Bring Back Bob the Banker

If you’re over 40 years old and didn’t grow up in the big city, you knew Bob.

Bob was a local banker. He lived in the same town where his bank was. He was a loan officer, probably a Vice President, and worked for the bank for years. Bob married his high school sweetheart, raised four or five kids in the town you lived in, belonged to the local optimist club, and attended a local church every Sunday. Bob showed up at most of the civic events in town. You saw him at many of the weddings, christenings, and funerals in town too. Bob knew everybody who was anybody in your town. He also knew a lot of nobody’s as well, but that didn’t matter to him – anybody or nobody, you were from his town and he was the banker.

Bob viewed himself as the guardian of the bank’s money, and the reputation of the bank in the local community was very important to him. When people needed money, they would come to Bob to apply for a loan. There was paperwork to fill out, but it usually wasn’t very extensive. Bob looked at the paperwork to be sure, but Bob knew you, he knew your parents, he knew where you worked, and he knew how much money you made.  Most importantly, Bob had a pretty good idea what sound financial practices were and he cared about your financial well-being because it was tied to his bank’s reputation.

Is Borrowing a Substitute for Getting Paid??

Many thanks to the organizers of Credit Slips for inviting me to blog this week.

Henry Ford had a good idea.

In January, 1914 he announced to the world that his workers would be paid five dollars a day. The five-dollar day doubled the average wage for auto workers, produced long lines outside of the factory gates, and helped to create a mass market for the Model T and other consumer durables.

For the next 60 years, this basic formula spread. An entire consumer economy was built on steady middle class jobs that paid slowly rising wages from productivity gains. Wage earners accumulated debts when they were young (mortgages, perhaps car loans, small installment loans for other durable goods), and paid those debts off over their working lives with inflation-discounted dollars from slowly rising paychecks. One was supposed to retire owning a house and not owing the world a cent.

By the middle of the 1970s, this system was fraying at the edges. By the start of the recession in 1981, the patient that produced steady jobs at rising wages was dead. U.S. Federal Reserve Chairman Paul Volcker turned his attention to fighting inflation. Interest rates rose, credit and banking was deregulated, investment became more dynamic, and economic recovery started in the late 1980s. Economic growth through the 1990s and up until 9/11 was very impressive, as were productivity gains in the U.S. economy.

But something was gravely wrong, and by the middle of the 1990s some observers were getting worried.  The economy was growing. Real wages and earnings were not. In fact, median before tax family income in 2001 dollars peaked in 1976 ($42,000) and has been nowhere near that level since. Layoffs, job instability, and family income volatility all rose to near record levels. Yet spending and consumption rose almost continuously from 1992 to now as household revolving debt grew from essentially zero in 1976 to over $9,000 per household by 2005. Total consumer debt outstanding went through the roof and has only tailed off in the past 18 months or so.

Slowly but surely In the U.S. we substituted borrowing and lending for getting paid.