Radio commentary, December 10, 2009
score one for the cows
An interesting article in the New York Times earlier this week, reporting that Congress has done absolutely nothing to reform the credit-rating industry. You may recall that the credit rating industry helped give us the recent financial crisis, which, though ending, has left behind a toxic economic residue. The industry is paid by the issuers of securities to rate them. Investors then choose whether or not to buy these securities based on the ratings.
You may wonder how objective these ratings are if they’re paid for by the companies being rates. The answer is they’re not. This was frankly discussed in an IM exchange between two Standard and Poor’s analysts that was revealed during a Congressional hearing in October 2008, when it seemed like there might actually be some serious financial reforms. Analyst 1 said “that deal is ridiculous…we should not be rating it.” Analyst 2 agreed, but explained: “We rate every deal. It could be structured by cows and we would rate it.”
In fact, these deals were structured by bankers, who are probably more dangerous than cows. And now that memories of the crisis are receding, Congress has just given up on regulating the rating agencies. According to the Times article, that’s not so much because of intense lobbying—the thing that has killed or watered down most other attempts to regulate finance—but fear of interrupting the flow of credit. The U.S. economy apparently cannot survive without insanely easy credit.
Happy days are here again! Until the next time….
Meanwhile, it does look like the recession has ended and some kind of recovery is underway. I’ve just been looking at several important indicators, and their behavior is conforming to the patterns seen in earlier recovery phases. This is particularly true of first-time claims for unemployment insurance—up slightly in the latest week, but in a strong downtrend—and industrial production. Still broken, however, is bank lending to businesses for day-to-day operations; that’s contracting, which could put the kibosh on the recovery. And I still think the job market is going to be the last to get the recovery news. But the worst does seem to be over.
Finally, GE chair Jeffrey Immelt gave a speech on Wednesday—at West Point, curiously the same place that our current Nobel peace laureate announced his plans to escalate the war in Afghanistan—said that his fellow CEOs had allowed “tough-mindedness, a good trait [to be] replaced by meanness and greed, both terrible traits…. Rewards became perverted. The richest people made the most mistakes with the least accountability.” He lamented the increasing inequality of American society, and in particular the dismal fate of the poorest 25% of the population. He didn’t disclose what he planned to do about it, because no corporate chief would ever endorse taxing the rich and giving the money to the rest of us, or funding a generous welfare state. Or welcoming a revival of organized labor (which would be funny, given GE’s antiunion history). That’s just not done. You can issue moral lamentations, but don’t do anything about it, because that would be un-American and, omigod, socialist.