April 15, 2009

Do not just blame some financial oligarchs but follow the profits instead

Sir Martin Wolf is right in that “Cutting back financial capitalism is America’s big test” April 15, but this has much less to do with cutting back powers of a “financial oligarchy” as argued with an unhealthy dose of populism by the previous IMF chief economist who-said-nothing-then Simon Johnson, and much more with cutting back on the use of some dubious non-market instruments that have helped to tilt the market too much in favour of the financial sector. Follow the profits!

The financial sector first lent to risky clients and then waved that magic wand of the credit rating agencies, which allowed them to generate immense profits reselling those same loans as having much less risks. What on earth does this has to do with oligarchs? It seems much more the fault of lousy regulators (among which we find the IMF) who empowered the credibility of risk surveying so much that even they fell for it and authorized an astonishing 62.5 to 1 leverage for banks when they lent to corporations rated AAA to AA-.

The financing of the consumer and home buyer in the USA lives and dies with the use of some non-transparent credit scores and which allows charging many consumers much higher interest rates in order to compensate for those that should never have been given credit in the first place. What on earth does this has to do with oligarchs? It is a basic fault of the US society that has allowed itself get trapped in a position where sometimes American parents give more importance to their children credit scores than to their school grades.