On "How to Unfreeze Bank Lending"

This is a great opinion piece by Robert C. Pozen, with which I agree fully.

The source of the current financial crisis is the uncertainty of whether or not a bank will be around tomorrow. So instead of trying to provide incentives that make banks more willing to lend to one another, why not provide a mechanism for banks to lend to parties they don't trust - without taking on unnecessary risk! Yes, read that again, the idea sounds ridiculous, but with the right proposal this idea is a super hit.

Pozen suggests the government should guarantee short term loans to institutions the government deems well-capitalized. The marvelous part about the idea is that he suggests charging a small fee in exchange for providing this service. Its an excellent concept, essentially the government would be acting as an insurance company, a company that insures short lived loans.
In a normal market an insurance company who drives all of their business from insuring short term loans wouldn't last long, because high quality borrowers can usually get a loan without a guarantor; however, in a market that is as unstable as the current market, such an insurer would thrive. I can think of no better way to put a significant portion of the $700 billion to work. In fact, if the government is good at choosing who it insurers, there would be no cost incurred. If only a small number of borrowers default, then the fees charged may cover the bulk of the cost.
Although it would be great to see a corporation step in and take advantage of this money making opportunity, as is often the case, private enterprise can only do so much. The urgent need for such an insurer suggests the government should take charge of the situation.

I'd like to send a big kudos out to Mr. Pozen for an excellent idea. Its great to see people proposing solutions rather than dwelling on past or present faults in the soci-economic system that is our country.

I have no association with Mr. Pozen, in case your wondering who this guy is, then fromt he article, his qualifications are as follows:

Mr. Pozen is chairman of MFS Investment Management.