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Post 18 Jul 2011, 1:13 am

Machiavelli wrote:The beauty of the market lies in the fact that it is entirely voluntary. If you haven't the stomach for risk, simply don't invest. Bury your money in a coffee can in your backyard and you can be 100% certain that you'll suffer no losses in the market.


That might have been true a few decades ago, but not today. The world is too interconnected, the financial markets too huge and the companies that operate in them too. Simply put if you can't let Lehmann or any other big bank or country crash without the whole system blowing up in your face (as in civil unrest or outright revolution) it doesn't work, no matter what your ideogical theory says about the free market.
The rating agencies are an integral part of that system, in part because governments made them important via laws that refer to their ratings, but that's the point we're currently at. And it's really not good enough anymore when they say "it's just our opinion", same way as the way the big banks run their business, that should have been shut down 2 years ago.
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Post 18 Jul 2011, 7:02 am

Note that it's the government--not the rating agencies--who require people to pay attention to the ratings. Query for you, Fax: if Congress passes a law requiring everyone to read and act on your Redscape posts, should that subject you to liability if one of them turns out to be wrong?

In short, I think your proposal re: the rating agencies has major 1st Amendment problems.
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Post 18 Jul 2011, 12:12 pm

Machiavelli wrote:Of course, for most practical purposes (actually, for all but the most esoteric philosophical purposes) it doesn't matter whether our perceptions are accurate or not--just that they are consistent. To say it another way, Cartesian doubt doesn't get you very far. We may actually be like Neo in his coccoon, but what difference does it make if we have no way of telling? Accordingly, perception is essentially identical to reality.
Yes, thanks Mr Hume.

To step away from the metaphysical and back to the economic (and to address your earlier point), it matters not one whit whether there is a "real" problem in the market or only a perception of a problem if the two have the same impact (and the very fact that you asked the question suggests that they do).
The effect may well be similar, but the cause is what we are talking about.
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Post 18 Jul 2011, 12:13 pm

Machiavelli wrote:In short, I think your proposal re: the rating agencies has major 1st Amendment problems.
1st Amendment doesn't apply in Europe. We are talking about Europe in this thread right?
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Post 19 Jul 2011, 12:44 am

Machiavelli wrote:Note that it's the government--not the rating agencies--who require people to pay attention to the ratings. Query for you, Fax: if Congress passes a law requiring everyone to read and act on your Redscape posts, should that subject you to liability if one of them turns out to be wrong?

In short, I think your proposal re: the rating agencies has major 1st Amendment problems.


Yeah mistakes were made not only in the financial sector but also in the political arena. Doesn't mean we can't rectify them. If the rating agencies exert undue influence we should adress that, if banks or the financial markets can tank the world economy we should adress that, when countries spend beyond their means that should be adressed as well.
We in Europe don't have 1st amendment issues so why should we care that the US does ? I mean it's nothing new that the US strong arms us into complying with domestic US law, i think we should just take our cues from your playbook.
I've got nothing against free markets, it's just that we don't have one and probably never had one in the financial sector, might as well take the proper steps then if in the end the taxpayer has to pay the bill.
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Post 19 Jul 2011, 6:06 am

By the way, of the 'Big Three' ratings agencies, two are US-based (Moodys and S&P), while Fitch are based in the US and UK but are actually owned by a French group.

In other words, it's not just an 'Anglo-Saxon' or US industry, although Moodys and S&P between them have 80% of the market.

I don't think it's unreasonable to have concerns that this small number of organisations have so much influence on the market. Financial institutions and governments listen to them when it comes to rating everyone else, and the same financial institutions and governments rely on getting as good a rating as possible from them. This gives them a lot of power. Even if it's not intentional, that power does tend to corrupt. It encourages the sorts of actions that Greece and Goldman Sachs undertook, to hide the extent of debt so that:

a) Greece could continue as it was, join the Euro and maintain it's credit rating (until the disaster of 2008-9 revealed the holes)
b) Goldman Sachs could make a heap of money (and this is why I think you can't exonerate them, they weren't just 'advising', they were actively hiding loans from Greece so that they could make them and profit from them)
c) The market in general was happy, the Euro nations were happy, and both GS and Greece were able to benefit from while being knowing that the reality was different. Again, GS managed (by some complete coincidence!?!) to hedge against a massive credit-crunch in 2007, resulting in their doing rather better than most competitors during the crisis.

