Fixing the Credit Crisis for a Fraction of the Cost

Reading and watching postmortems of the credit market freeze have been very enlightening. At the core of the problem is a lack of confidence and trust in those handing out credit ratings, the people who said that big bundles of sub-prime mortgages were AAA-rated securities. Banks who bought these derivatives also have no idea what exactly they contain. Congress unwisely chose to buy out some of these fraudulently rated securities as a way to free up capital, but it doesn't do anything to fix the problem.

Instead, we need a top-to-bottom re-rating of these securities and full disclosure of what mortgages types they contain or represent. This should expose their true value and allow the buyers to sue the sellers for the fraud they have perpetuated. This will recover the ill-gotten gains from the fraudsters, punish them for the misdeeds they have done and allow the market to start buying and selling again with confidence that the buyers know what they are getting. In short, the idea is to remove the poison of bad data to let the market does what it does best. This would be a relatively cheap way to fix both the symptoms and the cause of the problem.

It's unfortunate that it's likely too late to implement such simple plans now that Congress has let the "free money" genie out of the bottle. I also find it sad that many are saying that the free market doesn't work when the problem wasn't the market but rather a few people trying to defraud it. Blaming the free market for those who commit crimes of fraud is like blaming video games for violent crime. It's a convenient scapegoat, but little will back up the claim.

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2 Responses

  1. Cameron says:

    A key question here would be what caused the credit raters to screw up?

  2. Jesse says:

    Simple: the people selling the securities were the ones paying for the rating. It’s the same “tail wagging the dog” problem you’ll see with arbitration companies (which find in favor of the companies cutting the checks a whopping 98% of the time).

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