Of course, the reason that credit rating agencies have been able to get away with rank incompetence is that government has legislated to allow this by restricting competition among agencies.

If there weren’t restrictions forcing government funds to be allocated only to those investments with a rating from one of the big agencies, then competition would have driven up standards among rating agencies.

Hi Paul

Good post, and on this issue I may have to bow to your greater research. But against it, I have to say: with this much leverage sloshing around, the money would have found crazy assets somehow. Compare to 1997-2000 dotcom boom – the same phenomenon in many respects (I blogged some memories of it today). When there are soaring assets and cheap money, people will find ways of conning themselves, conning other people, getting overoptimistic . . . it is the leverage we have to control, if we have scarce political capital.

best

G

a) nice to see my comment linked. I note, re-reading that thread, that you don’t address Luis Enrique’s demolition of your clueless rant *at all*. Shock, horror, etc.

b) one grumpy chap who’s been fired having a go at his employers != proof of corruption.

c) the people who’ve paid the biggest price for the financial crisis have been the rich and those in the City. See: my comment on the original thread, where I highlightedthat UK/US GDP has fallen by 5%ish, while S&P’s share price has fallen by 50% and they’ve laid off 10% of their workers (who, obviously, don’t count as workers under your West Lancs Spartist ‘only blokes in t’pits are workers’ definition).

d) However, David Boycott is far more of a raving idiot than you.

#1 Do you actually understand how all this works? Some years ago ratings agencies moved from an “investor pays” to an “issuer pays” business model. The problem with this setup was that issuers have a vested interest in a good rating.

Lack of competition was certainly not the problem here because competition between ratings agencies drove a trend towards safer ratings being issued as a matter of course. More competiton would have had little effect other than to drive up the number of agencies willing to give good ratings to junk.

If there is a failure of government it would be considered as the failure to ban the “issuer pays” business model.

#4 b) One disgruntled employee may not be a sign of corruption, but given that the ratings agencies were clearly at fault in the financial crisis, you’d have to argue that something was wrong with the way they were conducting their business. We can argue the toss over corruption/incompetence if you like but I’d say that at least the managers had become so used to the income they were getting that they were at least willing to turn a blind eye to exactly what was going on. That says corruption to me.

c) I’d suspect that your average S&P employee who lost their job would be in a far better position wealth wise than your spartist West Lancs worker type, I reckon that in terms of human suffering it’s really hard to say that “the rich have suffered more”

the people who’ve paid the biggest price for the financial crisis have been the rich and those in the City.

What? Exactly how did you come to this hilarious conclusion?

Because he doesn’t get the difference between losing a pound if you only get five a week and losing a pound if you get 50,000 of them a week. Furthermore the decline in value of an asset is not the same as losing an income which funds your expenditure- many people can just hang on to their assets until the next boom, when you lose your income, you lose your income.

@6, I don’t think you need to assume either incompetence or corruption: just “assuming something that had never previously happened (ie a 25%+ fall in US nationwide house prices) would continue not to happen”.

@8, actual job losses have been centred in the City – and they’ve fallen on people who make average London wages in support roles, rather than solely on Masters Of The Universe. And in terms of human suffering, it’s well-documented that above starvation level it’s *changes* in income that drive happiness vs misery, not absolute income (ie if someone on benefits continues to take home £100 a week while someone previously employed goes from £750 a week to £100 a week, then the second person will suffer much more).

There are valid criticisms to be made of the rating agencies, and I don’t think anybody would want to defend the agencies in everything they did. And, in common with most profit orientated organizations, should “what makes money” differ from “doing what’s right”, nobody should be too surprised when making money wins. Here’s James Surowiecki writing about dysfunctionality in the system, and this should I hope be a link to Lawrence White’s article, mentioned in that thoughcowardsflinch post you link to above.

At the same time, this doesn’t mean that every article or blog post that contains the sentiments “credit rating agencies are bad” and “finance is bad” is correct – you can still talk a lot of nonsense and reach those conclusions. Paul, after having had a quick re-read, I think I stick by my criticisms of your original article. Here, you might be right here that investors in CDO just have to lump it, if they lose money because the rating agencies have now downgraded them because of new rules, and Harch Capital Management should just suck it up. But your translations don’t make much sense to me. The “‘compact’ thing between bond issuers, investors and the rating agencies” – the investors and the banks lost billions because these securities weren’t as safe as they thought, fat cats saw their personal wealth fall 90% (or whatever) and so on …you make it sound like this did it on purpose and have benefited from it all. Why write things like “now that the worldwide poor is beginning to pick up the huge national debts”? What does that mean? The poor are buying government bonds? If you are trying to say anything substantial, I can’t tell what it is.

“who paid the biggest price” is the mother of all badly defined questions

I would be interested to see data on what the distribution of job losses has been during the recession, according to income.

John B @4: No, I’m sorry John. You just can’t carry the clever insults off as well as Giles did, though I do appreciate the effort to work out where I’m from, and that there used to be a mining industry in this neck of the woods; I don’t think I said anywhere that I was happy that workers in the city lost their jobs, and as you note @9, I’m well aware that many who have lost their jobs are not the mega-earners. I do have in fact have a decent understanding of what it is to be both in 21st century and a member of the working class(es) (I think the distunction’s set out in EP Thompson somewhere), though I admire the clever way you try to insinuate that because I’m from northern England my worldview will be dominated by images of people in cloth caps.

