Two years ago, the housing bubble led to a market breakdown that helped cause a financial collapse. Now, lawmakers are attempting to regulate different sectors of the financial system in order to prevent such incidents from occurring again.
This issue has also been discussed at length in this blog. In a recent one, I said that I have no problem with certain regulations, but what we need is smart regulation – not regulation for the sake of it. The regulations we need should encourage economic growth and create barriers for those who would simply take advantage of economics at others expense. For example, the government should not have encouraged Fannie Mae and Freddie Mac to increase their faulty business practices.
Yes, that was a jab.
Lawmakers, however, are turning to the credit industry, particularly credit raters. Members of Congress are quick to blame raters for labeling risky investments as “safe”. In order to make certain securities seem more competitive, raters are apparently slow to announce when a risky investment begins to turn sour. Senator Carl Levin (D – Mich) is spearheading the movement to make these raters more transparent in their dealings.
This kind of regulation seems fine honestly, but on the other hand, how can the government ensure this kind of oversight? How will it know when raters are being completely truthful? In short, it can’t. This kind of financial overhaul lacks teeth, and the market should be able to phase out credit raters that are known for less-than-transparent. If banks and investors do their research and realize which investments are sounder than others, credit raters should have significantly less power to influence the markets as Congress seems to think they do.
My guess is that Congress will try to find a way to retroactively penalize seedy credit raters. However, the only thing this will accomplish is credit raters finding ways to bend the rules even more. What Congress should do is find a way to incentivize credit raters to be more honest.
Such a financial reform is difficult at best.
As long as there’s a catchy jingle every time there’s a commercial break, I’m okay with credit raters.
Oh, those are the wrong kind of credit raters? Whatever.
Read the AP story here: http://finance.yahoo.com/news/Lawmakers-turn-to-credit-apf-331555961.html?x=