Yesterday I caught the first few minutes of President Obama’s speech about the economy. Let me make it clear that I am an Obama supporter and I have been since 2007. But, I am surprised that President Obama did not use the words “triple-A rating” when talking about the credit rating system yesterday in his speech. You can not fix something if you are afraid to call it by its name.
If money and credit are the life blood of our economy, then the credit rating agencies were the Leukemia that infected, weakened and eventually lead to the financial crisis and bond market meltdown of collateralized mortgage obligations (CMOs) in our economy and around the world. If money and credit, loans created by commercial banks, are to our economy what healthy red blood cells are to the body, then the fraudulent triple-A credit ratings that were placed on all those securitized debt obligations, amounted to the economy being over run by a proliferation of white blood cells that destroyed and weakened the flow of cash and credit to the many sectors of our economy.
President Obama is right when he says that getting the commercial banks healthy and lending money again is necessary for the rest of the economy to recover and grow, but he is making a huge mistake not to recognize the role that the credit rating agencies played in our financial downfall.
The long term fix is the removal of the responsibility of the credit rating function from the hands of the private sector. Credit ratings are to finance what weights and measures are to commerce. At one time a two-by-four measured two inches by four inches, but not anymore. Today a two-by-four is three and a quarter by an inch and five eighths. The triple-A credit rating, in the hands of the private corporations that slap them on, have lost their creditability. It is time for the Federal Reserve Bank to take on this responsibility. The Federal Reserve Bank makes the requirements for bank collateral to be triple-A rated, should they not be the rightful place to assess the viability of what constitutes a triple-A rating? Commercial banks pledge triple-A rated securities everyday in the performance of their work, who better than the Federal Reserve Bank to take responsibility for what is and is not of triple-A quality?
Our economy can not recover and grow without the flow of credit, credit for mortgages, cars, credit card debt and even a college education. Securitization of debt obligations permits our economy to grow because it matches up borrows with lenders with huge pools of cash to invest. However, without confidence in the credit rating system the recovery and growth of our economy will be truncate. The conflict of interest that is inherit in the way the credit rating agencies exist today can not and will not solve our economic problems.
Stay tuned.
P.S. Today I made a copy of my posting and sent it to THE WHITE HOUSE. If you think what I have written sums up your feelings, please feel free to make a copy of my blog's postings and mail them to THE WHITE HOUSE. In time, we may get our message across about the need to change the way business is done on Wall Street.
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3 comments:
I am about to put a boy through college. What you say is especially poignant to me, given a 10% pay cut at work and now dependence on viable credit sources to get him through school.
Stay in cash, savings accounts, short CDs. You don't want to play the market with your son's college years so near. Check out scholarship money at the university or college. Sometimes scholarship money goes begging for students to take it. Check out to see if any 529 programs exist in Illinois, it may not be too late to buy credits.
FRED
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