Wednesday, November 02, 2005

DBAS: An Economic Steriod

We should be wary of politicians using the Development Bank of American Samoa (DBAS) as an economic steriod to boost our economy. Like the drug, the spur in our economy's growth can be just a temporary fix. Living life on credit is good up to the day you have to pay your dues.

Recently, DBAS raised the loan ceiling for businesses from $150,000 to $300,000. The idea is that DBAS will loan to those ventures commercial banks will not lend to.

This is very typical of government to lend other people's money so easily. Since commercial (private) banks lend their own money, they're more careful about who they lend it to. Is Abe Malae lending his own money to applicants? Will it hurt him in his own pocketbook if they don't pay back?

The answer is no for both questions. Taxpayers will have to pick up the tab. That means you, me, mainland Americans, and future generations.

The only reason commercial banks won't take on such ventures as ecommerce or windmills on the mountains is because of the limit on interest rates. If Abe Malae wanted to lend his own money for such risky ideas, he would want to recoup as much money as possible as fast as possible as they are more likely to fail than more proven businesses. He can only charge as much as those entrepreneurs are willing to accept. He might negogiate for 50% interest rate at first, but the borrowers may not take it. Abe personally may not take anything below 30% for such risks borrowers want to pursue. Negotiations go back and forth between Abe and the borrowers until they reach something like 44%.

Both parties are happy lest neither would not accept the terms of the loan. But such a deal is illegal according to our good government.

Such negotiations not only weed out ideas not planned carefully enough, but keep borrowers accountable and encourage them to get their ideas off the ground and refinance on better terms ASAP.

But why waste time when we can have taxpayers foot the bill again and again and again?

Having taxpayers finance loans to businesses serves as an incentive for unaccountability by both the DBAS and borrowers.

Lending credit should remain the business of the private sector (commercial banks, stocks, bonds, and so on), where market incentives encourages accountability on the part of lenders and borrowers.

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