I’ve been thinking about incentives, not unusually. How can we great a better system of loans and borrowing in the mortgage market.
There is an incentive for people to take loans that they can’t afford to pay back, because hey a big house, this is nice.
The bankers incentives are a bit more complicated. They we willing to lend mortgages to people who couldn’t afford them because, house prices were booming and the increased price of the house would outweigh the loss on the loan and the bank could just reposes the house.
So there is both demand and supply for irresponsible loans.
The concept of my idea is this, as a loan (and the economy) is basically just a relationship of trust, that both parties will uphold their end of a deal, we introduce a trust based loan market.
A loan system whereby your “credit rating” comes from people’s recommendations of you. If you fail to repay your loan then not only your “credit rating” that suffers but the person that gave you your recommendation. Initially this would bring benefit because it would through peer pressure encourage people to pay back their loans and spend responsibly, hence removes demand for un-repayable loans.
Secondly firms will move into the market whereby they will give you their recommendation for a small fee. The firms which recommend people with unrealistic paying back abilities will soon go out of business. Through market forces they will find out the most profitable way to recommend people.
I hypothesise that they will find that the “old fashion” banking system of getting to know your customers through face to face interviews will prevail.
By removing the feckless buyer, who wants a loan they can’t repay, and the the feckless seller, who wants to give them a loan they can’t repay; we produce a method of using market forces to reduce the number of un-repayable loans, promoting economic stability.
Possible side effects:
Intimidation to force people to give them recommendation.
—You can force people to agree to contracts they don’t want to already.
Cause weaker family bonds when you involve money.
Cause family bonds to become too strong, which leads to people’s individual network to have a natural limit.
—Would only happen in nuclear family rather than wider.
Irresponsible people tend to have irresponsible children. Therefore this scheme will leave people without anyone they can turn to when they need money.