Chapter

Institutional Failure and the Global Financial Crisis

Timothy J. Sinclair

in The Consequences of the Global Financial Crisis

Published in print May 2012 | ISBN: 9780199641987
Published online September 2012 | e-ISBN: 9780191741586 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199641987.003.0008

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Who could have imagined the obscure, arcane business of debt rating would become — in the context of the worst economic and financial crisis since the Great Depression — a matter for serious public comment by presidents and prime ministers? The public debate about the role of the rating agencies in the generation of the subprime crisis revolved around an idea which now seems deeply entrenched in popular, financial market and academic understandings of the agencies and their incentives. The core element of this thinking is that how the agencies are regulated generates a significant weakness in the ratings they produce. This chapter argues that the concern with regulation of the rating agencies is largely mistaken. Regulation is concerned with the ‘rules of the road’, not with the design of the road itself. The road is the problem, not the rules we invent to govern it. Although criticism of the agencies may serve a useful political purpose, too much attention to this issue will produce complacency about the inherent volatility of global finance, setting the world up for a repeat of the Global Financial Crisis once the appetite for risk returns.

Keywords: rating agencies; blame; crisis; debt; bonds; capital markets; regulation; asset-backed securities

Chapter.  7646 words. 

Subjects: Political Economy ; Financial Institutions and Services

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