Thursday, March 12, 2009

Global Meltdown Solution Part III: Alternate credit channel

The global credit channel is a central sysmptoms and collateral damage of current crisis. The core of this is in US and therefore US government agencies are attempting bailout after bailout. The US government is not liable for rescuing an essentially global channel. It's first duty to clean the domestic channel. The two are cross connected to such a degree that they cant tell what they are fixing.

The solution, to my mind, is simple. Create an alternate credit channel - what I call "the modified good bank solution".

  • Create a good bank - with regulatory charter that allows lower capital norms, higher government guarantees etc. so that it will have liquidity, capital and ability to acquire assets.
  • Let it give credit to worthy borrowers who have the ability to repay.
  • Create a mass loan transfer drive - where the borrowers to move their loans to this bank - rather than buying loan books from established banks.
  • Accelerate the process by establishing uniform common minimum norms for acquiring loans. Start with lowest risk with highest documentary evidence.
  • Augment the document checking using other government agencies workforce.
  • Repeat the drives till you have covered big chunk of population. Government can take over some homes and convert them into temporary offices - establish geographically wide network - quickly.
  • This bank should be broken up into managable units and privatised at a pre-committed date in 5/7 years time.

The global bailouts are more complex. This should be funded with pooled money. Using the IMF or world bank is a good starting point. More on that later.

Addendum: Why Us needs to fix domestic credit channel first?
US is biggest consumer of the world. The world needs able US consumers to continue to spend albeit to their comfort level (and definitely to lesser degree). The able and wanting consumers are currently being denied a chance to consume. This is dtrimental to everyone.