EU Considers Banning Ratings Agencies From Warning That Countries May Be In Financial Trouble
from the head-in-the-sand-regulating dept
Ratings agencies, who rate the risk and financial viability of all sorts of debt products, were one of the major scapegoats of the financial crisis. A lot of people pointed the blame finger at them, noting that they rated all sorts of incredibly risky and often highly questionable financial instruments as being incredibly safe. And, it’s absolutely true that they did a dreadful job. But, it’s kind of ridiculous to blame companies for stating an opinion. On top of that, it’s a basic free speech issue. You can’t tell a company that it can’t express an opinion on the financial soundness of something. To me, the real problem with the ratings agencies was that the government built them into the law. That is, the government required certain institutions to maintain specific percentages of “highly rated” bonds in order to engage in certain activities. That not only legitimatized the opinions of ratings agencies like Moody’s and S&P, but it also gave those “opinions” much more of a feeling of fact, rather than opinion. Could you imagine if the government said movies could only be shown in theaters if the NYTimes and the Washington Post movie reviewers gave them positive reviews? That’s what the law is basically like with ratings agencies.
And while I think that the big ratings agencies can make big mistakes, that doesn’t mean the answer is to shut them up. However, some regulators in Europe disagree. They’re discussing a plan to require agencies to not give out ratings, specifically on sovereign debt, which is where many of the key concerns are right now. With many countries in Europe facing serious debt problems (Greece, Portugal, possibly Spain and Italy among them), it seems like Europe has decided the best way to deal with the problem… is to stop people from talking about the problem.
It’s difficult to think of a worse plan.
The defenders of the plan complain that S&P, Moody’s and Fitch represent an oligopoly over ratings. And that may be true, but that’s no excuse for stifling speech. The way to deal with an oligopoly is to add more competition to the market, rather than limiting what those companies can do… especially when it comes to things like expressing an opinion.
Filed Under: europe, free speech, rating agencies, sovereign debt
Companies: fitch, moody's, s&p
Comments on “EU Considers Banning Ratings Agencies From Warning That Countries May Be In Financial Trouble”
Yeah, That'll Work
You can pretend that things aren’t what they are through media manipulation, accounting tricks, and police state tactics, but reality will always win through in the end.
It’s certainly kicking our ass now.
I think that the problem they are looking at is that ratings agencies often cause a ripple effect, which makes things become more “true” than they were before.
Warn on debt, people run the price of debt up, more likely to default.
Which came first, chicken or the egg? Was the risk of default higher or lower before the rating agency created a “run on the bank”?
“With many countries in Europe facing serious debt problems (Greece, Portugal, possibly Spain and Italy among them)”
if only they had stricter copyright laws
Shooting the Messenger
Ratings agencies are a valuable check on official bull****.
What’s really upsetting the Powers That Be is that the ratings agencies are calling the officially-ordained liars like Trichet liars.
While ridiculous to try to outlaw speech I was having the same thought that these ratings agencies were driving a lot of this debt hysteria self fulfilling prophecy no?
Re:
It might be somewhat similar to saying you can’t yell “Fire!” in a crowded theater. Except they’re saying you can’t yell “Sell!” or “Buy!” in a finicky market.
Yeah, That'll Work
History suggests that ?the end? can often be pushed a century or two down the road. In exceptional cases, it seems people can put it off for a millenium.
You think your average Roman citizen just woke one fine September morning in 476 A.D. and said, ?Oh-oh, looks like the party is over, fellas!?
Recently, someone pointed out that this is corollary to, ?The market can stay irrational longer than you can stay solvent.?
The problem with these rating agencies is that they are (mostly US-based) private entities who wield substantial power over the economies of foreign countries. For instance, American rating agencies have just lowered Ireland’s credit rating given the country’s recent economic difficulties. Once the credit rating has been lowered, the country now faces increased interest rates if it needs to borrow money, or if it issues bonds.
This in turns affects the country’s economy, as it is now much more costly to borrow money. This becomes a big problem if the credit rating is not representative of the country’s actual ability to pay, or of the actual risk of defaulting. It basically means that the rating companies can sabotage a foreign country’s economic recovery just by giving out an “opinion”.
Re: Re:
The problem with these rating agencies is that they are (mostly US-based) private entities who wield substantial power over the economies of foreign countries.
Actually the problem with this is that policy makers gave them too much power by relying on their verdicts for a lot of policies. If their ratings wouldn’t could as thresholds for certain actions to be taken the whole thing would be less dangerous.
