The inverse link between subprime loans and student phones
Why is a bad credit score so common? More pertinently, why do failures in consumer credit reports so much more frequently fall on the risk-averse side of correct? I was refused even a pay-monthly phone contract on the basis that my credit history is poor, even before the credit crunch began. I have never given any cause to upset my credit report, as my credit check shows- the only debt I have ever had is my student loan which is automatically subtracted from my paycheck and therefore not subject to the same ratings agency scrutiny. At the same time the much maligned Moodys, Standard and Poor’s and Fitches were guilty of failing to respond properly to the hype for structured products, products which relied solely on their recommendations. Market demand for these structured products was pressuring mortgage lenders, car dealers, sofa salesmen, plastic surgeons or anyone else offering goods and services with finance to loosen their criteria and boost sales so these loans could be sliced and packaged to meet investors’ particular risk requirement. Multiplying the madness, the agencies were labelling all these opaque investment products as risk free.
What is it then that has caused this glaring disparity between consumer ratings prudence, leading to a respectable, yet inexperienced, borrower like myself from owning a phone contract in 2006 and the commercial ratings agencies which assigned AAA ratings to structured investment products contaminated with the debt of slack-jawed layabouts? In the same way as a regulator is subject to agency capture, due to their rising position of importance in investment as these opaque products emerged, ratings agencies became subjected to the same influence. What has become clear is that when a wave of optimism overcomes London and Wall Street no one can protect investors from reckless lending. Ineffective regulation lures us into a false sense of security, discouraging market-led investor caution as do ineffective product ratings. Regulators are of the same breed as bankers, many are ex-bankers or hopeful of finding jobs in that sector soon- credit ratings agencies are different only that they have the added adverse incentive to do their job properly; more maniacal lending means more business. What’s more, the first to break ranks and do their job properly would quickly have been ignored; such is the strength with which a bubble expands.
So why could I not have a phone yet every other redneck in Middle America received delivery of a shiny new caravan? If only Northern Rock had offered mobile phone finance…
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