As flagged by the interpretOr August ’11, Jeff Madrick, Senior Fellow at the Roosevelt Institute and former economic correspondent to the New York Times, has recently published a metaanalysis of the origins, historical contexts and characteristics of financial crises.
Similarities to Eurozone abound, as the following quote reveals:
“Throughout history, financial crises have been generally similar to each other. An asset – land, housing, stocks, bonds and so on – rises in price, financial institutions lend to investors to buy more, and prices are driven to unsustainable levels. When the bubble bursts, investors sell assets to repay their loans, and prices fall further, often in panic.”
(Jeff Madrick, The Age of Greed, Alfred A Knopff, New York 2011)
the interpretOr also reveals that prior to the collapse of Lehman’s in 2008, Wall St had made trillions from trading sub-prime mortgages that were based on a giant ‘Ponzi’ scheme. How this was achieved was attributable to ongoing deregulation of the finance sector, tacitly permitting finance houses such as AIG and Countrywide to trade essentially unsecured mortgages to a rapacious sector – the buy-in, or incentive, was that sub-prime mortgages were subject to very high interest rates – these flimsy, high risk/high yield products were sold in bulk, providing massive, short-term and unsustainable earnings.
The ratings agencies, (see earlier interpretOr posts), S&P, Moody’s and Fitch, rated these bulk packages of very risky, partially unsecured mortgages, without elaborating on their inherent risks, weaknesses and unsustainability. European and other banks around the globe, bought into these toxic tranches and the resultant GFC was and is the outcome.
Now, we can add to the indictment: Euro crisis, ‘Silvio’ the clown, toxic sovereign debt…debt that was packaged and leveraged by…the same trio of ratings’ agencies. We’re nearly at 2012 and yet these same greedy, moronic, tragically influential ratings’ agencies are still calling the shots.
In late 2010, a Eurobond dealer broke away from the conformist consensus of his peers and spoke out against the ratings agencies (S&P, Moodys’ and Fitch). This lone voice had made it onto the BBC World Service and clearly stated that the ratings that these agencies had given toxic Greek, Spanish, Italian and Irish sovereign debt were incorrect. He called these government bonds as sub-junk trash. He derided the ratings as being as fetid as the subprime ‘miscalculations’ of 2008 and earlier.
Listeners were not told at the time that these same ratings agencies derive their revenue from the commission that they are paid by the merchant banks and governments that are issuing the bonds that they, the ratings’ agencies, rate.
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