Yeah, That'll Work
You mean the reality of letting ‘central banks’ control the money supply?
The cause of the worlds’ bullshit economic woes being the whole debt==money system of banking…
We all know the solution, and it’s an easy one: honest money. Money backed by a scarce resource which cannot be inflated, deflated, created and destroy worthless fiat money at a moments notice whilst keeping people, companies and even entire nations held hostage to debt.
Yeah, That'll Work
You mean the reality of letting ‘central banks’ control the money supply?
That falls under “accounting tricks”. They like to pretend that they can increase wealth by increasing money, but reality is setting us straight now, isn’t it?
http://salespider.com
Check out that site if you want help promoting your blog/company.
Re: Re:
“Who let you in here?”
Re:
so what you are saying is that by stating their opinion that ireland is a riskier investment than say germany, that then is a bad thing?
without these rating agencies, how would any institution make a decision on where to invest? what the european governments will find out is that nobody will invest in their debt because they can’t make a risk determination.
Yeah, That'll Work
Which perfectly explains the recurring panics of the 19th century.
Or not.
?
?
?There is always an easy solution to every human problem?neat, plausible, and wrong.?
????????????Mencken
Yeah, That'll Work
Yes, nigh global manipulation of the money supply by central banks does perfectly explain the recurring panics of the 19th century.
We know enough about economics at this point to cause such things on purpose, for the benefit of a few.
Whether or not ratings agencies helped or hurt their respective economies, the EU cannot stop them from issuing opinions. US ratings companies will issue opinions in the US. No EU law can/will stop that. They can set up their own ratings companies to evaluate them given different assumptions if they believe the current ratings institutions are spreading FUD, but regulating opinions won’t work.
Obvious consequence
This may be the stupidest idea that anyone could ever possibly come up with.
A) Many institutions, banks, pension funds, etc are required by law to have a certain percentage of their assets in highly rated investments. Many others in practice are required to hold certain percentages (ever read the prospectus of the funds in your 401k?). While what Mike cited was specifically US law, I’d bet there are similar laws in many other countries.
B) EU bans ratings agencies from rating sovereign debt.
A + B = C
C) All these banks and funds now have to liquidate most of that debt at firesale prices because no one will want to, or be able to legally, buy it.
Great Depression 2.0, this time its for real.
obscurity
A philosophy of:
What people do not know will not hurt them.
or
ignorance is bliss
Sticking your head in the sand and ignoring the world around you has always worked – right?
Yeah, That'll Work
Money backed by a scarce resource
I assume you mean the gold standard.
Please read your history. NPR has a good piece on it: http://www.npr.org/blogs/money/2011/04/27/135604828/why-we-left-the-gold-standard
Fact: The Great Depression while western economies were on the gold standard.
Fact: Most economists agreed that coming off the gold standard is what helped get us out of the Great Depression.
Fact: No serious economists think going back onto the gold standard is a good thing or even remotely possible.
Yeah, That'll Work
The authors of that piece got right to the true heart of the problem, even though they didn’t recognize it –
Take away fractional-reserve banking and it’s impossible to have more currency in circulation than the bank has gold to back up that currency – short of physical theft of the bank’s reserves.
Yeah, That'll Work
Spot on, in re the average Roman citizen.
They also probably knew, just as we do, that when the economic disparity between the very wealthy and the very poor becomes great enough, a correction occurs. The correction may, in some cases, be a societal shift that remedies the disparity, or it may involve heads on stakes, burned residences, and the other trappings of violent revolution. But it is inevitable, and thus it is not a question of if, but only of when, it will occur.
I expect to live long enough to see it in the US. But perhaps not; perhaps the control over information flow is sufficient to push the date another generation into the future. Or perhaps it is SO total this will be the exception to the pattern. I hope not.
Governments trying to micromanage an economy is what causes an economy to get in financial trouble.
Allowing people the opportunity to give honest ratings is a better long term economical approach. If I can’t be given honest ratings and the ratings that I get suck, I will think twice before seeing a movie regardless of the rating because I will assume that the rating plays little part in the quality of the movie.
If honest ratings are allowed, I could find a rating authority that I trust and I will be more inclined to see a movie recommended by that rating authority because my personal experience tells me that this particular authority gives reliable ratings. Banning bad ratings may get me to see more movies in the short term, but in the long term I will learn not to trust the ratings that I am given because all the bad ratings are being censored and so the only ratings left are good ones.
