Something Rotten in Marketland

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.

13 thoughts on “Something Rotten in Marketland

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  2. There are reasons that sports teams forbid gambling by players, managers, coaches, referee’s and umpires. And there is no better example than this to show what the reason for that is.
    When you game the arbiters, you game the game, and the result smells gamey. Frankly, it stinks to all high and holy/unholy heaven.
    When you, as a team, decide to pay the umpires, who then make decisions in your favor, and you then also go to gamblers, who know what you’re doing, they,the gamblers, in turn, will make a profit off the suckers who bet. And for that privledge, the gamblers will pay the team a share of the winnings.
    If you are found guilty of doing anything even close to that in any major sport in the world, not only will you never be in that sport again, FOR LIFE!, you will be prosecuted for criminal misbehaviour.
    If that e-mail came from your IP address, on either the bankers or the rating agencies end, and can be traced to you, you need not only to be fired, and prosecuted, you need to be forbidden from EVER dealing with these industries again.
    Did Shoeless Joe Jackson, in 1919, cause something that led to the the Great Depression of 1929? Did Pete Rose cause the entire worlds economy to come close to collapse. NO! These financial guys and their ratings agencies did. Why not punish economic criminals worse than stupid, or naive, or greedy ballplayers?
    Here’s what you do if they’re found guilty:
    Prosecute them.
    Fine them. Take every dollar you can find.
    Imprison them.
    Banish them.
    There haven’t been a lot of cases of players or arbitors of games involved with gaming the system lately, with the exception of that ref in the NBA. And there’s a reason for that. The punishment is meant to fit the crime.
    I’m against violence, but ‘drawing and quartering’ is starting to sound pretty reasonable to me…

  3. I think I remember from Econ 101 (actually, I never took Econ 101 :o) that in order for the free market to work, all the players need to have relatively equal buying power. Well, these big banks had way outsized buying power. They had the wherewithal to put S&P out of business if they didn’t play along. Thus, there was no free market in play at the time. QED.

    I’m no libertarian, not by a long shot. But I’m willing to concede that free markets might in fact work, if they are free in a way consistent with theory. But reality is sooooo far afield from free-market theory…

  4. At one point even Obama had likened economic calamity as something that “just happens” like the weather. Some are going to stand by the line that this was a near systemic collapse that could not be forseen when it was systematic corruption, plunder and lack of oversight which led to dismantling of regulatory safeguards which had been built up over years and for reasons that were dismissed out of hand by free-market advocates and those who would profit by their undoing.

    I’m not wiling to concede that totally free and unfettered markets might in fact work because markets have players with more money than most can get their heads around and that money buys votes in Congress. Those players would like to make the rules but they need policing and rules even more than the rest of society since they are no more moral than the general population. The require more regulation because of the havoc they can wreak on the rest of us when they are given free reign.

    They aren’t even good parasites because most parasites know better than to drain their host dry.

    These problems all happened when conservatives stopped thinking of the market as what it really is — a bunch of human participants subject to all human foibles. Instead they posed as men of science while suggesting that markets were a phenomenon of nature and would always be true to some idea mathematic model.

    I never believed it for an instant and they’ve clearly been proven wrong.

  5. Maha you know what the market fundamentalists’ response will be: that everything would have been sweet if only there had been EVEN LESS regulation than there actually was. I mean if they’ve convinced themselves the whole catastrophe was Bill Clinton’s fault for forcing institutions to make bad loans, they are operating on faith and not reason.

    Government regulation is like the doctrine of original sin: no matter how good you think you are, you can’t get rid of it entirely. Therefore there’ll always be a bit there somewhere that the fundies can point to as the cause of all our problems.

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  7. What surprises me is that there has not been a bunch of lawsuits against the rating agencies for fraud. It is one thing to have boilerplate protection for mistakes and uncertainties of recommendations and analysis. It is not quite the same thing as willful misrepresentation and absolutely irresponsible and negligent behavior. Why this is not being tested by some smart lawyers is a puzzle.

  8. give um time YY. I surely believe that in time there are gonna be a lot of law suits filed. For instance why cant thte people who lost their 401 plans and those who lost their pensions and IRAs, hold these people accountable for their loses? they are gonna want their money back too. Can you blame them, if they do?

  9. YY,

    I believe that the ratings agencies claim that their ratings are like “movie reviews” (just opinions), protected free speech. I don’t know if any courts have ruled on this, but if it goes in their favor, it would be like suing Roger Ebert because you saw a movie you didn’t like based on his glowing reviews… can’t sue for differences of opinion, right?

  10. Lies that can cause financial loss can be protected speech, but fleecing of money on basis of a lie, I believe is fraud. With so many fund managers buying into the AAA rated crap on basis of misrepresentation (as opposed to innocent mistakes), why is it that there are no lawsuits? Has it gotten to a point, like in the true black economy, where scam drug deals are not recoverable in the legitimate court system? Why the silence despite the huge losses?

  11. 93percent of all security backed mortgages with aaa was backed up, and are now junk assets. You cant tell me that they didnt go into these mortgages and picked the ones they knew would fail. They missed 7 percent though you, would have thought they would have been a little more realistic.

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