An exceptionally wise column by Martin Wolf in this morning’s Financial Times strikes me as important for even casual business-press readers who may be wondering how to think about the global financial crisis.
There is no irony in this headline. It is dead serious:
Why the credit squeeze is a turning point for the world
First and foremost, Wolf writes:
What is happening in credit markets today is a huge blow to the credibility of the Anglo-Saxon model of transactions-orientated financial capitalism. A mixture of crony capitalism and gross incompetence has been on display in the core financial markets of New York and London.
One doesn’t have to necessarily agree with the ideas to at least consider them as they apply to mortgage brokers, frontline lenders (e.g. Countrywide Financial Corp., Citigroup), Wall Street lenders and securities packagers (e.g. Goldman Sachs, Citigroup), rating agencies (e.g. Moody’s), the buyers of these securities worldwide (e.g. Citigroup), and last but not least, financial regulators (e.g. Treasury Secretary Henry Paulson, formerly of Goldman Sachs, former Treasury Secretary Robert Rubin, now of Citi… Never mind; more on regulators from me later).
What is left of the idea that we can rely on financial institutions to manage risk through their own models?
Good question. Wolf rightly says that the crisis calls into question the “workability” of securitized lending in its present form, the role of central banks in managing such crises, the limits of the U.S. consumer (more on them later, too) as the world’s consumer-of-last-resort, the very real possibility of recession, and the credibility of ideologically driven U.S. policymakers, who, with the recently announced mortgage bailout plan and other steps, are now intervening “directly in the rate-setting process on mortgages, in an attempt to shore up the housing market,” Wolf writes.
Not for a long time will people listen to U.S. officials lecture on the virtues of free financial markets with a straight face.
And here’s another good question:
What, moreover, can reasonably be expected of the rating agencies? A market in U.S. mortgages is hardly terra incognita. If banks and rating agencies got this wrong, what else must be brought into question?
If anyone is wondering, I agree with the thrust of the column.
As I read him, he’s saying that this is a time when all assumptions—especially those about what markets do well and don’t do so well—should at least be examined, not least by business reporters and editors. These ideas inform the work of The Audit and may explain its urgent tone on issues ranging from the business-press’s performance covering Citigroup to the pending takeover of The Wall Street Journal’s parent by Rupert Murdoch’s News Corp. and its affect on the nation’s leading financial watchdog’s ability to do its job.
As Wolf writes:
Experience teaches that big financial shocks affect patterns of lending and spending across the world. Originating, as it does, at the core of the world economy, this one will do so, too. The question is how stable and dynamic the world economy that emerges will be.
The Audit operates on a simple premise: if we ever needed a great business press, it’s now.