Unfortunately, politicians often seek to sacrifice long term sustainability for short term profits and that’s why we’re in this mess.
Re:
Shutting up the ratings agencies wouldn’t change a thing for those countries. Investors (especially sophisticated investors) look at the same signals as the ratings agencies. So if a country was going to be downgraded but instead the ratings agencies are told to shut their mouths, the institutional investors will do the research themselves, pull their money out and then everyone else will know that the country’s debt is bad. The ratings agencies are useful because they effectively provide research to smaller investors who don’t have the money to run their own research departments. They also provide a certain amount of standardization across the industry which is very useful.
Re:
(and this doesn’t just apply to movies, it applies to other things as well. I was just using the movie example as an analogy).
The Euro using countries are worried that the common currency “the Euro” will fail and it is a possibility Greece, Ireland (southern) already on the verge of bankruptcy with Spain, Italy and Portugal likely to follow. the only country that has the resources to bail out the others is really Germany. So it is a high possibility that the Euro could fail as Europe has no federal government like the USA, it has no central controls over the currency, which is partly why some countries stayed out of it
The problem with ratings agencies in the U.S. leading up to the financial crisis is that some of the tops agencies weren’t exactly objective observers. They were reluctant to accurately rate risky investments for fear of hurting their relationships with those who stood the most to gain by selling those investments.
Wrong on definition of "scapegoat":
“…scapegoats of the financial crisis. A lot of people pointed the blame finger at them, noting that they rated all sorts of incredibly risky and often highly questionable financial instruments as being incredibly safe. And, it’s absolutely true that they did a dreadful job.”
AS YOU STATE, the ratings companies aren’t mere patsies assigned the blame, but actually guilty. Why the whitewash for fellow “economists”, Mike?
Hopelessly wrong on the intent, too.
Plan is now to keep ratings companies from telling the TRUTH so as to prevent public panic.
All along it’s been banks using FALSE ratings to rob the people, now the gov’t doesn’t want them to panic from the TRUTH. — See the common point there? The people are always deceived and kept from knowing the reality.
And to nail it down, since you’re uncertain: ratings companies, banks, and gov’t have always been in cahoots.
Yeah, That'll Work
sigh
So what happens when there’s no more gold to be dug out of the ground? No more money can enter the economy.
So say I’m an entrepreneur. I want to start a small business, but I need some capital to do so. If no one can lend me money, my business doesn’t get started. People I would have hired don’t get jobs. Stuff I would have purchased doesn’t get bought, so the companies selling/making it don’t get paid, and can’t pay their workers.
Not all debt is bad debt.
I would not have the good job I have now if I hadn’t gone to college. I had to get a loan to do so. Somewhere around $35k for that, but I get paid double that per year now. Getting to my job would be difficult without the car I bought – again with a loan (FYI, fully paid off in 3 years). I live within my means, have savings, have a very good start on retirement investments. When properly managed, debt can be a good thing.
Truth is power (and a ticket to jail)
What a world – where knowledge and truth are prohibited and, in some places (think whistle blowers) considered crimes against the state.
Yeah, That'll Work
If there’s no more gold to be dug out of the ground, you find something that has similar properties to use.
And doing away with fractional-reserve banking wouldn’t mean doing away with borrowing/lending. It just means that Mr. Banker, instead of loaning out the depositor’s money, simply loans out his own (the bank’s shareholder’s) money. If the loans then go bad, it’s out of his pocket. The bank still has enough gold in the vault to cover all the currency in circulation.
Fractional-reserve banking is one of the few true “Heads (loans are paid off) they win (banker keeps the lion’s share of the interest), tails (loans are not paid off) you lose (depositor and/or taxpayer are out the money)” games out there. That’s why it’s so good to get into banking. 🙂
Re:
Just about everything you said applies just as well to individuals and their credit scores.
If an individual is unhappy with a low credit score, they can either:
a) Help the agency see what errors they may have made
b) Work (while dealing with less than ideal interest rates) to improve the state of their savings, spending, payment history, income, etc.
Governments can do the same (or they can simply shoot anyone who gives them a bad rating).
rating agencies... so trustworthy: "our ratings are opinions"
“our ratings are opinions”
http://www.youtube.com/watch?v=eYdTnNzttxk
http://www.youtube.com/watch?v=eYdTnNzttxk
http://www.thedailyshow.com/watch/wed-june-22-2011/grecian-burn
…
let see, three USA rating agencies have being trying to destroy the euro (and get richer) and forgot to check the USA…
then some ppl wonder why the chineses created their own rating agency.
