Ratings Agencies and Public Sector Predictions

Mike Konczal over at Rortybomb:

There’s a few ways to think about how the ratings agencies could add value to the financial marketplace. Information tends to be a public good, so there’s a free rider problem towards any individual investor paying to rate a bond. This is one reason why issuers tend to pay for the rating. There are also instruments so complex, or with so little historical and comparative information, or so illiquid, that the ratings agencies can bring their so-called expertise to give information.

But the United States bond market is one of the largest, most-liquid, most-studied, most transparent markets in the world. There’s nothing the ratings agencies have that any else doesn’t have.

And what’s more important, the ratings agencies own internal analysis shows that they are terrible at rating government debt. Their ratings are all off, as government, especially those with a printing press for their own currency, simply don’t behave like the corporate world they were designed to analyze. And rather than just being wrong, they are wrong in that they are always overestimating the liklihood that governments will default.