The Case for Ratings Agency Deregulation

The term “deregulation” is normally associated with the right, but there’s a long tradition of progressive deregulation in this country aimed at bolstering competition and forcing firms to be disciplined by each other rather than by captured regulators. Ted Kennedy, for example, played a key role in bringing price competition to air travel and trucking. And via Tim Fernholz, here’s a proposal in that spirit from Lawrence Wright at the Roosevelt Institute to unravel the regulatory cartel that keeps the ratings agencies in business no matter how badly they screw up.

I’m not sure this is the be-all and end-all of the issue. Ultimately, I think some kind of ratings agency “public option” (to coin a phrase) could be a good idea. But as a first step, deregulation makes sense to me. The way it works right now, for many purposes you have to rely on one of the established agencies. Consequently, there’s no real market discipline on their myriad conflicts of interest. It’s a recipe for disaster, it was a disaster last time around, and while there are good ideas in the main regulatory reform bill I don’t think it addresses the ratings agencies in any kind of satisfactory way.