On your point about the whistleblower, I think the key point is that this is now about more than a whisteblower – see, for example, Luis’s link below.

I think other commenters incl Sunny are dealing satisfactorily with your view that the rich have had suffered the most. I suppose you can try and argue that the financial crisis leading to loss of finance jobs cannot be equated directly with world recession leading to the additional deaths of many thousands of children (see Chris Dillow at http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2009/09/how-the-crisis-kills.html for example), but I think you’re on dodgy ground.

Luis @10

Thanks for this – I’ll pick up the stuff you link to later when I’ve a bit more time, though as you identify I think Lawrence White’s historical perspective is also important.

In the end Luis, I’m not likely to satisfy you with anything that you would regard as ‘substantial’ i.e policy views on how the dysfunctionality you refer to might be remedied. As I set out in the earlier comments thread, and in my longer initial piece at Though Cowards Flinch (plus earlier bits) my purpose is political, in as much as I am suggesting that the credit rating agencies is a good place to initiate a wider protest movement about the way the financial system as a whole is deleterious to the interests of the working class/the poo. That is, as my original headline suggests, it is a good place to ‘focus our anger’, as militant left wingers, because what you describe as ‘dysfunction’ and I term ‘corruption’ is clear and is becoming clearer, to the extent that even you accept that there is something wrong. I contend that it’s better to focus miltant action like this than walk around the city with placard shouting more generally about the need to end capitalism, because that’s not going to happen (I accept there’s no immediate likelihood of action against S and P briniging immeidiate success through direct action alone, and that it needs to be supported by other forms of political action).

Of course you will think I am barking mad to have such far-reaching obejctives, especially at my age, but that’s simply because we’re on totally different sides of the argument, and I’m currently a long way in the minority. That is why the OP talks about my venturing on to LibCon turf, and I accept that doing so is more a bit of fun than it is serious political activity.

But even though we’re on different sides, I am grateful that your response is civil, and I hope you mind mine civil too.

I think it’s a weird place to focus anger. What are the placards going to say, “Down Gaussian Copulas!”? What will “militant action” be trying to achieve? I’m not sure that the “financial system as a whole is deleterious to the interests of the working class”, but even accepting that it is, I cannot see how the credit rating industry is an important part of such a story. More accurate credit ratings would a good thing in general, but is the accuracy of credit ratings of particular importance to the working class?

The credit rating agencies gave too generous ratings to certain securities, which you think was the result of corruption. So you think militant left wingers should be focused on cleaning up corruption (or structural dysfunctionality, where it exists) to ensure that credit ratings are as accurate as humanly possible. I can’t argue with that.

Is this your “far reaching” objective? I suspect not. I suspect you have some objections to the very existence of credit rating agencies.

I’m sorry to interrupt a good discussion with a rather facile observation. However, I really did enjoy this typo from Paul:

“in as much as I am suggesting that the credit rating agencies is a good place to initiate a wider protest movement about the way the financial system as a whole is deleterious to the interests of the working class/the poo.”

john b – There appears to be an inconsistency in what your saying, is it “the rich” who have suffered most from the financial crisis or is it folk in the financial sector on reasonably average salaries. I’ve got plenty of sympathy for the latter but not much for the former.

On the subject of your “it’s the differences” schtick, I’m not sure I like the direction your argument’s taking. What you say seems to imply that the poor, who have nothing should simply be happy with their lot. That’s an argument that makes me feel seriously uncomfortable.

As far as incompetence goes, it seems strange to me that experts who deal with risk on a daily basis failed to factor in the possibility of a correction after the house prices had more than doubled in the past 6 years. That would seem to be some pretty poor asessement of risk to me (although I’ll happily admit that the ratings agencies were hardly alone in messing this one up).

Paul – I’m afraid I’m warming to Luis’ argument here, much as I dislike the ratings agencies I’m not entirely sure that they are the right focus for the left’s anger.

Luis/Andreas

Sorry, missed these further replies.

Luis: my original position on credit rating agencies was related to the way in which they seemed not only to be poor at their own jobs, but then seemed happy to abuse their power further by offering advice to the UK government on how it should manage the economy i.e. by threatening it with a downgrading if it didn’t reduce the deficit quick (I remember Andreas expressing outrage at that too). (Interestingly, I note that Argentina is now being allowed back into the fold, even though it defaulted massively in, I think, 200, but that’s another story…)

For me therefore this was an act indicative of bully-boy capitalism which deserved an airing and I hoped would cause a few ripples. It didn’t, though it is interesting to see at least some anger picking up in the States.

Andreas: you may be right. What I was trying to get over originally was that capitalism is an ‘elephant you have to eat’ ie. in portions, and that the appropriatre places to start need to be carefully selected. Whether credit rating agencies are the right place is of course debatable, and certainly the industrial arena is more likely to bring more immediate success for leftwing movements; it’s simply that not everyone can easily participate in the industrial arena, and a target ‘spread’ is needed.