Controlling Lender Behavior: Asset and Liability Restraints and Discussion

In recent years, there has been considerable discussion on the matter of channeling credit into socially desirable investments. Among the many problems to be faced in this area are (1) identifying those social objectives or sectors that warrant special attention, and (2) reducing the resulting large, number which would certainly include housing, small business, agriculture, and environmental controls to manageable proportions. As is well known, the more pieces of the economy that are designated as socially desirable for public policy purposes, the less useful such a designation becomes. Available funds and other resources can be channeled into designated areas of the economy only at the expense of nondesignated areas. Therefore, a balanced view of the whole question of socially desirable forms of credit must take into account the implicit reordering of social priorities that, in effect, reduces the amount of funds and resources flowing into affected sectors. Trade-offs are mandated, but may not be made very easily. The American political process does .not provide an explicit or suitable framework for arranging or reordering social priorities or objectives. Rather, the process tends to be one of compromise and of politics. As a result, policy incentives for most economic sectors are developed in a highly diffused and disorderly fashion. The result is often little net benefit to those sectors. It can be argued that it is desirable to direct resources and funds into selected areas of high social priority when and where the private market economy either cannot or will not do the job on its own. For one thing, considerable evidence exists that the private credit market