Turmoil in the markets, banks bailed out - what is going on? Whose fault, who pays?
Some poor (poor?) chap in the London stock exchange trading rooms today lamented that the financial turmoil was all the fault of the Credit Rating Agencies. Well that's all right then. We know who to blame – or do we? You see, the agency has to give a good rating, because the institution that sells the securities, buys the rating, and will only pay for it if it likes it – so what's a Poor agency to do?
Yes that's right – the Credit Rating Agencies are paid by the companies whose products they rate! (Enron had great credit ratings until the last minute!) If the investment bank is not happy with the rating, they don't pay for it. In other industries this is called either a conflict of interest, if you are feeling generous, or a fraud, if you want to be accurate.
The government say 'it's not my fault' – but it did take the credit for the feel good factor of a 'sound economy' which was built on these dodgy loans. Now that that credit has become a debit I wonder what the 'sound economy' sounds like. A raspberry perhaps, or the faint, rising moan of an approaching perfect storm?
When a bank or investment house crashes and is rescued by the government, who pays? Interest rates are held down (to help the banks – poor darlings), so savers and pensioners are punished. Inflation, recession and increased money supply reduce the tax income to government and help to push up government borrowing, so public services are cut back – to balance the books. The government prints more money, to pay for the bad security it has just nationalised, leading to inflation so we have to work harder to maintain the same living standard.
During a radio interview, we were told about a financier who had raised money for a seriously over-priced mortgage, and, when questioned about the soundness of the deal, said “I know, but I couldn't give a monkey's – my bonus is sorted!” How many bankers or agents know the security is over priced but go ahead with the deal anyway? Was this financier telling pork pies when setting up the deal?
This all matters because it means is that while we pay, the fat cat reviews the menu and dreams of new dishes.
So, who ate all the pies? – the Fat Cat of course.