4 ms·

Hot take: 2008 was caused by over regulation, resulting in broken incentives for rating agencies and preventing any real bad outcomes from them just rating ever

Hot take: 2008 was caused by over regulation, resulting in broken incentives for rating agencies and preventing any real bad outcomes from them just rating everything as great.

ethbr0 5y ago
Finding a trustworthy oracle is always a problem. Either you can let (systemically important) people buy whatever junk they want, or you can mandate a minimum bar. But if you mandate a minimum, who judges what does or doesn't meet it?
- beiller 5y ago
  I don't think this is an oracle problem. I watch reviews online for products I want to buy. Seems to work fine. But let's say now legal action is threatened for any negative reviews. What happens to the trust now of online reviews?
  - marcosdumay 5y ago
    It's more than that. Do you read reviews paid by you or by the seller of the product they are reviewing?
    - smaryjerry 5y ago
      I think the rating system he referred to was supposed to be independen.
    - beiller 5y ago
      I've kinda lost track of the analogy at this point. I'm surprised I was downvoted so much. I didn't have a strong case to begin with. To try and carry on, if I was paying for product reviews like companies do for the rating agencies, I'd expect them to be even more accurate and impartial! If the companies (reviewees) are paying the reviewers (bribes?), I'd expect them to be crap. But companies are not paying Fitch to rate them are they. Other investors are paying Fitch for the supposed impartial review. But since high ratings makes markets go up, and monetary policy is greasing the wheels so that nothing can fail, it caused all ratings to creep up. Because after all the rating are based on empirical data and nothing is allowed to fail (bail out).
      - marcosdumay 5y ago
        > But companies are not paying Fitch to rate them are they. They often are. A lot of times a large investor pays them to look at a possible investment, and this case is quite ok. But the official ratings they are listed with are set by a third party mandating the company "go pay Fitch to rank you". It's not plain bribery like companies paying reviewers, but it's quite shady.
        beiller 5y ago
        I understand what you're saying but ultimately it's still the investors paying Fitch. You can clearly see they have no quid pro quo with the company or product they are evaluating. All your saying is who's invoice the bill appears on but the company is not paying that bill. The investor pays through the acquisition.
        marcosdumay 5y ago
        There is no investor at this point. The mandate is made by a 3rd party that is expected to be neutral. The investor only appears after the entire thing is settled. Yes, it's not a case of fraud. It's a case of a process structured in a way that facilitates fraud. (Who pays for the invoice has the power to negotiate its value.) It is a very different thing, but it's still a problem to be solved.
- emn13 5y ago
  The issues weren't with risk per se, nor any minimum bar, but with risky assets dressed up to deceive buyers (and those that audit collateral) into thinking they're not risky. If something is too complex to interpret: maybe that's not immediately a problem, but it likely shouldn't serve as collateral for a loan (or similar), especially not systemically. So this conceptual oracle doesn't need to be perfect: it just needs to accept a few false negatives (unnecessarily rejected collateral) in order to ensure there are few false positives (unwisely accepted collateral). Philosophically it certainly feels to me like an easier problem than finding a more generally trustworthy oracle; but these kind of things certainly are tricky.

Hot take: 2008 was caused by over regulation, resulting in broken incentives for rating agencies and preventing any real bad outcomes from them just rating everything as great.

ethbr0 5y ago

Finding a trustworthy oracle is always a problem. Either you can let (systemically important) people buy whatever junk they want, or you can mandate a minimum bar. But if you mandate a minimum, who judges what does or doesn't meet it?

beiller 5y ago
I don't think this is an oracle problem. I watch reviews online for products I want to buy. Seems to work fine. But let's say now legal action is threatened for any negative reviews. What happens to the trust now of online reviews?
- marcosdumay 5y ago
  It's more than that. Do you read reviews paid by you or by the seller of the product they are reviewing?
  - smaryjerry 5y ago
    I think the rating system he referred to was supposed to be independen.
  - beiller 5y ago
    I've kinda lost track of the analogy at this point. I'm surprised I was downvoted so much. I didn't have a strong case to begin with. To try and carry on, if I was paying for product reviews like companies do for the rating agencies, I'd expect them to be even more accurate and impartial! If the companies (reviewees) are paying the reviewers (bribes?), I'd expect them to be crap. But companies are not paying Fitch to rate them are they. Other investors are paying Fitch for the supposed impartial review. But since high ratings makes markets go up, and monetary policy is greasing the wheels so that nothing can fail, it caused all ratings to creep up. Because after all the rating are based on empirical data and nothing is allowed to fail (bail out).
    - marcosdumay 5y ago
      > But companies are not paying Fitch to rate them are they. They often are. A lot of times a large investor pays them to look at a possible investment, and this case is quite ok. But the official ratings they are listed with are set by a third party mandating the company "go pay Fitch to rank you". It's not plain bribery like companies paying reviewers, but it's quite shady.
      - beiller 5y ago
        I understand what you're saying but ultimately it's still the investors paying Fitch. You can clearly see they have no quid pro quo with the company or product they are evaluating. All your saying is who's invoice the bill appears on but the company is not paying that bill. The investor pays through the acquisition.
        marcosdumay 5y ago
        There is no investor at this point. The mandate is made by a 3rd party that is expected to be neutral. The investor only appears after the entire thing is settled. Yes, it's not a case of fraud. It's a case of a process structured in a way that facilitates fraud. (Who pays for the invoice has the power to negotiate its value.) It is a very different thing, but it's still a problem to be solved.
emn13 5y ago
The issues weren't with risk per se, nor any minimum bar, but with risky assets dressed up to deceive buyers (and those that audit collateral) into thinking they're not risky. If something is too complex to interpret: maybe that's not immediately a problem, but it likely shouldn't serve as collateral for a loan (or similar), especially not systemically. So this conceptual oracle doesn't need to be perfect: it just needs to accept a few false negatives (unnecessarily rejected collateral) in order to ensure there are few false positives (unwisely accepted collateral). Philosophically it certainly feels to me like an easier problem than finding a more generally trustworthy oracle; but these kind of things certainly are tricky.