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.