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Comment by heavyset_go | Hacker News Reader

The government didn't force anyone to give AAA ratings to junk financial assets.

Forced no, but that's the issue with complex regulations, they all interact in subtle ways and no one can fully predict the side effects.

One can argue that public agencies created bad incentives with regulations that mandated ratings agencies' assessments, and then shielded various parties from any accountability by bailing them out, thus removing the main feedback loop of the system (ie: you mess up, you fail).

If you swap out "regulations" with "financial instruments" your first comment makes a lot more sense.

One problem is, "you mess up, you fail", is not a sufficiently effective feedback mechanism - at least since the debtors' prisons were closed, but even they were not effective, either. One problem is that, even under this doctrine, the risk to the individual instigator is not commensurate with the totality of the damage done. Another is that the feedback comes too late, and delayed feedback results in instability.

The government does however have hundreds of regulations around bond/debt ratings. This regulatory capture ensures that only a few rating companies can legally provide ratings.

It's interesting to consider whether the ratings do more harm than good at this point. Would a better rating system emerge if we got rid of all the legislation around bond/debt rating?

That's nonsense. You can start a bond rating agency tomorrow. It just won't mean anything because no one will trust it and you won't be in a position to demand access to company internals to inform your ratings. And the SEC won't recognize your ratings (it has recognized additional firms in the past, but it's nontrivial) which means for a lot of regulator purposes your ratings have no effect.

If they got rid of regulations tomorrow, the first barriers to entry would keep you from starting a ratings agency anyway.

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