My two proposals for financial reform are: Shared Equity Financing and adding a loan component to medical savings accounts ... making a Medical Savings and Loan.
The common thread for these two reforms is that they focus on building equity while finding alternatives to interest.
Western history is full of economic collapses caused by loans falling out of sync with the equities backing the loans.
For example, a mortgage is a margin play against real estate. We saw in our current economic crisis that a drop in housing prices put a large number of home owners "underwater." Their home is worth less than the loan against the home.
The primary goal of a regulatory regime is to keep loans in sync with equities. The alternative is to find alternatives to interest bearing loans.
The interest on a loan is simply a premium that a lender pays to access money. Interest bearing loans add the premium to the payments.
The medical loans that I outlined in previous post approach the premium from a different angle. Rather than backloading the premium, it frontloads the premium. People owning a medical savings account will pay a premium to have access to a guaranteed medical loan that would cover a gap between their savings and high deductible insurance.
As the premium was paid in advance, there is no reason that this loan should bear interest.
Shared Equity Financing is an alternative to traditional interest bearing mortgages. Rather than borrowing a fixed amount of money against the house, the property owner takes out a percent based lien against the property. This lien would track local property values. The liens would be purchased by entities wishing to invest in real estate.
Both reforms are designed to help individuals build and maintain equity. The MSL program encourages individuals to build equity in their medical savings account. Shared Equity Financing helps people regulate their exposure to the local realty market. A traditional mortgage is a margin play. You have a loan of a fixed amount tagged to a property of a variable amount. In such a scenario, one never really knows how much equity they have. A shared equity lien is percentage based; So, the homeowner would know with certainty the percentage of the home that they own.
Our financial system collapsed as it was based on extremely complex formulas that tried to shield investors from risk.
I believe that the real quality of a financial instrument lies in its ability to reflex the equity behind the instrument. Before imposing a new regulatory regime, I think we would be wise to develop financial tools that better reflect the equity in our economy.