Operation
As mentioned, the fund would be operated as a linked-loan system. Thus the fund would not make loans directly at applicants, but would rather make deposits in banks which are making loans. For example, a person interested in borrowing money, to buy a house or to start a business, would apply at an area bank. If the loan request meets the bank's criterion for credit-worthiness, the bank then makes an application to the fund. If the loan meets the fund's criterion (i.e., a black person living in the city of St. Louis or for a project which will create jobs in a predominantly Black area) then the fund makes a deposit equal to the loan amount in the bank, at several points below the prime interest rate. The bank would pass on part of this lower interest rate, saving the borrower money while also increasing the bank's profit. Thus while the cost of capital is subsidized by the fund through lower interest rates, and banks have an incentive to make use of the fund due to the potential for increased profit, all liability for the loan is assumed by the bank; the fund is protected from losses by bad loans.
Private Market Restraints
The linked-loan format is important. In a free market,the distribution of capital tends to be decided according to the productivity of the use to which the capital will work; capital tends to be directed to where it will produce the greatest gain. Political distribution of resources introduces another definition of gain, that of a political nature instead of economic gain. The disbursal of capital depends not on physical productivity, but on political productivity; resources go to the group which offers the most in terms of political rewards. The result is that the politically connected tend to benefit, and not necessarily those with the most viable projects or the greatest need.
This poses a number of difficulties. Those adept at working within the value structure of political distribution are often less adept at working within the harsher value structure of the free market; businesses which get in the habit of benefiting from political connections usually function less well in the private market. Essentially, the person or organization becomes trained in the ways of politics but unable to operate in the free market, and thus grows to depend upon the political process for further disbursal of resources.
This danger of dependency exists in any kind of political disbursal, including affirmative action programs. Attempts to include more Blacks, or more women, or whichever group is the target, often lead to a lowering of standards, essentially the move away from free market standards and to politically defined standards. Although this does result in short-term gains for the targeted group, the long-term effect is dependency and an inability to achieve true progress. People in the targeted group are unable to satisfy the free market standards, unable to operate free from the influence of government, and so they become dependent upon government for further disbursal of benefits.
Obviously, this is something we hope to avoid; our goal is to extend self-determination to Blacks, not to create a new vehicle for dependency.The functioning of the linked-loan fund is designed to work against the tendency to lower standards by working through the free market. Because it is the private sphere dictating the standards instead of the government, the standards are much less likely to be weakened. Because banks decide where the money will be loaned and assume liability for the loans, the possibility of political influence is greatly reduced; banks cannot afford to ignore free-market standards.
A linked-loan system is not without difficulties. Using such a system will slow down the pace at which money is loaned, and could open banks to charges of redlining. However we believe this fund would work against redlining, by putting pressure on banks to make loans to minorities and in predominantly Black areas.
Ultimately, the success of the entrepreneurial fund depends on the success of the COPs program. Banks will not make loans, regardless of the potential profitability, if they believe the danger of default to be unreasonably high. Crime, by driving down property values and driving up the cost of businesses, has a direct impact on the ability of banks to recoup their loans. If the problem of crime can be brought under control, we believe the existence of the fund will cause capital to be directed into north St. Louis, which will work to reverse urban decay.
Next: Money in the Bank