A former senior VP at Moody’s wrote an 80 page letter to federal regulators, blowing the whistle on systemic pressures placed by Moody’s business people on the ostensibly objective analysts. To those who are shocked by this, it helps to remember Econ 101: when you get paid by the people whose bonds you are rating, there’s a lot of incentive to keep the customer satisfied.
But it doesn’t stop there. Michael Hudson of UMKC notes that the perverse incentives of ratings agencies lead them to push against raising taxes to pay for things now. Instead, it’s better financially for the ratings agencies if governments keep taxes down but sell bonds . . . ’cause that’s more business for them.
Amazing what basic economics can teach you about the ratings agencies.