Today’s Europe and the Twisted Benefits of Rating Agencies
Why can rating agencies do more to improve the financial health of countries than anything else?
July 27, 2011
The catalogue of misdeeds by Moody’s and Standard & Poor’s is long. But it is also worth recollecting, at least in brief, in order to show the depth of the cesspool these self-appointed arbiters not just of global finance, but indeed of global economics, are operating in.
Yes, they were way too late in detecting the global financial crisis and are now, predictably enough, overcompensating by being too stringent. Yes, they suffer from a severe home bias, in that they tend to find the actions of foreign entities much more deserving of “beratings” than the actions of U.S. entities.
And yes, they colluded with the investment banks to create irresponsible AAA ratings for financial products in the subprime mortgage sector that ought to have carried a toxic label. Often, the sole purpose of these artful concoctions was to take advantage of the naiveté of hapless German Landesbankers operating in New York to the fullest extent.
And yes, perhaps the market ought to have wiser — and certainly more — rating institutions. In addition, most of them ought not to be domiciled in one single country, the United States, which gives these agencies a whiff of being an extended arm of U.S. foreign policy. Instead of relying on the CIA to organize coups, the rating agencies end up throwing fuel onto the fire in whatever regional theater — a move that is far swifter and further-reaching than anything that agency in Langley has ever come up with. Greece, with its history of CIA-infused military coups, actually is a good case in point.
In short, it would not be an exaggeration to call these institutions arsonists, who at the same time act as firemen who perversely see themselves as doing the Lord’s work.
Just how, then, can the actions of such heavily conflicted, downright duplicitous institutions turn out to be beneficial in the end?
Modern democracy has blunted any instincts for practicing proper self-discipline when it comes to fiscal matters. Fiscally speaking, the self-preservation instinct has lost out to the desire for instant gratification.
Very few nations in the world today are true Keynesians, i.e., equipped with a finance minister and a political consensus that has them overspend in times of true economic crisis — and then make up for that overspending by hoarding public funds in good economic times.
It is indicative of how far the world has slipped that we commonly believe now that Keynesianism means only that one overspends in times good or bad. But Keynesianism is by no means just another term for permanent deficit-spending.
Against that backdrop, it is no wonder that the oldest democracies, often with the oldest populations, have a particularly difficult time tightening their belts. Yes, there is the presumable whip of the “financial markets” expressing their displeasure about a nation’s path — or lack thereof.
However, the reaction of the “markets” is often too amorphous, unclear or ill-timed to send a clear signal.
In their place, smoke signals emanating from inside the rating agencies are clear-enough signs that a nation may be running a serious risk unless corrective action is forthcoming.
To get parliamentary bodies to act, in an age when they largely see themselves as crowd pleasers, rather than the wise stewards of responsible public policy, is infinitely difficult.
The rating agencies give these weakened bodies, as well as reform-oriented finance and prime ministers, timely tools at their disposal that may allow them to call on their fellow citizens to let reason prevail and change policy, as painful as that may be.