Susan Schroeder: Public Credit Rating Agencies: Increasing Capital Investment and Lending Stability in Volatile Markets.
Public Credit Rating Agencies: Increasing Capital Investment and Lending Stability in Volatile Markets
Palgrave Macmillan, New York, 2015, 196pp.
When the GFC began in 2008-9 there was widespread criticism of the major international credit rating agencies--Moody's, Fitch and Standard and Poor's. They were perceived a having exacerbated, if not caused, the crash because of erroneous judgments they made about the riskiness of complex financial instruments such as 'collatoralised debt obligations'.
Critics, including Robert Wade, argued that the agencies were complicit because they derive income from payments by the very businesses whose securities they are supposedly objectively rating. Nothing new there, of course: as the author of this book notes, the ratings agencies have been subjected to criticisms, including 'regulatory capture', ever since they began. A critique of the agencies and their bizarre rating of Australian governments' securities was published in JAPE No.34 over 20 years ago.
Susan Schroeder's book thoroughly examines the functions that the credit ratings agencies perform, looking from a perspective informed by heterodox economics. It has chapters considering private credit risk, sovereign credit risk, regulatory capture and the role that a public credit rating agency could perform in stabilising an otherwise unstable situation. The source of the instability is located in the inherent nature of investment in a capitalist economy where uncertainty is ever-present. Schroeder's thoughtful application of insights from Keynes and various post-Keynesians--particularly Hyman Minsky--grounds her critique of the ratings agencies in a broader understanding of the economy. This distinctive analytical feature of the book can be expected to significantly enhance its interest to heterodox economists.
A second distinctive feature is the author's advocacy of public agencies, national or international, as a response to the current problems. 'Market competition', such as it is, among the private agencies is clearly inadequate to safeguard the public interest. The penultimate chapter of the book makes the case that public agencies could impart more stability of lending, promote new technology and increase the profitability of new investments. It is a reformist policy proposal that warrants careful consideration in an otherwise deeply problematic credit ratings process.
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|Publication:||Journal of Australian Political Economy|
|Article Type:||Book review|
|Date:||Jun 22, 2015|
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