Without this - or incredibly tightly policed regulation of the existing private agencies, I don't see how an outcome like the one described here isn't mathematically guaranteed?
Then, of course, ...
>The Financial Crisis Inquiry Commission estimates that by April 2010, of all mortgage-backed securities Moody's had rated triple-A in 2006, 73% were downgraded to junk
>many of their ratings turned out to be catastrophically misleading, the large rating agencies enjoyed their most profitable years ever during the past decade.
I think we should have new state run ratings agency, one that competed for ratings at market rate. This would force the private labels to at least give out more plausible ratings.
[1] http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf [2] https://www.sec.gov/news/speech/2009/spch020609klc.htm
Are you going to ban people from giving opinions as to whether various investments are good or not? As well as being anti free speech it would make life harder for investors. However I guess you could have a government controlled agency in parallel. Or regulate the agencies that their ratings have to be reasonable to get a license and ban/fine them if they are giving AAA ratings to junk.
We already do basically do that for legal and medical advice.