I will be open and say I don't know what the solution is, because any tightening of regulation may result in unintended consequences. I am surprised, however, at the reaction of the American on here to simply raising the issue - it's as if you are comfortable with a small number of private organisations that are closely tied to governments having a massive influence in the market. Rather than consider the idea that there's an issue, it looks like you are finding excuses to say nothing can change.

eg: rules would be blocked by the 1st Amendment, or that a problem is the same thing as the belief in a problem, or that the only fault lies with Greece (actually, one big problem with the Greek crisis is that German and French banks are very exposed and so if there isn't a bailout of Greece or her banks, some of them may also need support from their own governments. Which is why Germany and France are so exercised about it, and why the debate between them is crucial.
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Post 19 Jul 2011, 5:33 pm

As noted, Moody's and S&P are based in the US and, accordingly, can say whatever they damned well please notwithstanding any European restrictions. Fitch is barely relevant in the financial markets, but if you want to make it less so by muzzling it, please be my guest.

GS's actions were somewhat less black and white than you make them out to be. In this world in which all sorts of complex financial instruments are traded, it's often quite difficult to determine whether an obligation constitutes "debt" or, if it does, what it should be valued at. For example, if I enter into a binding contract to pay you a million dollars should Chelsea Clinton be elected President in 2060, how should I show that obligation on my books? Under most accounting rules, you'd multiply the $1 million by some discounting factor to take into account the unlikelihood of the liability ever maturing, and at certain points between now and 2060 you'd make some adjustment to that value to reflect changes in that likelihood--but none of this is particularly concrete and as instruments get more and more complex inevitable loopholes develop that cause certain obligations to be valued in odd ways.

Now, it's worth noting that GS did not write the rules--either with respect to accounting principles or with respect to what Greece would have to count as "debt" in order to comply with the rules for entry into the Euro zone. What it did do was give factually correct advice to the Greek government as to the content of those rules and as to what sorts of instruments would allow the Greek government to get its hands on cash while staying inside the restrictions imposed by those rules. It also aided the Greek government in issuing or otherwise getting involved with those instruments.

What it did not do (but what you seem to be suggesting it should have done) was substitute its judgment for the judgment of the democratically elected and validly constituted goverment of Greece as to whether that government ought to issue or otherwise become involved with such instruments.

I realize that there's a huge temptation to point fingers whenever things go wrong, but ex ante it was by no means a forgone conclusion that such would happen. I frankly find it shocking that you think that a bunch of unelected bankers in New York should even consider the notion that they should have a veto over the monetary policy of a free, democratic, sovereign state, much less that you are blaming them for not exercising such a veto.

The Greeks purport to be capable of governing themselves; that means that they should accept the consequences--good or bad--of the policies they choose. If that's not the case, they ought to stop their whining and make themselves a colony to anyone who is inclined to take them (or if no-one will, set themselves up with a tyrant to run things for them). If and when they do that, I'll be happy to listen to their complaints about how it's someone else's fault that they're screwed (although I suspect they'll be somewhat less free to make such complaints). Until then, I have very little sympathy.
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Post 20 Jul 2011, 11:44 am

Must say I'm puzzled by this feeble attempt to blame the ratings agencies for the collapse of the Euro. Nobody has to listen to them do they ? Let's face it, all they do is produce an opinion on the credit-worthiness of states and companies for the guidance of investors. The only reason it's so influential is because investors happen to give significant weight to the opinions of these agencies. Muzzling them is just shooting the messenger, and in any case it's hardly likely to make any difference. I very much doubt that major institutional investors are incapable of forming their own opinions. Absent Moody's et al they'd still need some kind of standard for assessing the risk attached to lending, so they'd some up with one.
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Post 20 Jul 2011, 12:41 pm

I wasn't blaming ratings agencies alone. I was talking about the influence of them (and they were clearly wrong-footed by the CDS trade as evidenced by the credit crunch).

