How To Avoid the Next (Worse) Crisis. Democratize Ratings.
Of all the causes which have contributed to the crisis we identify ratings, and rating agencies in particular, as the single key factor. According to the Financial Crisis Inquiry Committe in January 2011: "The three credit rating agencies were the key enablers of the financial meltdown". Credit rating agencies play a pivotal role in the economy. They process, filter, and funnel information from the financial industry and economy in the form of ratings onto the markets. Markets and investors rely on this information. The processes that lead to a rating are:
- massively expensive
- not transparent
- not suited for a turbulent economy
It is not difficult to imagine how conflict of interest fits into the picture. However, credit rating agencies are tremendously powerful and continue to thrive in a business-as-usual fashion, as if nothing had happened. That is a reflection of immense power. In effect, a downgrade of a country's economy by a single notch means billions of losses for that country. Overnight. Now that's power.
Until we can break the above scheme, there is no real reason to believe that situation will change. However, breaking the scheme is, given the power concentrated in the hands of the rating agencies, almost a practical impossibility. Therefore, a different approach is necessary. If credit rating agencies are left to operate then they will surely spark another crisis. This is because the global economy has been crippled and is very fragile. It cannot take a second severe blow. And on a good crisis many people make fortunes. So, every now and then we must have a crisis, whether we like it or not.
There are two tremendously powerful pieces in the global puzzle:
- The People
- The Internet
The immense power of the internet, toghether with millions of individuals, can be combined to create a new approach to rating that is beneficial to investors, to the economy and without the need of the rating agencies. A radically innovative web based rating scheme has been launched recently:
It is affordable, verifiable and objective. What this system accomplishes is the democratization of ratings.
This crisis offers a tremendous opportunity. Because the authorities behind global finance will never agree to change the rules - it is in their interest to maintain the status quo - the least investors can do to defend themselves is to resort to a new and
"democratic" rating system that will safeguard them from purchasing products known to be toxic. In order to avoid investing in companies close to default, investors must be aware of their real state of health. A web-based rating system will put pressure on public companies to publish genuine financial reports. Publishing financial reports which do not reflect correctly the real state of health of a company makes life much easier for rating agencies. Since it is the rated companies which pay for the rating, the circle is closed. This must change. Until the early 1970s the investors paid for rating reports. When the rating agencies changed their business models, and started to charge the rated companies for their services, this allowed conflict of interest and opacity to enter the picture. The rest is history.