Fire Alarms Systems

It 's a lot of attention to S & P over the last couple of weeks after it to \ the first of the three major rating agencies' Downgrade' U.S. debt had been. As we mentioned at the time, it 's pretty ridiculous to get upset about the downgrading because it' s only one company 's opinion. And yes, very ridiculous reasons for the opinions of a few reviews of businesses are written in the law, and some creditors are obliged to keep certain types of debt are based solely on the opinions of the company. The real problem is that such opinions matter. In fact, as many commentators have noted, after the S & P downgrade people actually rushed to buy more U.S. debt, reducing costs, which should be done the exact opposite of what would you think is.

Of course, S & P has other problems. Nate Silver has a brilliant (as usual) Takedown of "substandard and Pourous,", in which he pointed out that S & P 's ratings are pretty awful. He goes through the data and shows that listening to S & P will make you worse. Basically a lot of other information will give you a much better indicator of the likelihood of default of sovereign debt. The specific problem?

S. & P. ??ratings was tend to be rather than lead the market. This means that in cases where the market's view of the default risk is wrong with S. & P. ??'s, S. & P. ??is a good bet to change their assessment in order to catch up on the market perception.

And of course many people who like bad S & P in the housing bubble, rating bunch of crap mortgages as investment grade if it was junk have clearly pointed out. Then there 's other general looseness. Pro Publica indicates that S & P - the way it should be mentioned, apparently a 2000000000000 $ "error" right before downgrading the U.S. debt is obviously lobbying against a provision requiring it to " significant error would report \. "

But does that mean, as some have suggested, mean that S & P should get some kind of legal trouble? Michael Moore even made the ridiculous suggestion that the company 's CEO should be arrested. Really? You would think that Moore, who has been condemned critical U.S. government policy over the years think twice before thinking that someone should be "arrested" be one of the words opinionthat was critical of the government 's ability to repay its debts.

But of course we still have some of the First Amendment, and that means you can state an opinion - even one turns out to be wrong or useless - and not be arrested for it. Once again, the real problem is this idea that we need one rating agency to determine the quality of the debt. In the equity world, many investment banks topic "review" on equity (usually some form of "buy, sell, hold"), but no one takes as seriously as the ratings by S & P, Moody 's and Fitch. Also I 'd argue that it can hold because of the requirements in the law on certain types of debt operations, and bind, which is only a few opinions. If we had the same rules for equity, we d 's. an entirely different stock market today. Sure, if a large bank classifies shares to sell people, but people \ implicitly acknowledge 's an opinion. When it comes to debt, something about the rating system and the demands it makes people think that the ratings are more "fact" than opinion, is.

So, let 's away from that completely. Let 's dump the requirements that any stocks of certain debt levels solely on the opinions of rating agencies with terrible track record base should be required. Instead, what 's wrong with just letting the decisions the market price, how trustworthy the debt? You don 't have to do away with benefits in full. Anyone can have an opinion. But without the requirements that only a few companies to make an essential part of the market, you could have a lot of open competition to see who really has the best opinion on the viability of certain debts.

So don't arrest the head of S&P. But, stop giving the ratings from these few firms special status that makes people think they're something more than just a random company's opinion.

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