When I talk about risk and safety, I always like to point out that it’s easy to make sure that no one ever dies in an airplane crash: ban air travel. The fact that we don’t suggests that we really don’t want perfectly safe air travel.
Similarly, it’s easy to make sure that you luggage is never lost when you fly–fine airlines $1,000,000 for every lost bag. (First heard this example used by Jonathan Skinner) Not only would you never lose a bag, if you could collect the fine as compensation, you’d encourage travelers to try to get their bags lost. But even without that perverse result, travelers don’t want a million dollar fine. True, no bag would ever get lost, but the cost of a ticket would become much higher because of all the costs that airlines would incur to avoid lost bags. The bottom line is that we don’t want the probability of a bag being lost to be zero.
Similarly, we don’t want ratings agencies to be perfect seers. The WSJ reports:
Ford Motor Co.’s financing arm pulled plans to issue new debt, the first casualty of a bond market thrown into turmoil by the financial overhaul signed into law Wednesday.
Market participants said the auto maker pulled a recent deal, backed by packages of auto loans, because it was unable to use credit ratings in its offering documents, a legal requirement for such sales. The company declined to comment.
The nation’s dominant ratings firms have in recent days refused to allow their ratings to be used in bond registration statements. The firms, including Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, fear they will be exposed to new liability created by the Dodd-Frank law.
The law says that the ratings firms can be held legally liable for the quality of their ratings. In response, the firms yanked their consent to use the ratings, hoping for a reprieve from the Securities and Exchange Commission or Congress. The trouble is that asset-backed bonds are required by law to include ratings in official documents.
The result has been a shutdown of the market for asset-backed securities, a $1.4 trillion market that only recently clawed its way back to health after being nearly shuttered by the financial crisis.
Many horrific results of legislation are intended. But this one, I suspect is more in the J. Alfred Prufrock category: That is not what I meant at all. That is not it, at all.”
As Hayek said in The Fatal Conceit:
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
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Not only are bond ratings required for placing bonds like so, they are de facto required in trying to place other types of debt. For example, syndicated loans.
Businesses would really like to start investing in new projects. Shenanigans like this bill will (a) prevent recovery in this country and (b) encourage any foreign firms to avoid issuing financing like the plague. I mean, they already do, but this will make it worse. Good-bye New York! Nice knowing you….
I can't wait for the 'Dodd-Frank' response to this outcome. Of course, I'm sure it will be blamed on greedy Wall Street firms, and not the true culprits.
Bush/Cheney did it.
Your airline analogy is occurring in real life too. Recently the DOT imposed punitive fines on airlines who leave flights stranded on the tarmac for hours. The result is that airlines are quicker to cancel those flights altogether instead of risking the fines.
http://www.usatoday.com/money/industries/travel...
I hope I won't appear overly cynical if I suggest this may not have been an unintended consequence at all. Rather, it may open an opportunity for empire builders at the Fed or elsewhere in the federal government to take over the debt-rating chores. The same liability would not apply, or if it did, the taxpayers have lots of money to cover the cost.
What happens to profit and loss when loss becomes a criminal act?
Thinking about it, how far away are we from directive 10-289?
“The law says that the ratings firms can be held legally liable for the quality of their ratings.”
Outrageous, how can the government expect any company to be “legally liable” for it's product or service?
We'll be back to bail out companies that are failing due to lack of financing through the debt markets. Chrysler has been bailed out two times…I'd guess we'll be counting again during the next economic downtrend.
Appreciate the irony of this statement: A bill that was meant to prevent another housing collapse just shut down one of the largest lenders in the car industry.
Perrrrrrfect.
I believe the financial control grab, er, bill could easily equal Obamacare in its ability to slow the economy and destroy the market's ability to innovate and drive down cost. It is breath taking in its reach.
I wonder if it is pervasive enough to drive the double dip by itself.
It could also be said that it's easy to make sure you never lose a debate–always debate with strawmen!
“The result has been a shutdown of the market for asset-backed securities, a $1.4 trillion…”
How many people understand these numbers? I often see “M” used to represent million, which is a 1000 fold error if it was meant to represent 1,000.
Both K and M are frequently used to represent 1,000. “M” seems to make more sense in an English/Metric worldwide system.
1 thousand = 1M
1 million = 1MM
1 billion = 1 MMM
1 trillion = 1 MMMM
See? M = “000″
Answer = 1.4MMMM
I would be very happy if this became a norm. On another topic, I was a big proponent of using the “=” sign instead of the “-” sign for FAX numbers … which would prevent me from dialing FAX numbers on a business card when I wanted to talk to a person. Never did catch on. I still dial FAX numbers.
We're talking about magnitudes of 1,000 — is it possible we could adopt a standard?
This result is fantastic is so many ways:
1. It displays what a sham ratings agencies are.
2. Leads thoughts naturally to the superior alternative of not requiring ratings on debt.
3. Reveals Frank and Dodd to be the fools that they are.
I couldn't be more pleased. At least until it affects my life, which it certainly will, because the ensuing lack of credit will force a Depression. Bye bye, money supply.
A criminal act? I think it's heading more in the direction of becoming law that you must incur a loss.
“…because it was unable to use credit ratings in its offering documents, a legal requirement for such sales.”
Why should credit ratings be a legal requirement in the offering documents? That government intervention was glossed over. So we have two interventions at work here, the legal requirement to include credit ratings in offering documents AND the Dodd-Frank Law. Here's an idea. Let's make a new law to create an even worse penalty for not providing credit ratings. So, we're one step from the Stalin wheat example given in Gregory podcast.
I'm sure the first legal requirement was put in place for Aunt Sally. Someone in the government believed she couldn't be trusted to make good credit decisions on her own, so “we” must require an “exeprt” to rate the risk for her.
