rating agencies

There's been a great deal of complaining today about Standard & Poor's downgrade of the US government's creditworthiness, but the time for talking about credit rating agencies is long past. There are four steps that can be taken now to end the rating corporations' reign of error.

These "agencies" aren't government entities, but they derive great power from authority conferred by the government. Yet banks and other institutions are allowed to hire the "agency" that rates them.

Picture a situation where the IRS has been "privatized," and taxpayers are allowed to hire the accountants that will review their payments for accuracy. (I know - I shouldn't give them ideas.) Everybody would hire the accountant that says they're due a huge refund, and pretty soon the entire system would collapse. That's not too different from the way the rating game works.

The moment for change was in 2008, when we learned of their key role the global financial crisis. But it's not too late to act now. Here's some background and a clear plan for ending the rating racket once and for all.

Bad Sheriffs

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Over at bloggingheads, my CAF colleague Bill Scher discusses the new international banking standards with Conn Carroll, a conservative blogger for The Heritage Foundation. Carroll actually agrees with a lot of what I have to say about Basel III, but I he draws conclusions from my post that overemphasize the role of regulation and ignore the insane lobbying and outright fraud that Wall Street deployed to create a crisis.

The fact that Carroll and I can agree on this stuff (to an extent) shouldn't come as a terrible shock—Wall Street reform is about the basic functioning of the economy—it's not an issue that needs to ignite ideological conflict. Here are his key comments:

"I like the acknowledgement that the problem of this last financial crisis had to do with a problem of regulation."

Nothing wrong there. You'd have to be insane to believe that financial regulations—or the regulators who implemented them—were up to snuff. But here's where I part ways with Carroll:

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Buffett just offered a standard defense of Corporate America that allows companies to do terrible things without any accountability. more »

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Today's Financial Crisis Inquiry Commission hearing on credit rating agencies promises to shed quite a bit of light on one of the most profitable and corrupt businesses in Corporate America. more »

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Thursday night's passage of Wall Street reform by the U.S. Senate is an event to be celebrated, but several key issues remain in play as the House and Senate seek to iron out differences between their respective versions of the legislation. more »

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