If you don’t think the financial sector is thoroughly corrupt, check out what Paul Krugman says about it: “of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.”
The rating agencies emerged as the “free market” version of financial regulation — they sold research to people considering investment. Libertarian theory argues that government oversight isn’t necessary, because the Holy Free Market (blessed be It) is naturally self-regulating. You see, rating companies like Moody or Standard and Poor have to maintain good reputations to stay in business. Therefore, management will take care to run such a company honestly.
Hah. Behold how free market competition corrupted the system:
It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt — which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages — could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job. It’s all too obvious, in retrospect, how this could have corrupted the process.
It appears that free markets are not so much self-regulating as self-corrupting.
(BTW, I just hopped over to Reason magazine to see what the High Acolytes of Free Markets had to say about the latest revelations on the ratings agencies. Um, nothing.)
A Senate proecdural vote on Wall Street reform is scheduled for 5 pm today. It is expected that Republicans will hang together to block the bill from going forward. They are scrambling to put forward their own bill, a bill designed to cover their asses so they can claim they aren’t really protecting Wall Street.
However, Steve Benen says that Dems are in a “heads we win, tails you lose” mood, and are preparing to hang the GOP with the meme that they are protecting fat cats.