Monday, August 8, 2011

S&P Takes a (well deserved) Beating

The Financial Times:
It is unacceptable that privately-owned, for-profit companies should have special, legally sanctioned status at the heart of the financial system to function as quasi-regulatory authorities whose opinions can determine what securities financial institutions can hold, how much capital they need, what the borrowing costs of every member of the system will be, all based on secret deliberations with no accountability.

The disastrously flawed ratings of these agencies were at the heart of the 2008 financial crisis and S&P’s action threatens to create mayhem again by creating uncertainty about the ability of the US to function in its critical role in the financial system.

The agency’s actions pose unpredictable and dangerous risks to the global economy. As Warren Buffett has noted, fear is contagious and spreads quickly; confidence is fragile and only returns gradually and over time. S&P’s actions can only undermine weak confidence and raise uncertainty. It has created what Keynes called irreducible uncertainty. We have no idea of the consequences of S&P deciding the risk-free assets issued by the country that occupies a unique place in the global economy may not be risk free after all.
Oooo, SNAP!

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