It may well be that you don’t like what a market price tells you. That doesn’t mean that you can – no, not should not, but cannot – reject the information that the market price is telling you.
The thing that Frances Coppolla is doing here. For she’s calling for the ratings agencies to be closed down:
Downgrading a hospital in the middle of a pandemic is downright immoral. And how in God’s name it is sensible to make corporations whose cash flows are evaporating pay more for their debt is beyond me. Have these agencies no sense?
To be fair, we already knew they had no sense and no morals. After all, before the last crisis, they were paid to misprice the risks of toxic securities. And since that crisis, they have forced countries to shred safety nets, underfund healthcare systems, and leave millions without the means to survive a sudden economic collapse. They are the architects of this disaster, just as they were of the previous one.
These ghouls serve no useful social purpose. Shut them down now, before they do any more damage.
A ratings agency tries – however well or badly – to work out how likely it is that a borrower will repay what they borrowed. That’s it. For sovereigns they don’t even get paid to do it, it’s just a freebie opinion offered.
So, note what the demand is. People should not be allowed to offer their opinions because Coppolla doesn’t like what those opinions are. Which is bad enough.
But now consider the economics of this. We clearly have an information asymmetry here. Any individual lender – and the markets of lenders more especially – knows less about the internal workings of a borrower than the borrower does. As with markets for lemons markets with information asymmetries don’t exist. Yet, as Mr Janet Yellen pointed out despite this logical truth second hand car markets do exist. The reason being that there are third parties who offer their opinions and thereby create the market. Create it by reducing the information asymmetry.
So, let’s close down the ratings agencies. At which point a hospital won’t be able to borrow money at all because no bugger will have a clue as to whether they’ll get repaid if they do lend.
Yes, let’s respond to a medical emergency by ensuring the medical system never does get financed. Well done there.
Or, of course, we can not be idiots, difficult though the idea is to believe when it comes to politics and hysterical reactions to markets.
And just to ice this particular little bolo, who is it that pays the ratings agency? The hospital doing the borrowing. Why does the hospital pay the rating agency? Because it aids the hospital in borrowing money more cheaply. The existence of the ratings agency increases the medical capacity of the economy by offering an opinion on whether the hospital is likely to repay the money.
And this is the thing to be banned is it?