The Daily Show on the Ratings Agencies

Granted, getting paid by the corporations they’re grading is a recipe for disaster.  But the reason they moved from the ‘conflict of interest’-less business model of investors paying them for the ratings of corporations they were deciding whether to invest in is because investors were passing around ratings rather than each paying for the service.  The Napster effect undermined their business, which doesn’t excuse their new model, but explains it and presents the pertinent question: how will they get financed?  Should they get funded and thus regulated by the government?  That might work, or it might become bloated and ineffective, especially since there would certainly be diplomatic repercussions of having a state-run entity rate other sovereign nations truthfully.  Not to mention, can we really trust the rating agencies’ evaluations of the federal government’s credit risk if it’s getting fed by the federal government?  Surely not.

People never think about these sorts of problems and immediate proclaim the government must regulate.  But part of the problem is what the federal government has already done: requiring only these particular ratings agencies to be used by financial entities in determining what securities may be purchased by them.  Why should S&P, Moody, and Fitch get the government seal-of-approval, thereby stamping out incentives for them to perform, giving them immunity against competition, and centralizing ratings authority in only a few entities? 

Shouldn’t investors have the right to be able to choose among many competing ratings agencies as well as the responsibility to do their due diligence in evaluating how trustworthy they are?  We infantilize investors, preparing them to be exploited by Big Banks and cutthroat hedge funds who have no problem taking advantage of pension funds to the tune of billions.

Financial centralization breeds oversimplification and interlocked fragility, as well as eliminating trust and accountability as we try to regulate complex decisions.  Decentralizing is no panacea, but it will allow the robustness of separate systems, cultivate virtues of trust as agencies become more local, and may in the end be more efficient due to the ineconomies of scale: corruption, inflexibility, and lack of accountability.