The story of the financial crisis is turning into a comic book: just like in Bat Man or any other serial, the villains keep coming back even after they’ve been defeated.
Through the 1990’s, former Federal Reserve chairman Alan Greenspan, with considerable help from the Clinton administration, gave Wall Street the opportunity to regulate itself. That experiment, based to a considerable degree on Mr. Greenspan’s ideology, failed.
Yet there’s Mr. Greenspan on the top of Wednesday’s comment page in the Financial Times criticizing the Dodd-Frank Act, which is the current U.S. government’s attempt to tighten the regulatory screws that Mr. Greenspan, former U.S. Treasury secretary Robert Rubin and others loosened in the 1990’s.
“The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems,” Mr. Greenspan writes. “Today’s competitive markets, whether we seek to recognize it or not, are driven by an internal version of Adam Smith’s 'invisible hand’ that is unredeemably opaque.”
Meanwhile, over in Europe, another group of people deemed responsible for bringing down the global economy continues to wreak havoc: the credit rating agencies. Portugal appears to be sliding toward a bailout as its borrowing costs climb in the wake of a series of credit downgrades.
The peaceful citizens of the European Union are upset at the rating agencies. The EU disagrees with the downgrades. But even though the agencies blew it by assigning some of their highest marks to some of the dodgiest assets that Wall Street has ever put up for sale, financial markets continue to be swayed by the credit raters. This study by economists at the International Monetary Fund argues that sovereign rating announcements on countries such as Greece have ripple effects across the EU, suggesting firms such as Standard & Poor’s have the power to destabilize financial markets. “Interestingly, financial markets throughout the euro area have been under pressure although credit-rating actions were concentrated in few countries such as Greece, Iceland, Ireland, Portugal and Spain,” the study said.
Win Thin, global head of emerging markets strategy at Brown Brothers Harriman, described the credit rating agencies as “flailing” in a note on Wednesday. “S&P cut Portugal one notch from BBB to BBB-, and comes just five days after it cut the rating from A- to BBB,” Mr. Thin wrote. “Did things really materially change over the past five days? It’s time for a reminder of what the agencies are capable of doing when they have been caught behind the curve.” Mr. Thin goes on to recall the Asian financial crisis, when S&P reduced Korea’s rating by 10 notches over two months at the end of 1997. “To us, the Asian crisis was when the credibility of the ratings agencies went out the window, as investors found out painfully just how far off the agencies had really been,” Mr. Thin said.
It should be said that as time goes on, the narrative of the financial crisis could change. Mr. Greenspan, once a hero, could well become a hero again. In the Financial Times, he asks a provocative question: what if financial complexity has a link to economic growth? The former Fed chief notes that finance’s share of gross domestic product increased considerably from the end of the Second World War to 2009. At least some of that growth came as he and others loosened financial regulation. “In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living,” Mr. Greenspan said.
Nor is everyone as critical of the credit rating agencies as Mr. Thin and his colleagues at Brown Brothers Harriman. Scotia Capital’s Derek Holt and Gorica Djeric said in their morning note to clients Wednesday that “rating agencies, for once, are doing their job.” They based this assertion on news that Portugal’s statistics office will restate its budget deficit this week. “Blame the governments for losing market confidence in reporting their figures from Greece through Portugal,” the Scotia economists said.
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