Absolutely - this goes to the point in my second post about informational asymmetries. It's quite probable that consumers won't ever be able to get full access to that sort of information even if they had the time or the inclination to seek it out. What I was trying to highlight though was that we should be careful about calls for more regulation, because such interventions change people's incentives. We need to be wary about the idea that regulation can help make the system 'safer' for consumers in particular - that's where policymakers can start to get into trouble.Gavin Scott wrote:I'm not sure the "seatbelt" analogy really holds true as a causal factor in the way you describe, Mr Q, as its not the retail banking customer who drives the bank.
Customers should show diligence when selecting a bank to leave monies on deposit - but how could anyone on the ground make a well-informed decision when the banks have been less than transparent about the extent of their toxic assets, and the true nature of their balance sheets? Besides, its been at least 50 years since there was a run on a British bank, and for most in the country it was an unimaginable outcome.
It's certainly interesting how easily the basic principle of 'buyer beware' was lost. If I'm going to buy something, I generally like to have a pretty good idea of what it is I'm handing money over for. Yet so many of these derivatives that were being traded were so complex that there is virtually no way anyone could have known what they were buying. And yet all the major players in global finance were buying them anyway. It was almost as if complexity was taken as a proxy for quality.This should never have happened, obviously. Or at least, its obvious to me - but it apparently wasn't obvious to those bankers who traded on these securities.
In this sense, the ratings agencies are rightly attracting a fair chunk of the blame. I think their credibility in rating these sorts of 'assets' (rather, highly toxic liabilities) has been destroyed. The problem is of course that the ratings agencies - whose services were used by buyers to determine if what they should be buying was safe - were being paid by the people who were selling the products. Surprise, surprise: if a particular ratings agency wants the business of a particular firm, then it has an incentive to say that firm's products are outstanding. Ratings agencies became advisors, working closely with the sellers to structure their exotic investment packages to secure the highest possible ratings. Put another way, they were recommending how the turds should be polished.
For all these problems, the difficulty is that the services of ratings agencies basically have to be paid for by sellers, because buyers will be able to 'free ride'. If you had a situation where buyers had to pay for access to ratings, then as soon as a few people have paid for the particular report, the information will spread. It's simply not the sort of information that you can keep a lid on. And if you know you'll be able to get the information without paying for it, then why would you pay for it in the first place? Which means that the ratings agencies won't have much business to keep them afloat at all.
Does that mean ratings advice should be regulated? Maybe. Though I note that S&P and Moody's basically enjoy a duopoly in terms of ratings advice as a result of accreditation standards that have tended to act as a barrier to entry. In fact, less regulation in this regard - allowing more players to enter the field and compete - should help raise standards. Given just how badly the ratings agencies have performed, I think people will be quite averse to taking their statements at face value. So they've got to rebuild their reputations now. Ultimately, people aren't going to value their services unless they perceive the information that they provide as being accurate.
It seems strange to say this, but cdd, you're 100% correct. It's politically infeasible to not bail out banks, particularly where consumers risk losing their life savings if the institution goes under. But doing so poses significant longer term challenges. If I were running a bank, yes, I'd be pretty confident that if I stuffed things up badly enough that the government would ride to the rescue. Shareholders get all the upside from risky strategies - that is, higher returns - and taxpayers get stuck paying for the downside.cdd wrote:I couldn't agree more. But there's a problem - really, any responsible government has no option but to bail out a bank that has millions of customers - and the banks know it. Although refusing to bail out the banks might result in a sturdier banking system in the future, as consumers become aware of the risk, that kind of strategy is political suicide. I just don't see any democratic government entertaining that strategy.
Although you're right to say the mere knowledge that the government wouldn't be bailing them out might prevent this situation from arising in the first place, the problem is how the government convinces the banks of this. If I were a bank, I'd be pretty sure it was an empty threat.
