I’m referring here to Paul Krugman’s column today. The ratings system in the financial sector has been a complete pile of crock. As Krugman noted, 93% of AAA-rated subprime-rated mortgage securities are now junk. How often should a AAA-security end up as junk? Clearly there has been huge systemic failure in this area.
I’m a very cautious regulator. One of the potential justifications for government regulation occurs if quantities and/or prices are not transparent. Mortgage-backed securities seem to be a clear case of non-transparency. And this non-transparency was aggravated by the corruption of the ratings’ process.
I don’t know what the best fix is, but I think the good news is that ratings should be an area where government’s role need not be huge or even terribly intrusive, even though it might end up being crucial. Indeed, a little intervention in the ratings game might have gone a long way to avoiding the systemic failure of this part of the industry.