Impersonal words like "ratings agency" actually consists of a bunch of really smart math, stat & physics phds ( & the occasional finance phd who didn't get into the buyside IBs & hedgefunds :) The ratings are spit out by models. The models ar driven by simulations upon giant matrices whose input is historical correlations. When the inputs fuck up, the outputs will get hosed too.
> Adjusting the models when they produce incorrect answers
Nobody adjusted the models when they produced incorrect answers because the answers weren't incorrect. They weren't the answers you like in hindsight, but they were correct insofar as the model was vetted & the input was correct.
Lemme give you a crazy, absolute bizarre scenario. Lets say there is massive acceptance of sexting pics among US youth starting tomorrow. Youtube is flooded with penises & vaginas. Then the churches start filing lawsuits against google because youtube is actively promoting pornography. You see what I'm getting at. For youtube to be relevant, it has to cater to the youth & not actively censor content especially stuff that has mainstream acceptance among youth. At the same time, it becomes liable. Rock & hard place. This is the exact sort of crazy bizarre stuff that happened during the financial crisis. The models are predictive, not normative. House prices actually went up, year after year, & the cdo ratings simply reflected that. Then people got burnt & are deciding the models are responsible! If the models priced normatively, the investors would simply look elsewhere for different models that priced predictively.
Yeah, that's pretty crazy and actually self-serving and disingenuous. If ratings labelled themselves "free-expression platforms for Math PhD's who don't guarantee nothin' but garbage-in, garbage-out" well then they'd have no obligation beyond that of youtube. But they signed up, actually put pen-to-paper and got money, for the responsibility of being "the adult in the room". You seem to think that their failure to actually be that is just a terribly unfortunate coincidence that they should have no responsibility for, despite their claiming that it earlier.
I can't believe you are seriously arguing this. According to you, ratings agencies have no responsibility for the accuracy of their models as long as they fit historical data. By this logic, it's "correct" to rate Greek bonds at AAA right now because they have never defaulted before (this is a simple and completely accurate model that fits past data). Also see: http://xkcd.com/605/
Ratings agencies aren't paid to make models, they are paid to make predictions. When those predictions are wrong, it's on them. It's not reasonable to give a AAA rating that is based on an assumption that housing prices will rise at 10%/year forever, just because they have for the last ten years.
Rating agencies aren't paid to be a cultural zeitgeist that analyzes and summarizes the way financial markets are right now. They aren't paid to "go with the flow" and accept assumptions uncritically. They are paid to predict what will happen in the future, and to make especially sure that the most confident ratings (which grannies depend on to make sure they don't lose their retirement) are only given to financial instruments that make the most conservative assumptions.
I'm just astounded that you so freely deflect blame for this onto the public. I hope that this isn't the general sentiment inside the financial industry.