7 thoughts on “Downgrade”

  1. I don’t think the ratings agency deserve a lot of blame. Virtually everyone was duped by the housing bubble.

    The housing bubble was 30+ years in the making and rose gradually like a tide in a bay lifting all boats. By 2000, it was all most people in the financial world knew and they considered it “normal”. It took a lot of insight to see that something was systematically wrong.

    To my knowledge, only a few libertarian analyst saw the bubble coming and they only did so because of ideological bias against government intervention in the markets. Not even they predicted the specific progression and scope of the bubble, they just knew that government intervention would create a bubble.

    In the specific case of Freddie and Fannie, the ratings agencies had to take the implied government backing of the government sponsored enterprises into account. Freddie and Fannie could only default if the problem was so big that the Federal government could not cover the loss. Who more than 5 or 6 years ago saw a crises of the magnitude coming?

    This is the systematic problem with government regulation or government mandated action like ratings agencies. Government works on conventional wisdom because it depends on a majority consensus to act. If the majority of people in the country or even a majority of people focuses on one area like finance, don’t see a problem then the government won’t either. Likewise, government mandated ratings agencies can’t deviate to far from conventional wisdom without either drawing government ire or damaging their reputations short term.

    The ratings agencies would have had to go against the grain of virtually all private and public analyst to say that something was wrong. Even if they had the insight and issued warnings, few people would have listened.

  2. Shannon….”few people would have listened.” ?

    Whoa, if S+P or Moody’s came out critical before the crash of Mortgage Backed Securities nobody would have listened? I don’t think so.

  3. Like most bubbles or bull market blowouts, it was getting pretty obvious the last year or two. The same thing happened in 1929. I was thinking of remodeling my house in 2005. Then I thought I would look around since selling and buying another house would avoid the mess and delay of a remodel. For the first time in years, I went house shopping in Orange County CA.

    I was astonished at the prices and the postage stamp lots that held (theoretically) million dollar homes. I wondered who in the world could afford all these homes. At that point, I seriously considered selling my house and renting. I was sure this couldn’t go on. Thank God, I didn’t do the remodel but just hunkered down.

    Three years later, my house had lost $250,000 in value.

    It just wasn’t that hard to see if you looked. I know a few people who did sell. They mostly did not have kids in school, as I did.

  4. S&P is not some Godlike entity. They do not do things of this magnitude out of some elevated spirit of serving the public interest.

    Why now? Who benefitted from it? Cui bono? Soros?

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