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 â€” 93 percent! â€” 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 â€” which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages â€” 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. Itâ€™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.