

The Man Who Called the Financial Crisis—70 Years Early - mhb
http://online.wsj.com/article/SB10001424052748704405704575596382345085258.html

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jeromec
I don't think the financial crisis would have occurred, at least not to the
degree it has, without the problematic credit ratings of the toxic securities
-- from major ratings agencies like Moody's, Fitch, and S&P.

This from the article catches my eye:

 _The seeds of today's problem were planted long ago, and its forgotten
history holds important lessons. In 1936, as part of reforms under the new
Banking Act, the U.S. government mandated that federally regulated banks could
no longer hold securities that weren't rated investment-grade by at least two
ratings firms._

I believe that could be re-worded like this, and essentially mean the same
thing:

 _In 1936, as part of reforms under the new Banking Act, the U.S. government
mandated that federally regulated banks could no longer hold securities that
weren't rated investment-grade by at least two [kindergarten kids with
crayons]._

Why are rating agencies, who appear to be unaccountable to anyone, given such
a key role in banking law? This law appears to be in place to protect the
stability of banks, but what happens if the rating measurement system is
flawed? I was listening to comments made by Warren Buffet post crisis on the
rating agencies. His position, to summarize, appeared to be, well, the
agencies may not be perfect, but the market has need of their services, so we
essentially need to have them. I'm not so sure this is the wisest course, at
least not without some form of accountability added in. If individual
investors can do their own research on investments, then banks can too. As the
article points out:

 _The record was so unreliable that it would be "still more responsible," Mr.
Palyi growled, to "stop the publication of ratings altogether."_

An interesting read along with this article is another one entitled _Bad
Credit: How S &P, Moody’s and Fitch Helped Cause the Housing Bubble_.

[http://www.bnet.com/blog/financial-business/bad-credit-
how-s...](http://www.bnet.com/blog/financial-business/bad-credit-how-s-p-
moody-8217s-and-fitch-helped-cause-the-housing-bubble/5062)

An excerpt:

 _If large financial firms masterminded the scam, stuffing junk mortgages into
securities, CDOs and other instruments, the credit agencies were their able
shills, rubber-stamping whatever paper came their way with an investment-grade
rating.

As Sen. Ted Kaufman, D-Del., said this morning in a congressional hearing on
the role of the rating agencies, “The big thing that was missing was the
referees on the field.”

Or more accurately, the referees were paid off.

The ratings agencies business model is based on a flagrant conflict of
interest — they’re paid by the firms whose credit they evaluate. That makes
them vulnerable to pressure from investment banks and securities issuers,
which naturally want a bullet-proof rating in order to attract investors._

~~~
nradov
I can see two possible reasons for why the rating agencies were given such a
key role. 1\. Once the rating agencies give their stamp of approval then no
one has to be held accountable for bad decisions. 2\. People _want to believe_
that it's possible to predict the future, and rating agencies are just a
modern equivalent of fortune tellers.

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fraserharris
His remarks about home ownership are astute - it is depressing how rarely
politicians consider the 2nd order effects of their decisions.

"Mr. Palyi warned in 1938 that a push toward universal home ownership would
"make the population fixed to the ground" by "overburdening them with housing
costs." That, he foresaw, would limit the mobility of American workers—helping
explain why unemployment is so stubbornly high today."

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kiba
One thing that the article notes is that it's not a good idea to trust
gatekeepers, no matter who they are.

They could be government bureaucrats, politicians, or corporations. They're
all humans and that they are all corruptible.

It doesn't matter how long your regulatory rules run. If people can abuse, get
around, bribes, they will.

For example, people can limits a lot of bank runs by simply switching away
from factional reserve banking. That would vastly increase the fundamental
soundness of banks. However, people decides to wrap it around with government
insurance instead.

The ideal system is a one that can be run by devils, not angels. That depends
on the right amount of rules, the proper rules, the proper incentives, and so
on.

What people end up though, is to make lot of well intentioned laws without
considering the consequences in detail. They think decrees will make the
problem goes away. They often done, and the problem often become worse. Then
they make new rules to fix problems with the old rules. It's a pervasive
cycle.

That's not surprising, given that the system relies on people electing
officials to office. There's not going to be enough time in the day for the
population to become an informed expert in everything that governs our lives.

~~~
anamax
> It doesn't matter how long your regulatory rules run. If people can abuse,
> get around, bribes, they will.

You're assuming that "the rules" would produce good outcomes if only we could
get people to obey. That's not likely.

Since the rules are produced by a political process, that assumption seems
suspect.

Even if it's true, you're assuming that rules makers can get it right, which
is highly unlikely.

Regulation is systemic risk.

~~~
kiba
If you read the rest of my comment, you realize that I do not think that all
regulations will produce good outcome if it is followed.

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jared314
There are enough opinions in the world to prove anything, but none of them
will be paid any credence until they are fulfilled. (Jot this down, because in
a decade, or two, it might prove to be correct.)

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rue
Marx called it in 1867. This is how capitalism works.

~~~
cynicalkane
Marx implicated just about every major feature of capitalism as part of its
impending demise, so whenever capitalism superficially looks not as good as it
used to be, there's probably some Marx quote about it. He called so many
things, it's the broken clock principle in effect.

~~~
rue
Actually Marx never asserted that capitalism would collapse, just that it was
naturally a boom-bust cycle with a general trend toward ever-bigger busts.

~~~
jerf
Marx's problem wasn't that his every criticism was wrong. His problem is that
his proposed solution was orders of magnitude worse than what he was
criticizing.

~~~
rue
It makes a funny quip, sure, but there is really no way to tell at this point.
Certainly most modern communists acknowledge that the totalitarian and
undemocratic efforts in the USSR, China and elsewhere were misguided, to put
it kindly.

~~~
anamax
Ah yes, no true Scotsman....

But, how do they acknowledge that "misguided"? The ones that I've run into
will only go so far as "the excesses were caused by the US" and even then they
weren't happy admitting to "excesses".

~~~
rue
Sounds like you hang out with the wrong kind of communists? I think anarcho-
syndicalism is gaining ground.

~~~
anamax
> I think anarcho-syndicalism is gaining ground.

One flavor of anarcho-syndicalism can exist without any acknowledgement of
govt, let alone changes. (No law stops you from sharing.)

What favors are you talking about?

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maeon3
<http://www.barefootsworld.net/prophesy.html>

Thomas Jefferson -- The Debate Over The Recharter Of The Bank Bill, (1809)

"I believe that banking institutions are more dangerous to our liberties than
standing armies . . . If the American people ever allow private banks to
control the issue of their currency, first by inflation, then by deflation,
the banks and corporations that will grow up around [the banks] . . . will
deprive the people of all property until their children wake-up homeless on
the continent their fathers conquered . . . The issuing power should be taken
from the banks and restored to the people, to whom it properly belongs." --

~~~
gruseom
That quote is a forgery.

<http://www.snopes.com/quotes/jefferson/banks.asp>

Turns out "inflation" and "deflation" weren't used during Jefferson's
lifetime:

<http://www.bartleby.com/73/1204.html>