Which gets us right back to Hayek's Fatal Conceit quote.
I have to disagree here. The upper case M should be used for a million with K representing 1000. Otherwise you'd create great confusion for those familiar with metric prefixes.
The standard you wish for is well established:
http://en.wikipedia.org/wiki/SI_prefix
Wasn't the collapse of this asset-backed securities market a major domino in the chain of events that caused the recent/current downturn?
“…..I always like to point out that it’s easy to make sure that no one ever dies in an airplane crash: ban air travel”.
Actually, you will probably kill more people only now on the roads which have a higher fatality rate and which will become ever more congested as a result of the flying ban.
The next logical step would be to ban driving and I'm sure you can take it from there
You have a point.
It is as if the purpose of running a business is to create jobs, not to turn a profit, because if you do then you receive a fine in the form of taxes.
However if you incur a loss (and are politically connected) you are rewarded with a fat bailout check.
I think Reagan put it best when he said “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Who still uses fax machines?
Many of those securities had inaccurate ratings.
So our lawmakers in their infinite wisdom have decided that the next time someone loses money because they gambled based upon ratings that later turn out to be inaccurate, it's not their responsibility it's the responsibility of the ratings firm.
Profit and loss has become profit and lawsuits.
“rewarded with a fat bailout check.”
You may be mistaking that for the puppet strings from DC that have just been surgically attached.
Strings that pull both ways.
Russ, I would go for Procrustean Capital Markets Economy here.
It is the overt goal of ignorant statists/fascists like Obamalini to limit risk (but guarantee return), and therefore investment opportunity, and therefore economic growth.
Execute order 66.
Uh, yeah, AJ, uh, chief, just a bit.
ABS/CMBS/CDOs/CDS etc. kinda played a little role, and were all AAA-rated, cuz FNM/FRE were de facto (and semi-de-jure) backed by Uncle Sam/Barney Fwank, cuz he thunk it was a good idea to expand home ownership well beyond historical levels by giving shit away, which got packaged in these intermediary securities, cuz they were all AAA-rated (see above). So everybody bought 'em, and everybody got screwed. Except for Bawney Fwank. The end.
Are you one of Danny K's gullible friends, by chance?
Correction:
Bawney Fwank gets intentionally screwed in his ass every day in his publicly funded DC brothel.
I was thinking of a notation that could actually be introduced to the entire population, and that is easy to understand — sort of facilitating communication rather than cloaking it.
I don't get it either, but they're on every business card. Actually, there are good reasons to use a fax — emails are saved by servers at both the origin and destination for somewhere between 90 and 180 days — and these records are subject to subpoena. If you want secure communication, fax is probably the safest unencrypted form available.
How about 10^(what the f difference does it make, because if we have to express it in this notation, we're all screwed anyway)
Why are you so wedded to the status quo?
Now, if they meant it in the same way as Prufrock, they would truly be acting insideously, as I demonstrate in this short exposition of the poem:
http://zatavu.blogspot.com/2010/03/on-love-song...
Every intrusion of government into the private-sector economy is to corrupt the outcome of markets in favor of one group of stakeholders in the private-sector economy over the remaining stakeholder in the economy. There are a number of reasons why the financial services industry continues to fail – their own corruption not being the least of considerations. The government's approach has been to add more opportunities for yet more corruption in an arena where the only standard that is supportable is one of complete transparency.
All of this points back to the fact the Federal Reserve System and our current commercial banking system were both designed for the sole purposes of creating a monopoly in favor of the banking industry that would hold all other stakeholders in the private-sector economy at risk to sustain these monopolies and without limitation. The resulting moral hazards created by the commercial banking system (and magnified by the failure that is the Federal Reserve System) continue to cause financial meltdowns with alarmingly increasing frequency. This begs the question of the practical future.
The bankers would have you believe there are no alternatives to what they have contrived for your benefit, but that would be no more true than the claims of Congress that the financial reform act has anything to do with real reform.
If we are to solve this systemic failure owing to poor monetary policy system structures, poor credit structures and weak bank business operating models we will have to look beyond those suggestions provided by the banking system, as we have found that reliance upon them and their co-conspirators in Congress leaves one feeling like a sheep having a discussion about the dinner menu with a pack of wolves.
This leads us to the inevitable discussion of Lovellian economics and the realization that only the self-sustaining and self-regulating systems (such as those defined in Lovellian economics) are going to be the source of real solace and real opportunity for our people. Everything else is just more fodder for the banking industry by which they gain at our expense and risk.
Just Bush. He did it all and don't you forget it.
A government that protects you is the same government that forces you to accept a forfeiture of your liberties as the price of protection. Rational Choice Theory isn't optional; like gravity it's always there to amaze us.
You call it good government.
So was I…
You had another link?
The wikipedia page has lots more info than we need for what we're discussing. Tthe prefixes for multiples of 1000 are well known all over the world, so why invent something new? I've never seen anybody use M to represent 1000 (M represents 1,000,000), so that would be uber-confusing.
Here's the part of the table that matters here, rearranged a bit:
NAME PREFIX SYMBOL NUMBER
Quintillion exa E 1,000,000,000,000,000,000
Quadrillion peta P 1,000,000,000,000,000
Trillion tera T 1,000,000,000,000
Billion giga G 1,000,000,000
Million mega M 1,000,000
Thousand kilo k 1,000
How about a man-on-the-street poll … my guess is less than 2%. Better yet, a man-on-campus poll … still less than 2%.
I hope more than 2% is familiar with the long-standing metric prefixes, but will you at least take my word for it that using M for 1000 will only add confusion?
Is this really unfamiliar to you or are you busting my chops?
I'm not unfamiliar — I just don't pretend there's any communication going on when used in public forums. Maybe they just need to be written out — is it 1,000,000 or 1 000 000?
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