Franken aims at reform of credit-rating system … What is Democratic Sen. Al Franken's big idea to clean up the credit rating system? Transparency. Franken, a junior senator from Minnesota, criticizes the Securities and Exchange Commission's inaction on a 2010 amendment he sponsored that would have eliminated conflicts of interest in the credit-rating business model. "Our financial system is kind of rigged," Franken said in his first prime-time interview Monday with The Last Word with Lawrence O'Donnell. – MSNBC
Dominant Social Theme: Standard & Poor's and the rest made lots of mistakes. Time to fix them.
Free-Market Analysis: When global markets collapsed in 2008, it must have been quite a shock to the financial world's rating agencies, as many prestigious institutions teetering suddenly on the edge of bankruptcy had top ratings from the industry's various ratings agencies.
This is one of the least-discussed episodes of the financial crisis and one of the most embarrassing. Literally trillions of dollars were – and are – invested in financial markets based on rating agency judgments. But only five years ago the entire Western system was broken and rating agency evaluations were basically revealed as a fraud.
It took dumping what we figure to be some US$50 TRILLION into the world's economy to achieve some kind of stability. But not a single rating agency anticipated anything like this impossible sum. In fact, the world's rating agencies didn't even anticipate the crisis. Not a one of them.
People like Peter Schiff warned of a coming monetary disaster pre-2007. In fact, the alternative free-market press was in full cry even before the disastrous events of the past five years.
That's because free-market – Austrian – economics provides us with an accurate template of How the World Works. First, central banks print too much money causing a boom and then, inevitably, a bust occurs. In this case a massive bust.
Rating agencies and their analysts are mostly (predictably) Keynesian and socialist in their outlook. They have no idea about free-market economics and make no attempt to apply free-market principles to their analyses. If they did, they would not have gotten the past five years so wrong.
Al Franken – a comedian turned senator – has a plan to fix what ails the ratings agencies. He believes "an independent board made up of investors, financial analysts and bankers [ought to] determine rating criteria, instead of the ratings firms."
"They made a lot of money, but Americans lost trillions of dollars, they lost their homes, lost their businesses, they lost their pension savings, they lost their jobs," Franken said of the failure of the ratings process that contributed to the financial collapse of 2008.
"Minnesotans lost their jobs because the credit rating agencies didn't do the only job they're supposed to have, the only job they had, which is to give accurate, objective ratings to financial products," he said.
The current system also allows Wall Street firms to choose—and then pay—the credit ratings agency that will award them the highest rating, an inherent problem that Franken seeks to eradicate. Since Franken's proposed measure to the Wall Street reform act of 2010, very little has changed, and an SEC report has proposed more discussion, rather than an overhaul.
… Franken argues that eliminating problematic relationships through an independent board would address the conflicts of interest, heighten transparency, and clean up the credit rating system.
"It all goes back to this conflict of interest. It would be like a figure skater bribing the judges and they're all giving 10′s," Franken said.
But is the problem really one of conflict-of-interest and transparency?
Or is it simply that ratings agencies are using the wrong economic model?
We would argue that the problem is the latter. What Franken should be calling for is a curriculum of free-market education that would be mandatory for ratings agency analysts.
Once they understand the reality of governmental and private-market interactions they can begin to formulate more accurate evaluations of companies and economies.
"Transparency" cannot rectify ignorance.