The World is Not as Safe as Wall Street Thinks

Facts matter: Sign up for the free Mother Jones Daily newsletter. Support our nonprofit reporting. Subscribe to our print magazine.

Felix Salmon posts this chart from a recent Basel report and repeats the familiar observation that “it wasn’t an excess of greed and speculation which led to the financial crisis, but rather an excess of overcaution, with an attendant surge in demand for triple-A-rated bonds.” True enough: everyone wanted super safe investments, so Wall Street cranked out boatloads of allegedly super safe investments. As the Basel report states, “Between 1990 and 2006, the year in which the series of ABS issues peaked, assets with the highest credit rating rose from a little over 20 per cent of total rated fixed-income issues to almost 55 per cent.” (That’s the heavy green line in the chart.)

But I think this misses the point a bit. The problem is that the Basel report cherry-picks its timeframe. Try this instead: “Between 1994 and 2006, assets with the highest credit rating rose from about 47 per cent of total rated fixed-income issues to almost 55 per cent.” That doesn’t seem quite so scary. But surely that’s a better timeframe to use since global issuance of fixed income securities was pretty negligible before that.

What is scary in this chart is the huge growth of debt in general over the past two decades, and in particular the boom in ABS debt during the aughts, which tripled between 2000 and 2006. These are the CDOs and structured products that fueled the housing boom, and there’s not much question that most of them should never have been allowed to join the AAA hit parade. They’re largely gone now, but unfortunately, Felix points out what’s next:

Finally, look at the way that the maroon bars — structured products, basically — have given way to a scarily large purple bar at the far right of the chart. That’s sovereign debt, and it tells you all you need to know about where the next crisis is likely to come from.

The share of debt rated AAA may be only modestly higher now than it was in the late 90s, but it still strains credibility to believe that half the debt in the world is truly AAA — i.e., essentially completely free of credit risk. The world just isn’t that safe a place.

THE TRUTH...

is the first thing despots go after. An unwavering commitment to it is probably what draws you to Mother Jones' journalism. And as we're seeing in the US and the world around, authoritarians seek to poison the discourse and the way we relate to each other because they can't stand people coming together around a shared sense of the truth—it's a huge threat to them.

Which is also a pretty great way to describe Mother Jones' mission: People coming together around the truth to hold power accountable.

And right now, we need to raise about $400,000 from our online readers over the next two months to hit our annual goal and make good on that mission. Read more about the information war we find ourselves in and how people-powered, independent reporting can and must rise to the challenge—and please support our team's truth-telling journalism with a donation if you can right now.

payment methods

THE TRUTH...

is the first thing despots go after. An unwavering commitment to it is probably what draws you to Mother Jones' journalism. And as we're seeing in the US and the world around, authoritarians seek to poison the discourse and the way we relate to each other because they can't stand people coming together around a shared sense of the truth—it's a huge threat to them.

Which is also a pretty great way to describe Mother Jones' mission: People coming together around the truth to hold power accountable.

And right now, we need to raise about $400,000 from our online readers over the next two months to hit our annual goal and make good on that mission. Read more about the information war we find ourselves in and how people-powered, independent reporting can and must rise to the challenge—and please support our team's truth-telling journalism with a donation if you can right now.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate