I was the first entry in National Review Online’s symposium “Down on the Downgrade” on whether the Standard and Poor’s downgrade was fair (Was probably listed first because they went alphabetically.).
I argued, “The downgrade itself was fair. However, S&P’s timing and ‘partisan gridlock’ rationale were questionable, as is its implicit advocacy of higher taxes.”
Focusing on the government’s barriers to competition among credit ratings firms and the way ratings are embedded in regulatory capital requirements for financial firms, I said, “In a truly free market for credit ratings, … S&P and Moody’s would be to securities what Zagat is to restaurants, a rating influential because of its reputation but without undue power over a restaurant and its customers.”
I continued, “The situation today with the credit ratings embedded in our financial regulatory system is analogous to one in which zoning authorities would give permits only to restaurants with top ratings in Zagat, whether or not customers wished to patronize them.”
I credited my colleagues Matthew Melchiorre for assisting me with his great research. There are lots of other insightful entries in the symposium from observers such as Chris Chocola of Club for Growth, Nicole Gelinas of the Manhattan Institute, and historian Burton Folsom.