Today’s Harmful Idiot Is Frances Coppolla

17
1675

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.

Idiocy.

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?

Sigh.

17
Leave a Reply

avatar
5 Comment threads
12 Thread replies
9 Followers
 
Most reacted comment
Hottest comment thread
9 Comment authors
Michael van der RietSpikeLondonerjohn77Bloke in Germany Recent comment authors
  Subscribe  
newest oldest most voted
Notify of
jgh
Guest
jgh

This thermometer is telling me I’ve got a fever, DESTROY THE THERMOMETER!!!!!!

It’s surprising these morons have enough brain power to remember to breathe.

Lurker
Guest
Lurker

Not surprising. Just unfortunate.

Spike
Guest
Spike

The ratings agency is measuring the proposition, “This enterprise is likely to repay its debts.” Frances is asserting the proposition, “I like the work this enterprise is doing.” (No need to measure anything; we’re in a pandemic, right?) There is no reason the answer to one question should be the same as the answer to the other.

I thought a certain buffet in town was doing the Lord’s work. (Brits: Our buffets are all-you-can-eat.) But turns out it wasn’t making enough money to survive. Yes to one proposition meant no to the other.

Edward Lud
Guest
Edward Lud

But, Spike, that is at best a partial characterisation of the proposition she advances.

Spike
Guest
Spike

You’re right; I omitted her death sentence for enterprises whose work she doesn’t like.

But wait! Ratings agencies “forced countries to shred safety nets”? When do we begin to see the benefits of this transformation?

Michael van der Riet
Guest
Michael van der Riet

Well they forced all countries to play their national anthems accompanied by the glockenspiel didn’t they? And for all the citizens of every nation to do a stadium wave as sunlight hits them in the morning? I think that you seriously underestimate the malevolent power of ratings agencies.

Phoenix44
Guest
Phoenix44

And a ratings agency that gets it wrong because it is being paid to get it wrong, will go out of business in a week. Do these fools not understand that? No borrower will lend based on the belief the rating agency has lied about the credit. But of course these people are far cleverer and understand far more abot how these thing work than the people actually involved, the people actually risking their money. It’s just such arrogance to think that you have spotted that something is wrong, but the hundreds of thousands using it every day and seeing… Read more »

Londoner
Guest
Londoner

Shows why a public good is best funded from public money. State ultimately has to pick up the risks that overwhelm the private sector, might as well assume them from the start.

Spike
Guest
Spike

In fact, the terrible risk of government “guarantees” – such as the “no-cost” (if no one defaults) loan guarantees made by the US Export-Import Bank (the “Bank of Boeing”) is that private-sector failures are parlayed into calls for more government.

You go farther, though, and call for more government in the absence of any market failure, merely by assuming one will happen eventually.

In fact, the only risks that “overwhelm the private sector” are the risks of living within constraints imposed by the Parasite Sector.

Londoner
Guest
Londoner

The comment was directed solely at funding of a public good such as hospitals, as happens in UK. I wouldn’t include Boeing in that. Healthcare, defence, education, yes, not aviation. Rather tend to agree with Tim about bankruptcy being the best course for all those highly geared businesses unable to survive a 3 month suspension of their normal activity. But you can argue it several different ways, I agreed with letting Lehmann go down, but also with propping up world financial system when the whole thing looked like toppling! Call me inconsistent if you will.

jgh
Guest
jgh

Hospitals aren’t a public good. A public good is one where use by A does not stop use by B, eg air, knowledge, street lights. If you use that hospital bed it stops me from using it, ergo hospitals are not a public good.

Bloke in Germany
Guest
Bloke in Germany

Defence is a public good but Boeing isn’t?

Have you thought this through?

Londoner
Guest
Londoner

You’re right, my bad.

john77
Guest
john77

I wanted Bear Sterns to go down – some idiot ordered JP Morgan to save it so people assumed that Lehman was safe and when aforesaid idiot decided to let it crash instead the mess was far far bigger than if he had let both crash or neither crash.

Spike
Guest
Spike

You don’t have an economic crash by some loans going bad. You have an economic crash by NO ONE KNOWING WHAT THE RULES ARE. (As is the case today.) This is what Geithner and Bernanke (Bush “compromise” appointees in 2006) did for the USA. Voilà, President Obama!

Londoner
Guest
Londoner

Not so. Dodgy US mortgage lenders lent a wall of Asian money to dodgy mortgagees, knowing full well what the rules were, but breaking them* . (During 2007, “defective mortgages (from mortgage originators contractually bound to perform underwriting to Citi’s standards) increased … to over 80% of production”.) And dodgy Wall Street wide boys created dodgy financial instruments to unload them onto the rest of the financial system. The rest is history. *(“In testimony to Financial Crisis Inquiry Commission, officers of Clayton Holdings—the largest residential loan due diligence and securitization surveillance company in the United States and Europe—testified that Clayton’s… Read more »

Spike
Guest
Spike

The mortgages were “dodgy” because (1) the Feds required reliance on race and class rather than ability to repay, and Bill Clinton put banks on notice that compliance would be a basis for approving the banks for ANYTHING, even opening a new branch; and (2) “Freddie Mac” and “Fannie May” famously repackaged the loans so that traders could not ascertain the quality of the debt.

The US Government REQUIRED loans to not meet minimal underwriting standards. Sorry if this doesn’t align with Salon’s opinion of who the good guys and the bad guys are.