CREDIT RATING AGENCIES: DOCTOR OR DENTIST
By Ross Smith
Capitalism is the extraordinary belief that the nastiest of men for the nastiest of motives will somehow work for the benefit of all.John Maynard Keynes
Political Economist 1883 – 1946
AS THE American authorities made the biggest bank seizure in US history, the President of France, Nicolas Sarkozy, a right-wing, pro-American leader, declared that "laissez-faire is over" and continued with "The idea that the market is always right is a crazy idea." He is in good company. The German Chancellor, the conservative Angela Merkel, said: "It was said for a long time, 'Let the markets take care of themselves'." But now "even America and Britain are saying, 'Yes, we need more transparency, we need better standards"'.
The Archbishop of Canterbury, Rowan Williams, added a liturgical flavour by saying that an excess of faith in the market had become a kind of "idolatry". And all of them were really just repeating something that the American financier and philanthropist George Soros has been saying for years. "Unfortunately, we have an idea of market fundamentalism, which is now the dominant ideology, holding that markets are self-correcting, and this is false."
The comments of these world leaders indicate that the worldwide call for regulation and transparency is not entirely a Socialist knee jerk reflex. The comments do raise the question of ‘Are we watching the demise of Capitalism, which arose from the decline of Socialism, and a return of the pendulum to a central position whereby the excesses of both models can be avoided?’
The situation in USA where banks and other financial institutions have collapsed due to following ‘market forces’ philosophy based operational practices is an extremely clear indication that the worldwide Privatisation and Deregulation credos are basically flawed.
This flaw has also been demonstrated in Australia, as has the flow on effect. A prime example is the meteoric rise in prices in the housing ownership/tenure sector, and the attendant decrease in affordability for the public. Another example is the all time high personal debt level in Australia. The theme of the pop song, ‘I owe my soul to the company store’ is very apt in today’s economic climate..
In an attempt to minimise the flow-on damage to the community the USA Government is now proposing buying back/propping up the financial infrastructure they ‘Privatised’ or ‘Deregulated’ for an income stream boost. In doing so they are reimbursing the speculators that made a personal commercial decision to buy-in, and providing a return on capital to those speculators. This is being done with money raised from the community through the taxation system. The community members who suffered from the decision to Privatise and endorse/apply Market Forces are not being bailed out. The inequity of the supply of assistance does raise questions of whose welfare is more important to the USA government – the speculator or the consumer? The spectre of Capitalism being supported at the expense of the community arises.
This concept, as proposed by the USA President, has caused a major political reaction from his own party – they do not see it being the role of the government to bail out the Finance Sector. They are calling it ‘Nationalisation’, which is directly opposed to their credo of Capitalism.
A similar finance sector support/bailout situation is emerging in Australia, with the recent announcement of the Australian government’s intention to purchase packets of mortgages from the Financial sector.
The proposed bailout for the Australian Financial Sector is based on the Government purchasing ‘AAA’ rated Mortgages from the financial institutions. The parcels of mortgages are known as ‘Collateralised Debt Obligations’, the sale of which was the underlying cause of the current world wide Credit Crunch. The CDOs were rated by the Credit Rating Agencies, for a commission based fee three times larger than the fee for rating a Corporate Bond issue. Unfortunately the ratings were not accurate when tested in the crucible of reality.
Are these self same Credit Rating Agencies, the authors of the current credit crunch, now to be allowed a second bite of the cherry? What proof is there that they have lifted their game? Why should they be paid more money to be part of the proposed solution to a problem they created? A medical practitioner is not allowed to have an interest in a funeral parlour, yet a dentist is allowed to make and sell dentures. The rationale for the restriction on the doctors’ commercial opportunities is that they should not be able to profit from the death of their patient [client]. Why should the Credit Rating Agency be treated as a dentist?
The concept of provision of government funds to the Financial Sector membership to enable them to have an income whilst they are not earning their daily bread [and also not paying taxes] is the same as the provision of a sustenance level income to the unemployed individual community member. The variance is the requirement of Mutual Obligation imposed on the individual. It is to be hoped that the government will impose the requirement to deliver benefit to the community on the proposed ‘CentreLink’ payments to the Financial Sector.
The Australian public recognise the long term expense to the community of generalised Infrastructure Privatisation. A current prime example of this recognition capacity was the community opposition to the Privatisation of Electricity in NSW. The NSW government’s failure to accept the public’s wisdom lead to its internal collapse with the ultimate price to yet be determined at the Ballot Box. A prime example of historic sale of government owned Financial Infrastructure was the sale of the Commonwealth Bank – now one of those being potentially offered the rescue line of being able to sell its mortgages to the government.
An inherent risk of the Australian government’s proposed rescue line is that it will preserve the high earnings level of the sector and thus perpetuate the high cost to the customer. It does not set out a mechanism to reduce the cost of money to the customer, nor does it set out a mechanism for the product purchase price to the customer to be lowered. The sector will attempt to pass on the compliance costs to the customer. The overall result will not increase the affordability of housing for example, nor will it increase the ability to access housing.
The issue of why should a predatory lender be guaranteed their profit arises. One option would be for the government to declare all predatory loans to be null and void with title for the property passing to the intended victim, the borrower. This option would cause the finance sector shareholders, not the current or future customer, nor the community, to carry the losses arising from predatory lending. After all, they were happy to accept the profits in the form of dividends. It would provide the shareholders with an incentive to be aware of the ethics of the business they own.
How the Australian government handles the financial situation arising from the world wide credit crunch will be a defining moment in Australia’s political history.
It will be interesting to see if they adopt a Doctor or Dentist approach to selection of the players for the bail-out, and the conditions applied to those receiving assistance on both sides of the finance agreements.
Ross Smith, Waterloo
The RIMFIRE Review is the weekly opinion publication of the National Tenant Support Network. It offers readers an opportunity to say what should be said, as distinct from what can be said, with anonymity, in the public arena. You are welcome to submit considered and robust opinion pieces for publication in the RIMFIRE Review, however, final editorial privilege will be vested in the Coordinator of the National TSN. 2007©RIMFIRE REVIEW.
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