The question is: Why this opinion makers also do business and are financial players?
Is this duality EU wants to ban. They are not just analists, they are players and also sell help to other players.
its like a teacher evaluating its students and selling and buying stuff in the classroom.
The way to deal with an oligopoly is to add more competition to the market, rather than limiting what those companies can do… especially when it comes to things like expressing an opinion.
You would think that in a free market the above would be true, but as anyone paying attention know we are not in a free market. What we have now is crony capitalism, look no further than GE and the current administration.
Besides it just wouldn't work
Rating agency report on country X:
“EU regulations require us to give country X a rating of at least Y”
Investors read:
“Country X’s real rating is lower than Y.”
An opinion?
Their phony ratings are just an opinion? Then by the same token every con artist’s “opinion” that he’s the owner of the Brooklyn Bridge is just expressing an opinion. Every huckster selling sugar pills as antibiotics is just expressing and opinion.
This is probably the stupidest comment I’ve ever seen on techdirt, and that’s a very low bar. The ratings agencies clearly participated in massive fraud in order to advance and protect their own interests. They knew they were rating junk and went ahead and did it anyway. If the answer isn’t to “shut them up”, what is? What is the proper recourse against swindlers?
And BTW, the 14th Amendment says “Section. 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” How is downgrading by some crooked “analysts” no questioning the validity of the public debt?
An opinion?
If the answer isn’t to “shut them up”, what is? What is the proper recourse against swindlers?
Um. As stated in the article itself (which you called the stupidest comment ever — but which apparently you didn’t read), the solution is to increase the competition. The solution is to allow more access to the data, so that more people can analyze it, rather than limiting it to just a few opaque companies. Then people can determine who they trust and who they don’t.
And BTW, the 14th Amendment says “Section. 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.” How is downgrading by some crooked “analysts” no questioning the validity of the public debt?
You’re talking about a different issue (US, rather than EU), you realize, but honestly, if you don’t understand why one of these agencies downgrading US debt would have serious problems… well, then you’re not worth listening to.
Stifling Speech
Unfortunately, what these ratings agencies are saying is ?Fire!?
I really don’t see any problem here…
Whenever their ratings of a particular country change, these agencies can issue a statement saying:
This agency is prevented by EU law from issuing a rating on its member country Greece. As a consequence, we no longer bother to rate Greece. Specifically, we will no longer provide our May 2011 rating of B1 for Greek bonds. If any investor should happen to conclude on their own that Greece should now be rated Caa1, we deny that this is how we would rate this country. And in an abundance of caution, we will not advise investors that we expect the Euro to lose 19% of its value in the next 12 months.
Yeah, That'll Work
Doesn’t that defeat the purpose of the gold standard? If gold starts getting too rare, add silver, then if deflation threatens again, add emeralds, etc, etc. Functionally how is that different from fiat money?
Ladies and gentlemen.
This is what you call Magic Wand Economics.
http://www.foxbusiness.com/industries/2011/07/13/moodys-puts-us-ratings-on-review-for-downgrade/
they are an opinion group that have to much sway in us and world opinion, look here, they are “threatening” to ?review for possible downgrade.? our AAA rating, we have not done anything yet, we have not defaulted on anything,but yet in the world public opinion they are causing a stir with threats of this, if we default then lower our rate, why do they make threats before we do anything, they should be removed from making any statement on anything
more competition doesn’t always mean better, it would just add more dirt to cloud the waters, more confusion over conflicting reports of rate ratings, means companies/banks/imf etc.. would just pick one, probably the already biggest ones and only use their info and demand their partners or potential partners use them as well if they want to do business
Re: Re:
So your solution is to remove (censor) a specific type of speech.
more competition doesn’t always mean better, it would just add more dirt to cloud the waters, more confusion over conflicting reports of rate ratings, means companies/banks/imf etc.. would just pick one, probably the already biggest ones and only use their info and demand their partners or potential partners use them as well if they want to do business
When are you going to get to the part where it’s a problem? If Moody’s and S&P are doing a good job, they would continue to be relied on. Opinions are really easy to publish, and many people would do so. If the two big ones screwed up big, some people would start looking elsewhere.
Rating agencys do not “express opinions”, they issue fabricated statements meant to generate (short-term, if possible immediate) profits for themselves as well as other interested/involved parties. And since when are companies persons, having “free-speech” rights? If they can generate those profits by running (non-american)economies into the ground, they will do so. IMHO their very business principle should be outlawed.