journal today entitled, "For Bankers, Trust Becomes a rare Commodity."
This is why trust needs to be brought back into the equation. The thing is, some banks still operate with large prfots and high payback rates...they are called "microcredit banks."
These past days and weeks, after a week in New York, and buried in the Financial Times, Wall Street Journal, tracking stocks on Yahoo Finance, receiving and making calls and emails to and from friends in various places, the one thing I find absolutely amazing is how different this "first world" financial behavior is from that of those involved in microcredit. The Poor Always Pay Back is the title of a book about the second stage of the Grameen Bank, created by Muhammad Yunus, the 2006 Nobel peace prize winner. Written by Asif Dowla and Dipal Barua, it underlies the fact that the Grameen microlending model has been replicated in over 100 countries. And unlike the hedge funds, US borrowers and investment banks, the payback rate remains well over 95% and up to 100% in the case of Kiva.org, which allows individuals to make microloans around the world via the internet.
Why? This money is not heavily leveraged. There is no pyramid-scheme type repackaging of debt. Debt is something to be paid back. In the U.S., I often heard about how one had to owe money to make money, that homes were not to live in but investments to "flip." In other words, the money loaned, and paid back, on time, is linked to concrete realities, products, education, not consumer debt, or inflated bubbles of real estate values in the Western world (which became inflated because the cheap money and the flipping lead to artificially high "asks"). Cheap money, low percentage rates may appear superficially to encourage growth, but the reality is that high-interest microloans, paid back, lead to long-term sustainability. The bubbles will not burst, because there are no bubbles. People are not spending time shopping for flat-screen televisions and flipping their rice paddie property. They know what matters and are focused and borrow and spend appropriately.
The poor always pay back because they have nothing left to lose and they have been given credit, with no collateral, based on trust alone, to actually create true small business and make real improvements to their lives and the lives of their children. There is no trust in Western banking these days...neither within the banks, nor between them, nor amongst the customers. Banks calling in loans from Carlyle Capital, part of the Carlyle Group, represented by some of the supposedly most well-respected people (men) in U.S financial and political spheres, simply do not believe they may be paid back, they don't trust those they lended to when times were good. In Bangladesh, an impoverished borrower from the Grameen Bank who loses everything in a disastrous monsoon-caused flood does not have his or her loan "forgiven," they are given a second loan to begin again and pay off the first loan. How many banks out there (besides the Fed?) are ready to do this right now? You could get a second mortgage, but it was all based on inflated values, nothing was explained to the sub-prime lender, and on top of all that, there were credit card debts. Debt was and is becoming a prison for many in the United States.
Microcredit borrowers are proud to be borrowers, to have been given credit in the first place, and to be part of a community in which they are trusted and that trust alone has real value. How many financial deals these days are made in New York and London and Geneva purely based on trust? Borrowers in the U.S. are unable to pay back their sub-prime loans, the their ridiculously large credit card (consumer) debt, and are preferring to walk away from (or burn down) their homes than make payments. People are wondering when the first bank will fail. The gut feeling I had when I first read about Northern Rock turned out to be true. But we cannot keep propping up financial institutions. We need to look at those which are successful and learn from them. This means taking microcredit institutions seriously.
We need to learn to trust our instincts and get back in touch with them. Did anyone ever wonder if overeating, overconsuming, and feeling depressed and empty after doing both, were linked? Like expensive, illicit sex, does one actually feel better knowing one is risking losing the trust of those we respect (including ourselves) for some short-term pleasure? U.S. borrowers do not trust themselves. Banks do not trust themselves, nor their clients to repay, nor other banks. They have no security at the moment, and are losing their self-respect. They have been, in fact, "acting out," as have the investment banks and hedge funds and sub-prime lenders. They grow obese, feel empty, become depressed, and instead of getting at the root of the problem, go shopping some more, take antidepressants, and wonder why things don't improve. In other words, they create excess empty fat, "the bubble," which is unhealthy, and then try to cover it up. It simply could not last.
Now maybe at least, with the credit cut off, they will have to face reality, and deal with their problems instead of avoiding them. Instead of borrowing in order to "flip" a property, buy a flat screen tv or designer purse, perhaps we can all focus, create real homes and spend more time on what really matters and less time just "spending."
This does not mean not enjoying life...in fact, it means just the opposite, remembering how simple and wonderful life can be, when trust and self-respect exist hand-in-hand.