H. D. Vinod Professor of Economics and Director of Fordham Institute of Ethics and Economic Policy Fordham University, Bronx, ny 10458

) Preventing Conflicts of Interest

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4) Preventing Conflicts of Interest.

My own published research is in this area, Vinod (2004,2008). With a huge sum of $700B at stake, the employees and contractors responsible for spending these funds should be required to post a bond on absence of any "conflicts of interest" so that if the parties fail to disclose conflicts of interest, the taxpayers can confiscate the bonded funds.

The tough love imposed on stock owners of failing financial institutions is healthy for the economy in the long run, since it does not give the impression that the Government will always bail out the risk-takers. Economic theory of information asymmetry shows that this tough love will help prevent the next bubble from sending the Federal budget deficit further into red. Seeing the huge bailout some are arguing that if we are bailing out rich Wall Street financiers, why not the poor on the Main Street? There is a danger that such amendments to the Paulson proposal would make this into a Christmas tree. There is some culpability by sub-prime borrowers which was possible due to the economic principle of 'information asymmetry.' The adult borrowers were not forced to borrow to buy houses they know they did not afford, but did not share that information. There was a failure of management by lenders, since they provided incentives (large bonuses) to their representatives to sell mortgage loans to unqualified borrowers, without bothering to do due diligence. All this was a matter of information asymmetry. The Bank representatives knew (or should have known) that the borrowers did not qualify, but went ahead and lent the money anyway, while cashing their own bonus checks.

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