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AS the Wall St Journal blog points out, Alan Greenspan has identified the true culprits in the current credit crunch.

…former Federal Reserve Chairman Alan Greenspan sharply criticized ratings agencies for their role in the current credit crisis. “People believed they knew what they were doing,” Mr. Greenspan says in today’s German newspaper. “And they don’t.”

Still, he doesn’t think it’s necessary to strengthen rating-agency regulation. Essentially, they’re “already regulated,” he says, because investors’ loss of trust means the agencies are likely to lose business. “There’s no point regulating this. The horse is out of the barn, as we like to say.” Greenspan also said he believes that the volume of structured-finance products will decrease. “What kept them in place is a belief on the part of those who invested in that, that they were properly priced. Now everyone knows that they weren’t. And they know that they can’t really be properly priced,” said Greenspan.

Well, that’s a point of view, certainly. That it was the rating agencies which fell down on the job is true, but there’s more to it than simple incompetence. It’s a matter of the incentives they face.

They are paid by the people issuing the bonds: so there’s always pressure not to open up the bonnet and have a good old poke around in the engine. If somehow a method could be devised for the buyers to be paying the agencies then there’d be a great deal more diligence in working out how such issues were structured.

Quite how this can be managed though is a rather more difficult problem.

Tim 

Posted: 24th, September 2007 | In: Credit Crunch, Money. Follow the Comments on our RSS feed: RSS 2.0