Neither am I, as it seems Mach is suggesting, saying that Greece is not to blame for her own problems. From my recollection of holidays in Greece, tax evasion (particularly property and business taxes) is a national sport.

What I'm saying is that I can see why Europeans may want to point the finger elsewhere, and that it's not totally inaccurate to say that between the influence of ratings agencies, fast-and-loose behaviour by some big financial and some complicity to boot, it's not 100% down to the European governments that they are in the particular level of trouble that they are.

The other side to the ratings agency issue is that they are being paid by all the financial services companies for advice and to rate individual products, and yet are relied upon by the same companies for advice. There's some moral hazard there.

Mach - Fitch control about 15% of the ratings market. That's not irrelevant.
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Post 20 Jul 2011, 2:21 pm

danivon wrote:...may result in unintended consequences.

Bravo, well said.
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Post 20 Jul 2011, 3:47 pm

I believe the phrase I used was "barely relevant."
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Post 25 Jul 2011, 7:07 am

mach
If there's a flaw, it's with folks who are investing money without doing their own diligence or even understanding the first thing about what their investing in. Note that those are the same people who--if things go wrong--later claim that something (what they can rarely say) is wrong with the system. Note also, though, that if by some miracle they profit from their idiocy, they've got no compunction about realizing their gains.

The beauty of the market lies in the fact that it is entirely voluntary. If you haven't the stomach for risk, simply don't invest. Bury your money in a coffee can in your backyard and you can be 100% certain that you'll suffer no losses in the market.

If everyone is scared into keeping their money under the mattress what happens? Private investment is the reason that economies grow. People are encouraged to invest, and the financial industry has created enormous infrastructures to encourage every person to join the "investor class". Part of this infrastructure are ratings industries...
Part of it, was suppossed to be the regulatory environment to ensure that investments are being made with enough information to the investor to ensure that they are making informed decisions.
You cannot say buyer beware, when the system has been gamed to the extent that they have no idea what to beware of... When even so-called sophisticated investors like large international banks are stung by the MBS fiasco propigated by Goldman Sachs, its not a failure of individuals being uncautious. Its systemic failure. That Greece should have turned out to be just another MBS shilled by GS is not entirely surprising.

Incidentally, Sweden has done very well in the last 4 years. In part because they didn't embrace the Euro and had the flexibility afforded a seperate curency, which they devalued to help them restore their economy in the 90s.... Seperate currenciues do allow national economies to be dammed in to repair themeselves as seperate organs of the whole...
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Post 25 Jul 2011, 11:44 am

Machiavelli wrote:I believe the phrase I used was "barely relevant."
I would still say that about 15% of the market was more than 'barely' relevant. I concede the misquote. Do you want to discuss the substantive points?
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Post 03 Aug 2011, 12:42 pm

I'm happy to concede that the Greek government acted through agents in getting itself into its current situation. I think that's true for any institution. It's not clear to me that those agents had a "moral" responsibility to interfere with the Greek government's economic policy. The Greek government is, so far as I can tell, legitimately constituted and democratically elected. Accordingly, it has the sovereign right to screw itself as it will.

To return to the main topic of this thread, I note that Jack Straw has now joined me in predicting the imminent demise of the Euro. Indeed, even the European Commission seems to be jumping on the bandwagon.

It remains to be seen whether the Germans will pony up for a round of bailouts for the Spanish and Italians or draw the line at Portugal; I'd say it's about 50/50. Won't matter either way, except to delay the end by a few months. As I've said before, I see the end-game as a suprise German exit from the Euro, leaving the other Euro countries to scramble. Will be interesting to watch...

Remember, kids, you heard it here first.
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Post 08 Aug 2011, 2:08 pm

I see that the ECB has begun the last phase of the bailout kabuki theater, instituting purchases of bonds issued by Spain and Italy. Of course that won't stop the bleeding, and the ECB simply doesn't have the resources to bail either of them out (much less both). Wholesale default by Greece is now a foregone conclusion, and I personally have little doubt that the rest of the PIIGS will follow in short order. This is the end game--we'll see several sovereign defaults in Europe within the next 12 months, and the Euro will, quite simply, come apart. I still see Germany delivering the coup d'grace when it bails, but there are other ways the end might come (but it will come).