Credit Rating Overhaul Lacks Teeth… And Common Sense

Two years ago, the housing bubble led to a market breakdown that helped cause a financial collapse. Now, lawmakers are attempting to regulate different sectors of the financial system in order to prevent such incidents from occurring again.

This issue has also been discussed at length in this blog. In a recent one, I said that I have no problem with certain regulations, but what we need is smart regulation – not regulation for the sake of it. The regulations we need should encourage economic growth and create barriers for those who would simply take advantage of economics at others expense. For example, the government should not have encouraged Fannie Mae and Freddie Mac to increase their faulty business practices.

Yes, that was a jab.

Lawmakers, however, are turning to the credit industry, particularly credit raters. Members of Congress are quick to blame raters for labeling risky investments as “safe”. In order to make certain securities seem more competitive, raters are apparently slow to announce when a risky investment begins to turn sour. Senator Carl Levin (D – Mich) is spearheading the movement to make these raters more transparent in their dealings.

This kind of regulation seems fine honestly, but on the other hand, how can the government ensure this kind of oversight? How will it know when raters are being completely truthful? In short, it can’t. This kind of financial overhaul lacks teeth, and the market should be able to phase out credit raters that are known for less-than-transparent. If banks and investors do their research and realize which investments are sounder than others, credit raters should have significantly less power to influence the markets as Congress seems to think they do.

My guess is that Congress will try to find a way to retroactively penalize seedy credit raters. However, the only thing this will accomplish is credit raters finding ways to bend the rules even more. What Congress should do is find a way to incentivize credit raters to be more honest.

Such a financial reform is difficult at best.

As long as there’s a catchy jingle every time there’s a commercial break, I’m okay with credit raters.

Oh, those are the wrong kind of credit raters? Whatever.

Read the AP story here: http://finance.yahoo.com/news/Lawmakers-turn-to-credit-apf-331555961.html?x=
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Chris Buchheit

Chris Buchheit was born under the hot Floridian sun during some year in the 1980s. There he studied school matters until moving to North Carolina in 1999. Possibly due to the fact that his mom had enough of him being inside all the time, he quickly got involved in community affairs via the Boy Scouts of America, where he learned the values of citizenship, morality, duty to God and country, and that the biggest kids get to boss around the smaller ones. Chris attained the rank of Eagle Scout in 2004, and still values the rank as one of his proudest achievements. Beginning in 2006, Chris began attending the University of North Carolina at Chapel Hill, where he quickly learned the value of basketball and poplar trees. Since attending UNC, Chris has been double majoring in Asian Studies, with a concentration in Chinese, and Political Science. When he isn’t slaving over his honors thesis, looking up a bunch of Chinese Characters, volunteering, or mindlessly browsing the same websites over and over, Chris enjoys writing short stories and novels. Much to his roommates’ annoyance, he also spends his free time learning to play the guitar. Above all else, though, Chris values God, his family, and his friends. For the future, Chris plans to apply to Georgetown to further his studies in Political Science, hopefully with a concentration on China. Pending acceptance into Georgetown, Chris would like to study while gaining professional experience in a government job in Washington DC.

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