Our current economic crisis is so large and its consequences are so great that they demand a
comprehensive and
sustainable solution for all concerned Before we ride off in any particular direction, we must first formulate a plan of attack. Fortunately, my co-author, Mingyuan Zhang and I just completed a
book that does precisely that by:
1)
“thinking out of the box” in order to identify what lies at the heart of the problem,
2)
analyzing what is needed to bring about the necessary changes in business practices, regulations, and the way in which the markets operate, and
3)
recommending appropriate methods and systems that will enable us to work through the current crisis while improving the effectiveness and efficiency of our current credit system and guarding against similar crises in the future.
Relative to the
first point, a fresh look at how loans are approved is necessary. We need to forget about how it is done today and consider how it would be done in a “perfect world.” Relative to the
second point, we must consider changes that would be necessary in order to implement the new lending system. This would include a business case and associated timelines. On the
third point, it is critical that we identify who qualifies for a loan going forward and who needs, and is entitled to, assistance before any bailout money is used to spur further lending or to help financially strained property owners.
To do otherwise risks reinforcement of the very lending and borrowing habits over decades that led up to this financial mess.
In particular, we challenge the notion that you have to use credit in order to prove you are worthy of getting a loan. The past and current credit bureau scoring models reward spenders, while penalizing savers and cash payers. We encourage students and those new to credit to borrower, even when they do not need to, in order to establish a credit history. By doing so, we are encouraging them to get used to buying or credit, instead of saving up for what they want. Once they get accustomed to that behavior, it can get out of control, and then they find themselves in financial trouble before they realize it because they purchased goods on easy credit terms that they thought they could pay off using future income that may not have materialized for one reason or another.
We need a system that does not encourage anyone to borrow when they do not have to and that rewards, rather than penalizes, consumers who save and pay cash. A
Comprehensive Credit Assessment Framework (
CCAF -- pronounced See-Caf) will bring about
more responsible borrowing and lending and, as a result,
more stability to our credit system, financial markets, and our national economy.
My next installment will highlight
five important properties that any proposed solution to a business problem should satisfy. I call them the
5 C’s of Creative Solutions! I hope you will read the blog installment and that you will decide to join the CCAF Posse to pursue, apprehend, and bring to justice the offending flawed concepts, practices and systems. All one needs to qualify is an open mind and desire to expose the truth and to secure an effective and sustainable solution. I hope you can join us in our quest!
Clark Abrahams is Chief Financial Architect at SAS where he leads business and product development. He has over 30 years of experience in the financial services industry. Along with co-author Mingyuan Zhang, Clark has written two books that re-think credit risk management and granting access to credit: 
