Current 09/2007

Niftiness Crowns Ignorance King

A lot of mortgages were sold in the US to people who - by any reasonable standard - could not afford the extremely high default risk involved in such a loan. Apparently, the borrowers were ignorant when entering their obligations. Defaulting loans normally also involves a risk for a more knowledgeable issuer; often banks. However, banks recently designed nifty financial products to reduce their risk dramatically. Mortgage loans were mixed together with other type of loans into bond funds. Surprisingly, these funds received a tripple A rating from rating agencies. (which are paid by banks for their services) So, investors bought shares in these funds effectively taking the loans away from the banks. As if touched by a magic want extremely high risk loans were transformed into maximum security bond funds that were highly in demand. Of course, it was only a matter of time before this glass castle collapsed. And it did recently. It produced a global financial crises mostly because banks and other investors were clueless about how big the damage was and who was touched most by the damages. Even among the professionals ignorance ruled completely. All major global central banks pumped enormous amounts of money into the system to prevent a severe global financial crises. It is not outrageous to question the sensibility of the interference of the central banks during the past decade. It could very well be that central banks have perverted taking financial risk by their interferences into the financial market, which were extremely beneficial towards banks. This created expectations which made the central banks in fact at the root of the current crises and central banks are around to prevent crises not to cause them, directly or indirectly.

It makes a lot of sense to start by reducing apparent ignorance on all levels in the initial decision, when things are still relatively simple. Obviously, borrowers should never enter into these type of loans offered to them by banks or others. In the Low Lands, all investment products have to carry a very simple pictogram that illustrates the amount of risk involved in the investment.

The same should happen for mortgage issuers in the US. Graphic designers could do an excellent job there - as they do in the Netherlands. This way graphic designers may play a bigger role in preventing a global financial crises than central bankers are capable of.


Investment risk ind.jpg


Investment products offered on the market in the Netherlands have to carry very simple information that exp


Loan risk.jpg


Maybe in the US (and elsewhere) loan contracts should also have the obligation to carry pictograms. Above, two sketches.



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