Almost from the beginning of MONEYTHOUGHTS, I have written about the role that the credit rating agencies played in the financial crisis. I have taken the reader, step by step, through the process. But, I am not a PhD. in economics nor am I a professional writer or journalist with a column in a newspaper or magazine. Today, one of my brothers, I have two, sent me an email with a link to Paul Krugman's article about financial regulation and the credit rating agencies and the lack of needed reform to prevent the conflicts of interest that the credit rating agencies have with the investment bankers that underwrite the mortgage-backed bonds. So, because a person with a Nobel Prize in Economics and a teaching position at Princeton University is more creditable (I wish I could have thought of another word) than me, I will give you all an opportunity to read what he has to say about this subject - the credit rating agencies and financial regulation. So, below please find the link to Paul Krugman's article.
http://www.nytimes.com/2010/04/26/opinion/26krugman.html?emc=eta1
Those that know and understand how a bundle of mortgages becomes a mortgage-backed bond and then sold to pension funds and other institutional clients around the world, also know that without a change in the way the system works as far as the credit rating agencies and the investment bankers are concerned, that we are indeed heading back down that same road that brought us to the point of the bond market meltdown in 2007-08. Getting the politicians in Washington, D.C. to understand this is a whole different kettle of fish. Lobbyists do not get those big bucks for sitting on their hands. They work hard to tell their side of the story. The only problem is their story brought this country to the point of a financial crisis that the Federal Government needed to rescue. If you do not want the Federal Government coming to the rescue, rules and common sense must prevail.
Stay tuned.
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5 comments:
I am glad the Congress is trying to reform some very bad things, health care system, derivatives and bad banking practices. I wish the reforms weren't so flaccid. I sure wish they were a little more robust.
You have to give Obama credit....I don't think Bush would have been vigorous in advocating reform.
I agree with Julie. We need a little less flaccid and a lot more robust!!
The point I was trying to make, and perhaps I did not do a very good job, is that there is NO regulation or reforms with regards to the credit rating agencies - flaccid or otherwise.
The way things are going, it would be asking everything possible for Congress to just reestablish the safeguards originally put into law in the 1930s. It will take an additional effort of Herculean proportions to pass reforms to cover newer forms of investment and banking along with the rating agencies. In all probability we'll get something much more imperfect than needed (as was the case with health care reform). Completion of financial reform will have to wait till after the next boom & bust cycle.
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