CNBC Host: Financial Distress Caused by Government, Not Markets

As the media continue their quest to assign blame for the present economic environment – mostly on the free market – some of the most overlooked culprits have been the major credit rating agencies.

The media have mostly blamed laissez-faire capitalism and unregulated markets for problems in the financial sector. But ratings agencies assigned to bring attention to problems were operating outside market competition thanks to government-endorsed oligopoly, according to CNBC “Power Lunch” host Michelle Caruso-Cabrera.

“But it speaks to the fact that ratings agencies are this government-condoned oligopoly,” Caruso-Cabrera said on Oct. 22. “You can only be a rating agency if the government tells you you can be. Then you are legally pushed into profits because you have to be rated if you’re going to issue some of these things. These guys were printing money so easily and not doing their jobs.”

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While Caruso-Cabrera suggested a market could decide which ratings agencies were best without government involvement, The Wall Street Journal’s chief economic correspondent Jon Hilsenrath proposed a solution on the opposite end of the ideological spectrum – rating agencies that operate as part of the government.

“Maybe they need to turn the rating agencies into some kind of utility because, you know in the end you can’t have a lot of different rating agencies however we come out of this,” Hilsenrath proposed, also on the Oct. 22 broadcast. “Because, the market depends on just, you know, kind of a few authoritative decisions.”

Caruso-Cabrera asked Hilsenrath why the government had to be responsible in determining which rating agency was the best, but instead allowing choices in the marketplace to determine the better rater.

“Because you need to have an authoritative decision,” Hilsenrath said. “If there are 10 different rating agencies, then issuers are just going to go around and shop for the best opinion they can get and the market isn’t going to have any confidence in the opinion. The market will ultimately gravitate to just a handful of ratings.”

The knock against the rating agencies were that they failed to properly assess the risk of subprime mortgages. As the instruments that contained the risky subprime debt became more and more complex, the rating agencies didn’t adapt and money continued to be invested in the weak sector.