One of the best summaries of the financial crisis that I've ever seen is this one on CNBC (of all places). In it they discuss the government-sanctioned ratings cartel of Moody's and Standard and Poor's, as well as the conflict of interests in having the firm being rated pay the ratings agency. (People have compared that to having judges paid by the plaintiff or the defendant.)
Essentially that makes ratings a farce. Large institutions -- such as pension funds, insurance companies, and banks -- are required to invest in AAA bonds. So the ratings cartel gives everybody a AAA rating, and the System is happy.
I don't understand the mindset of some people to have a knee-jerk reaction favoring more government regulation to financial institutions. If risk had been rated honestly and accurately, these bubbles could not occur. There are independent rating agencies that could be used. Or they could require the buyer of bonds to pay for the ratings, not the seller of the bonds, as they do now.
Or the government could run the ratings agency. What, you say, that isn't the kind of thing a free-market, libertarian guy is supposed to propose. But recall that overseeing "weights and measures" is in the Constitution. When you buy gasoline you've probably noticed the sticker put there by the state inspectors. Similarly at the grocery store. You wouldn't trust the grocery store or the gas station alone to determine when a gallon is a gallon, or a pound is a pound.
Measuring risk is less precise than defining pounds and gallons, but it is similar in purpose.
Comments