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A New Culture of Money (updated)

Sometimes it's hard to believe how much time an investor can spend reading business reports and opinions without finding anything of quality. Most of it is just news media fluff and cheerleading, performed by sex kittens; or Debt, Doom, and Gloom sermons performed by old bald white guys in bow ties. And yet, we are so much luckier than just a few years ago, thanks to the internet.

The Mainstream never considers anything fundamental: it only cares about how quickly the country can get back on the wrong track, that is, Business as Usual. Outside the mainstream, fundamental issues do get questioned, but at the expense of a kooky element. By that I mean an outlook that is emotional, moralistic and scolding, and fixated. For instance, I sympathize philosophically with gold-bugs and the Debt & Doom types, but I seldom follow their financial advice. Still, I'm glad they're around to counter the conventional drivel and group-think of the narco-Keynesian mainstream. An individual investor -- like Machiavelli's Prince -- must deal with the world as it is, not as it should be.

But I'm happy to run across an article about something that should be talked about everyday: the culpability of ratings agencies (Moody's, Standard and Poor's) in giving AAA ratings to debt instruments that were pure junk. It offends everybody's common sense notion of fair play when a rating agency is paid by the firm that it is rating, so why does such an outrageous conflict-of-interest continue?

The thing that interested me most in the above link was that China now has its own ratings agency. The all-important question is whether this Chinese debt rating agency becomes listened to and followed, at the expense of Moody's and Standard & Poor's. If so, American junk debt culture could be in for an unpleasant surprise.

Wall Street gets paid on the basis of how many dollars of transactions take place, so obviously an honest ratings agency would throw sand in the gears and become the most hated institution in the financial world. Why shouldn't the government play a direct hand in the ratings? Even a Small-government man like me doesn't want BP to be in charge of testing its own gasoline pump gage; that's why there's a sticker on the gas pump that says that some government inspector has verified that a gallon is really a gallon.

Maybe a government agency's rating of debt risk would be compromised by the revolving door relationship between government agencies and a subsequent, more remunerative, career on Wall Street, lobbying for the same corporation that he was supposedly regulating a few months earlier.


Nailed it again. Well done.
Don said…
Excellent post! I invest our portfolio so I read/hear a lot of the crap that is out there about investing. It's great to hear another voice in the wilderness that sounds sensible. Thank you!
Thanks Don. I clicked on your profile and learned of your blog. It looks like we have some things in common.
Unknown said…
What's the solution? Vote the bums out and bring in the new elected guys who are also beholden to those same business and lobbying interests that supported the one time office holders. Nothing really changes.
The solution can't come from the USA; the creditor nations like China and Japan need to begin using their own rating agencies to rate US toilet paper. They should demand -- not request -- cooperation from the US government and Federal Reserve.

Their accountants should tell the financial institutions and US government to drop their drawers, bend over the table, and join the Army.