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[X] HOME PAGE (Main Menu)
CONTENTS
[X] Resolving a Conflict of Interest
[X] Lending-Service Contracts
[X] Implementation Hazards
[X] References
. The purpose of this
essay is: (a) to describe a conflict of interest between prudent banking and government-funded economic stimulus efforts and (b) to explain why Lending-Service Contracts between government and lending institutions will reduce this conflict of interest and
in turn, help support the nation's consumer and small-business borrowing markets.
. This essay does not offer a solution to the nation's long-term trend toward increased wage and wealth inequities. These inequities are major root causes of the current economic instability.
RESOLVING A CONFLICT OF INTEREST
. At the beginning of and during a recession, banks typically adopt conservative lending policies. An individual bank's primary concern is to
survive the downturn by minimizing risk. In contrast, the federal government's goal during this period is to slow and reverse the nation's economic downturn. In this regard, several federal agencies and the Federal Reserve have adopted a variety of loan
and insurance programs designed to strengthen financial institutions. The intent here is to INDIRECTLY stimulate the consumer and small-business market sectors.
. Details of some of these programs are posted on web site www.financialstability.gov. [X]
. Unfortunately, lending institutions that receive public funds will consider the money to be their own and will use it prudently. As explained below, Lending-Service Contracts make it possible for tax money to flow DIRECTLY into consumer and small-business borrowing markets, regardless of the lending policies of local banks.
LENDING-SERVICE CONTRACTS
. In a
conventional loan arrangement, the lender: (a) sets a lending standard, (b) will evaluate applicants' credit worthiness, (c) if approved, will loan its own money, and (d) will assume the associated pay-back risk. Under a Lending-Service Contract, the
lending institution will perform the same evaluation and clerical tasks, except the lender is paid a service fee by a 3rd party who sets the lending standards, supplies the money, and accepts the risk associated with each loan. In this instance, the 3rd
party would be the federal government.
. Lending institutions would be under contract to assign each of their loan applications to one of three categories and to perform other duties.
. The first category, would have applicants who meet the lender's own high-quality standards. Applications in this category would promptly be issued a loan with the contractor's own money. If a qualified applicant could not be issued a lender-backed loan because of low reserves, the application would be placed in the second category.
. The second category would contain loan applications that meet a more relaxed good credit rating set by the federal stimulus programs. If the federal contract monitor concurs, each second-category borrower would be sent a check from the U.S. Treasury. Contracting banks would be reimbursed for costs encountered while handling these loan applications. The "strength" of a lending institution would not be an issue, as long as it meets contractual requirements. The goal here not to strengthen the economy and avoid duplication of effort by using contractors with the skilled staff to do the job.
. Standards for second-category loans would periodically be adjusted as economic conditions change in each geographic area. As a local economy returns to normal, the number of first-category borrowers would expand while the number of second-category borrowers would shrink. In time, the second category would disappear, and the need for Lending-Service Contracts would end.
. The third category, would contain loan applicants rejected by both the private lender (contractor) and the federal government. Applications from all three categories would be analyzed to track economic conditions in the local economy.
IMPLEMENTATION HAZARDS
. In theory, Lending-Service Contracts would eliminate the conflict of interest between prudent lenders and government economic stimulus efforts.
Presumably, lending contracts would be most useful at the onset of a recession, when lending-market uncertainties are highest. However, waiting until the recovery phase of a recession before using Lending-Service Contracts could easily lead to new debt
bubbles in some regions of the nation. In fact, the whole process of using borrowing as a vehicle to help recover from a debt-induced recession requires careful implementation.
REFERENCES
Details of some
federal stimulus programs are posted on web site [X] www.financialstability.gov.
[X] HOME PAGE (Main Menu)
Address:
Bill Buckel
1641 Hess Blvd.
Columbus, OH 43212
. .Ph. 614--488-8963
Notice: This web site does not have an e-mail return address.
URL = http://www.billbuckel.com
Up-dated: June 5, 2010