Martin Kettle really does seem to have firmly grasped the shitty end of the stick in this argument:
Moody\’s believes? Who, pray, elected Moody\’s? Which treaty did Moody\’s sign? On what basis do we bow the knee to Ms Muehlbronner? I have nothing against her; but I do have something very strongly against the salience and influence of the credit ratings culture in which she is a rising spear-carrier. That\’s because, as the nations of the world struggle to extricate themselves from the global financial crash, Moody\’s and its two main competitors, Standard & Poor\’s and Fitch, are not objective neutrals whose only concern is to make intelligent oversight of the markets.
The thing is, you see, you don\’t have to bend the knee to Ms. Muehlbronner. You can go off and buy whatever bond you like, sovereign or not, whenever you wish. There is absolutely nothing at all stopping you from entirely disregarding any and everything she says.
At root though Kettle\’s problem is that he just can\’t deal with the fact that a market is simply the aggregation of the views of all the people in said market (and, indeed, those whose view is not to join said market). This is actually democracy writ large in the price system.
Ratings agencies are really, and they came into being long before the theoretical analysis was done, a response to George Ackerloff\’s asymmetrical information idea (\”the market for lemons\”).
Governments know more about economic activity, about tax revenues, about the laws they\’re going to pass, than individual bond investors do. There is thus an information asymmetry here. Markets with such asymmetries work less well than markets without such imbalances. And as so often happens, markets do find a way to reduce such asymmetries: Glass\’ Guide for used cars, ratings agencies for bond issues.
No, certainly, no one thinks that they are infallible and further, there are some imbalances in the way the market for their information works (for example, issuers pay the ratings agencies). But they are a response to that very problem that the market itself has noted.
We don\’t know, as individuals, what the Greek Government is doing to cook its books. So, collectively, we\’ll hire some bright people to go look at how the Greek Government is cooking its books. We can take their advice (\”we think they\’re going to go Kablooie!\”) or not as we wish. But we\’re not bowing to them, we\’re not ruled by them: they\’re simply an expression of opinion, one among others, in that marketplace.
But Kettle\’s real problem here is that he\’s reifying the market. \”The market\” causes this or that. It\’s not an unusual lefty thing to do, this reification. But it is, at root, still a gross error. For what is actually happening is that individual differences of opinion are being weighed off against each other and a general balance of what those opinions are is being reached.
The ratings agencies are only one set of such opinions: perhaps better informed (or suffering from perverse incentives if you like) than some others but that really is all they are.
If I think that the Greek Government is bust then I\’ll not buy their bonds (or sell those I own, sell those I don\’t own) and the more people think the way I do the higher the yield, the lower the price, of those Greek Government bonds.
The credit ratings agencies are leading a market assault on nations and peoples. We must curb them hard if we can.
It\’s lovely, isn\’t it? The instinctive response of banning free speech when you don\’t like what is being said?