Monday, June 8, 2009

The Triple-A Credit Rating Is Not Bottomless

Did you watch 60 Minutes’ interview with Chairman Ben Bernanke last night? There was some good stuff in the interview and the footage of the inside of the Fed was something to see. I bet we all could use a pallet of one hundred dollar bills

I agree with the comment that next to the President of the United States, the Chairman of the Federal Reserve Bank is the most powerful person as it relates to our economy. The central bank of any country has an enormous responsibility for not just the monetary policies of the country, but with the United States, our domestic economy and the economies of the rest of the world. For many years, the United States’ economy has been viewed as the locomotive that pulls the other economies of the world with it much like the locomotive pulls the other cars of the train.

Ben Bernanke is highly qualified to be the Chairman of the Fed, but like all of us, experience has a lot to do with the knowledge we bring to the job. Before becoming Chairman of the Fed, Ben Bernanke was a professor of economics at Princeton University. His area of expertise was central banking and the Great Depression. Unfortunately, technology has permitted the world of banking to change, and those changes have, in my opinion, rendered the old tools of monetary policy incapable of influencing the growth of the money supply as well as creating what I would call “leaks” in the system.

Over the last several months, the Fed has had to take ex-ordinary measures to deal with the financial crisis. But, unless the Fed and the Federal Government (Congress) are prepared to make some permanent changes in the way banking is done, we are going to travel the road of a financial panic and crisis again.

The Fed must, in my opinion, have complete control of the credit rating process. The issuance of the triple-A credit rating must no longer be in the hands of the private sector, to be “shopped” by the underwriters as was done in the recent past. The credit ratings are the weights and measures of finance, and must be controlled by the Federal Reserve Bank. There is in my mind a mathematical relationship between the growth of the money supply and the issuance of the triple-A credit rating. The triple-A credit rating can not be inflated and stand for nothing. The integrity of the triple-A rating is essential to our economy not going down the same road to a financial crisis again.

Wall Street will abuse the credit rating system again as it has done several times in the past. The fixed income sector of the market that creates the billions of dollars of structured financial obligations and their triple-A credit ratings is not bottomless.

Stay tuned.


LceeL said...

Yesterday, Sunday, I heard the tail end of "This American Life" on XMPR - the Public Radio arm of XM. Ira Glass was taking the CRA's to task for their part in the current crisis. In fact, his idea is that the seeds of this disaster were sown in 1936 when the banks were told that they could only hold "Investment Quality" bonds - thereby giving the CRA's - which had previously been a tool for investors to use - the force of law. It was like wiring the economy with explosives. Oh - and the CRA's are fully aware of their conflict of interest. they 'just deal with it'. Yeah, right.

moneythoughts said...

Excellent comment Lou. I appreciate that info. I plan to keep on writing about the credit rating agencies, and our government's decisions to leave them in the hands of publicly held companies.

Butch said...

I agree with your assessment of Bernecke's ability to use his background of training of the depression era vs todays economic conflict. While it is important to know these facts, hopefully they are used as a tool to make the necessary changes but not expected to work as in the past. I heard a comment on a comparison as to what Reagan did economically vs what Obama is doing by some commentator on TV. I believe what most are missing when looking back at Reagan is how much the WORLD economy has changed. The globalization alone is such a huge factor today. I'm not sure that Reagan's plan would work, he left everything alone pretty much and today that just doesn't seem to be possible.

The true question today, but won't be answered any time soon is, how much intervention is enough and how much it going too far.

You mention Bernecke and you have mentioned Volker, I would like your take on Geithner and how much input do you think he is having on the forced bankruptcies of the auto industry. I don't see this as an Obama plan.