If, for example, ABC Farmers, Inc. pays as much as twenty cents on the dollar, the firm will make a gross profit of 20% by collecting on two out five of the outstanding bills. The more ABC collects, the greater its profit. Expenses are quite modest since all that is needed for this debt collection business is a computer for producing and emailing statements, a phone for calling ‘customers’ and a bank account for accepting payments. Also helpful is the tenacity of a pitbull in the collecting process.

This type of ‘farming’ is reminiscent of tax farming in the Roman Empire. An ancient tax farmer made an advance payment to the state in exchange for the privilege of collecting taxes within a given territory. The more the taxes collected, the more the profit. Once the ‘contract’ was let, the state effectively washed its hands of the matter. Much the same conditions hold for debt collection today.

It is not in the interests of the modern debt collectors to try to determine how much, if anything at all, is actually owed on a particular account. A bill included in the portfolio purchased by ABC, for example, might be for a debt that was cleared through a legal bankruptcy proceeding. The interest of ABC is to try to collect regardless of the disposition of the debt. It costs little to send threatening letters, and if the alleged debtor eventually succumbs to all the badgering, ABC adds a bit more to its coffers.

Potential for abuse grows as obligations to pay are detached from the original transactions in which they were incurred. A company selling a product or service has some incentive to treat its customers fairly, if only to promote return business. The owner of an abstract debt obligation has no such incentive. Cynical practices are rewarded since people sometimes pay off balances that are not due simply to escape further harassment.

Companies sell accounts receivable for far less than the face value of the accounts because they believe the return on investment in pursuing delinquent accounts is not worth the cost. Possibly this policy helps the company’s bottom line in the short term, but it does not help to stimulate customer loyalty and has the long term social cost of reducing trust in the economic and political system.

LORD POLONIUS
Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
- from “Hamlet,” William Shakespeare, 1599/1601

Few of us have been following Lord Polonius’ advice. Credit is the lubricant of the modern economy. In the throes of a major financial collapse triggered by excessive credit formation we are being urged to spend and assume yet more debt to stimulate economic activity and job creation. If it is impossible to operate on a strict pay-as-you-go basis, the next best thing is to make sure you borrow from people or organizations you know and trust.

The relationship between borrower and lender has become so attenuated that even legal authorities have a hard time determining the identity of the lender. A lender of record on a mortgage may not be the property owner since the mortgage might have been bundled together with other such loans to form an asset base for a mortgage backed security that was sold to investors. “We don’t own the property,” [said] a spokesman [for a bank]. “We’re the owner of record, but the investors who bought the mortgage-backed securities own it” (NYT, March 8, 2009).

Borrowing from a known party, company or individual, entails a moral obligation to repay because the transaction is based on a relationship of mutual trust. Lending entails the complementary moral obligation to serve the borrower by delivering accurate accounting and record maintenance. Central to these complementary obligations is the relationship of trust between parties who are known to each other. Trust is rooted in human relationships and becomes attenuated when those relationships weaken. The perceived obligation of an individual to an organization is not generally as strong as to another individual, but certainly much stronger that it is to an unknown party. Obligation and trust evaporate completely when the unknown party is several levels of remove from the individual. This is precisely what has happened with borrowers and lenders in the housing boom that preceded the current economic crisis.

Securitization of loan portfolios – packaging loans such as mortgages and selling them to investors – is an instrument of metamanagement, designed to improve efficiency and profits by leveraging money. Such practices can drive a wedge between borrowers and lenders, attenuating the social bonds needed to motivate the parties to a financial transaction to discharge their respective obligations.