The Past Speaks

The quality of US economics journalism has been severely criticized in the blogosphere in the last few days. Brad DeLong has called for the better press corps, using a recent piece by Tom Friedman (of The World Is Flat fame) to illustrate his point. Friedman wrote:  “India has a weak central government but a really strong civil society…. China has a muscular central government but a weak civil society…. Egypt… has a weak government and a very weak civil society…. But there is one thing all three have in common: gigantic youth bulges under the age of 30, increasingly connected by technology but very unevenly educated.”

Friedman’s piece is unintentionally hilarious. As DeLong pointed out, China’s age pyramid is quite different from those of the other two societies, thanks to the famous One Child policy.

China Age Pyramid

Virtually every educated person on this planet knows about the One Child policy. A few days ago I was teaching the students in my history of globalisation class about fertility rates, Malthus, and the Demographic Transition. At least half of these first-year university students in England already knew about the One Child policy.  Friedman, who travels to Asia frequently, appears to have forgotten about it.

Then there are the important issues that the media doesn’t talk about. As readers of this blog will know, I’m interested in the ratings agencies that evaluate the safety of various types of bonds, including sovereign debt. Some pretty spectacular problems with the ratings agencies were revealed by the 2008 GFC, when securities previously rated as excellent were revealed to be worthless. It is pretty clear in retrospect that the ratings agencies, which have a privileged position under US law, had an obvious conflict of interest (i.e., a good reason to give a falsely positive rating). That’s because the ratings agencies are typically paid by the person giving the rating rather than the consumer of the data. (There are some ratings agencies that don’t take money from the entity being rated and instead rely on subscriptions).

The Franken Amendment to the 2010 Dodd-Frank law would have eliminated this conflict of interest by requiring a firm issuing a security to contact the Securities and Exchange Commission (SEC), which would then choose a rating agency to do the work of evaluating it.  However, a member of Congress succeeded in delaying the implementation of the Franken Amendment until December 2012 so that it could be “studied”. It is now 2013 and the study of the Franken Amendment is somehow, mysterious, not yet finished.  As the Center of Economic and Policy Research pointed out, neither the New York Times nor the Washington Post have investigated why the measure has been delayed.  These are the two well-funded, left-leaning newspapers with a heritage of serious investigative journalism [think Watergate] that one would expect to shine some light on this issue.

Clearly the press corps isn’t doing its job. Neither, however, are academic historians.

Here’s why I would condemn the historical profession and, in particular, specialists in late 20th century US history, for their failure to investigate. The ratings agencies owe much of their power to the fact they are designated as Nationally Recognized Statistical Rating Organizations or NRSROs. Since 1975, the US government (the SEC actually) produces a list of approved NRSROs that has become a global standard: if they want access to US capital markets, a security issuer needs to go through a NRSRO. They are gatekeepers. A few months ago Sam Bowman wrote an interesting blog post in which he argued that the NRSROs were “quasi-governmental” agencies rather than genuine private companies. He is right that they owe their privileges to state favour, but they are privately-owner commercial enterprises. That’s why they need to be watched so carefully– they operate in the profitable twilight zone between free enterprise and state monopoly.

The whole category of the NRSRO was created by the SEC in 1975.  The decision-making process at the SEC is murky, of course, but it is striking that no academic historian has studied the political history of the making of this category and its preservation. Why was this category created in 1975? What were the names of the specific individuals who were pushing for it? Was its creation opposed by members of Congress? What was the attitude of the CRAs, borrowers, lender, and other stakeholders to this innovation?

Today, it is routine to hear politicians in Greece, Italy, and elsewhere denounce the ratings agencies. Economists have spilled a lot of ink on the subject as well.  Given the sheer importance of NRSROs such as S&P, Moody’s, and Fitch you might have thought historians would investigate this topic, perhaps by doing a bit of oral history, using open archival materials, and maybe putting in a few FOI requests. However, I know of no secondary literature on the creation of this category in 1975. No articles. No books.

The non-existence of this literature represents a massive failure on the part of the historical profession. On Monday, the Justice Department launched a $5 billion lawsuit against S&P for its role in the mortgage meltdown. Hopefully the headlines about the lawsuit will encourage some academic historian to publish something on the momentous events of 1975.