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November 25, 2008

Solving the Problem Behind the Problem

Catherine New
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A crisis of trust is plaguing investors, says adjunct professor Seth Freeman in a recent column in the Christian Science Monitor. His column discusses the “promise problem” that we’re facing at the economic level — that is, how do investors know that borrowers will keep their word?

Freeman suggests that the solution is a building a “trust support,” and that doing so requires both parties to answer the following questions:

  1. Who can serve as a credible bridge of trust? The government, for instance, can back borrowers’ promises.
  2. How can we most effectively watch or test the promisemaker’s ability to perform? Helping lenders know what toxic assets borrowers hold might help them test for ability to perform.
  3. What incentives and penalties can best encourage performance? My nephew is a case in point.
  4. Are there ways to build in mild, moderate, and strong trust supports? A range can help lenders and backers intervene early and late with the least coercion necessary.
  5. Does the solution satisfy all parties’ key interests?
  6. What if the worst case scenario happens?

“The promise problem is as central to the current crisis as it has been to many others. It’s the issue lurking behind many of the world's biggest problems. Want to stop global warming? The spread of nuclear weapons? Human rights abuses?” Freeman writes. “Tackling the promise problem is the great and often solvable challenge behind the others.”

Comments

by Yogik Pitti | December 01, 2008 at 3:23 AM

In this kind of market its very difficult to trust which has been very rightly said by the author. But we should not forget that the interest or the return which will get on lending the will be equally high.Which means that you will get paid for the risk which you will undertake.As result what you need to look at is risk to reward ratio.Second which is most important is that to what extent your capital is protected.Suddenly the cash which you are holding in your pocket has lot of value.This value is genrated in a very short span of time.So you have very little time to react on it . There are few things a person do before lending money . The person should have the full knowledge about where the money will be invested and the person should keep the track record of whatever he had lend.Lender should make sure that his money is not being used in paying some other lender

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