Lynyrd Skynyrd’s song "Mr. Banker" is a tale of woe worthy of being re-recorded as a country song. It features a gentleman who is down on his luck who is attempting to convince a banker to lend him the money to bury his father. He has no house. He has no car. He asks the banker: "how much does money mean?" He offers him his 1950 Les Paul guitar. The banker has refused his request, and by the end of the song, there’s nothing to suggest that he has changed his mind.
Should he have reconsidered? Should he have granted the loan?
While economics cannot tell us what is moral and immoral, it can help us understand that there’s more than meets the eye (or more than tugs at the heart) when we’re talking about buying and selling or borrowing and lending. Economics shows us the trade-offs associated with the loan. At first glance, it seems like the answer is obvious: of course he should grant the loan even though it’s high-risk and even though the hero of the song might not be able to repay. You’ve probably lent money to someone that you’ve never seen again. Maybe (perish the thought!) you’ve borrowed money and never paid it back. If the banker has a heart, then it seems like he should grant the loan. He must be pretty cold if he is willing to turn down a desperate man.
This isn’t the banker’s situation, though. First, we have to ask about those to whom the banker has a fiduciary responsibility. Second, we have to ask what happens if the banker uses their money to make a risky loan. Finally, even the answer to the moral question is still ambiguous.
If you were asked to lend money to a friend who is down on his or her luck, it might be virtuous to do so. In this case, the banker isn’t being asked about what to do with his money. He is being asked what to do with the money the bank’s depositors have put under his care. Years ago, Milton Friedman argued that corporations are morally and socially obliged to increase their profits as long as they don’t tread on the rights of others. The down-on-his-luck hero of the song is asking the banker to risk his depositors’ money on a loan that has a pretty high probability of not being paid back. He ultimately offers the banker his guitar, which might be worth enough to pay for the burial but which might be very difficult for the banker to sell. When a banker makes a loan, he is taking a risk with money that isn’t his. It is money his depositors expect to be able to access on demand or money they expect to see grow as interest accumulates. It’s money people have deposited in the bank in case of emergencies--the death of a loved one, a blown transmission, any of a number of other things--or as a way to grow their wealth.
There are downstream consequences that we have to consider, as well. Banks that make bad loans will cause their own depositors (and their depositors’ friends, families, suppliers, and customers) to suffer. If the banker lends the money to the song’s hero and it isn’t paid back, it’s less available for someone who wants to grow his business, buy a house, or bury his own father. A banker who makes risky-to-the-point-of-being-imprudent loans jeopardizes not only an abstract thing called "money," but also the health and wellbeing of everyone with whom the bank does business, and everyone with whom the bank’s customers do business, and so on.
The Forgotten Man
Let’s motivate and then consider a concrete example. In his short and excellent book Applied Economics: Thinking Beyond Stage One, Thomas Sowell talks about how economics is the art of asking "and then what happens?" about any proposed change. In Economics in One Lesson, Henry Hazlitt wrote that "The art of economics consists in looking not merely at the immediate effects but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." Finally, William Graham Sumner urged us to consider "the forgotten man:"
The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together and decide what C shall be made to do for D. The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C’s interests, are entirely overlooked. I call C the Forgotten Man.
There are a lot of forgotten men when we are thinking about what other people should do with their money. What happens if the banker grants a bad loan for $1,000? That’s $1,000 the bank doesn’t have to lend to the butcher, the brewer, or the baker who might want to expand his business. The butcher, brewer, and baker and their families are worse off because they have to make do on smaller incomes. The charities they support have fewer resources. Their customers (actual and potential) are able to enjoy less meat, beer, and bread. That’s probably not a big deal for people who have the luxury of reading and writing articles like these, but it can be a very big deal for people on the brink of poverty.
The odd charity loan here and there probably wouldn’t be enough to sink an otherwise-well-functioning bank, but if the banker gets into the habit of running the bank as a charity then the bank won’t be long for this world. The ultimate victims would be the bank’s employees, depositors, and potential customers. The irony is that in order to do a good thing for the hero of the song, the banker would have to make his depositors’ lives and employees’ lives a bit more precarious. He would have to make it more likely that they ultimately find themselves in want of charity.
Again, economics as such cannot tell us exactly what the banker should do. It can highlight the difficult-to-see but still crucially important trade-offs associated with the banker’s options. It would certainly be commendable for the banker to refer the song’s hero to a church or his favorite charity, or it would be spectacularly generous of banker to pay for the burial or lend the money to the hero out of his own pocket. Taking big risks with depositors’ money, particularly given that we trust bankers to protect and grow our assets, is a different matter.Photo Credit: Jon Callas