Archive for the ‘credit ratings agencies’ Tag

The meltdown continues

When I started this blog, only a few weeks ago, the current financial crisis was barely beginning.  The blog is just a continuation of the rants round the kitchen table my friends and I have been having for years, and tt is tempting to argue that the financial meltdown could all have been avoided if only the world had listened to what we were saying. Tempting, but wrong.

We knew the meltdown was coming. It has been obvious to anyone who could do basic financial arithmetic that everything was badly out of kilter and a correction was coming. The Icelandic banks’ balance sheets were shot to pieces at the start of the year – and their juicy interest rates were a forlorn attempt to attract enough deposits to put them right. Smarter investors spotted the danger and stayed away, even with today’s inadequate transparency levels.

Transparency isn’t a panacea. Making good financial information available isn’t enough: it has to be read, in good time; and most people are too greedy and too lazy do so. There’s no point in opening the blinds if no one is going to look in, and the financial markets are driven by greed.

But one aspect of the meltdown has been the failure of the credit ratings agencies. Perhaps they could have done a better job, had they had transparent access to the raw financial data? Perhaps. But the way they get paid is all wrong. Who pays them? Ultimately, it’s the debt issuers – the organisations whose credit rating is being assessed.  This model is obviously broken.

Full financial transparency, however, does make an alternative credit rating model possible. Instead of using ratings agencies, software bots like Google’s web-crawler would constantly crawl the accounts of the world’s companies. There could be open-source and commercial bots, and it would be up to the user to choose which results to trust.  With open-book accounting, automated credit-crawlers could replace the ratings agencies and would probably do a better job.

This is something that the regulators need to consider for the future.

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