Spengler gnarling at Asia Times:
What brought the banks down was not speculative bets in volatile markets but what appeared to be ultra-safe investments in the most conservative assets available, namely medium-term bonds rated Aaa/AAA by Moody’s and Standard & Poor’s, the major rating agencies.
The US Federal Reserve agreed to allow the banks to put on more leverage (that is, allocate less of their own capital against prospective losses) than they had in the past. But the Fed agreed to do this only for assets that were supposed to be virtually default-proof. The ratings agencies “sold their soul to the devil”, as a Standard & Poor’s analyst admitted in an e-mail later brought to light by a congressional investigation, in order to rubber-stamp riskier assets with the AAA label.
But that’s because the banks couldn’t find enough prime assets in which to invest and had to find subprime assets to replace them.
There is nothing wrong in principle with Paul Volcker’s call for banking caution. But the problems of the banking system can’t be separated from the larger economic picture.
Without a way to match the aging savers of the industrial world with the young workers and entrepreneurs of the global south, banking problems will persist no matter what regulatory regime prevails.