Simon Black: Not in the Mood for Moody's

Writes the prolific Simon Black of the Sovereign Man,

In the middle of a heated battle against my jetlag yesterday, I finally decided to exercise the nuclear option and turn on CNBC in order to stay awake.

I figured someone would say something completely ridiculous, and it would get my blood boiling enough to power through the next couple of hours.

Within minutes I saw a top economist for Moody’s (one of the largest rating agencies in the world) saying that there are absolutely zero signs of recession.

Boom. I was suddenly so wide-awake it was like that adrenaline scene from Pulp Fiction.

I couldn’t believe what I had just heard. Moody’s. No recession. Seriously?

In addition to being criminally complicit in committing widespread fraud that fueled the housing bubble ten years ago, Moody’s takes advantage of every opportunity to show the world that they don’t have a clue when it comes to economic forecasts.

It’s like what Churchill said about democracy– it’s the worst form of government, except for all the others.

Well, Moody’s is the worst rating agency and economic forecaster… except for all the others.

These are the same guys (along with their colleagues at S&P, Fitch, etc.) who totally missed the boat on the housing market and slapped pristine credit ratings on subprime mortgage bonds.

They also missed the boat on the subsequent banking crisis, giving strong ratings to Lehman Brothers and AIG right up through September 2008.

Lehman, of course, went bust that month. And AIG had to be bailed out by the taxpayer.

Moody’s and the gang also missed the rest of the global financial crisis, the collapse of Iceland, Greece’s bankruptcy, and just about every other significant financial event since… forever.

These guys are so drunk on their own Kool-Aid that in October 2007, Moody’s announced that “the economy is not going to slide away into recession.”

In December 2007, they called the bottom in the housing market, suggesting that prices would not fall any further.

Of course, the following year, the entire world was engulfed in the biggest financial crisis since the Great Depression.

Moody’s didn’t see it coming. Wall Street didn’t see it coming. The Federal Reserve didn’t see it coming. Governments didn’t see it coming.

Everyone assumed that the good times would last forever.

So when the agency that consistently fails to predict recession predicts that there will be no recession, you can pretty much guess what’s going to happen next.

Read the rest here (Mr Black deals with Negative Rates)

It's all about incentives. Add to this the agency problem (principal agent dilemma). Establishment institutions are unlikely to go against political interests, because of the businesses that they generate from such ties, and likewise, the social clout that they accrue from them. That's unless conditions have become so bad to deny them.  And that's why they have been principal advertisers of bubbles or they will remain blind to the risks of recession or of crisis. 

Moreover, they can be extensions of government interests. In the case of credit upgrades and downgrades, geopolitical tensions (particularly trade sanctions) has led to credit downgrade of Russia. I opined that Philippines got credit upgrades in exchange for military bases.

By the way, there is nothing about free markets here. Rather it's all about fascist-cronyism.