…which Matt will win because he will channel his Inner Tarantino and slice my head in half.
But before then, let me express some skepticism that Matt’s rational actor utility-maximizer will come through for us.
1) Strictly speaking, it seems to me that the competitive market theory does not imply that firms will always maximize profits: it says that firms that do not maxmize profits will disappear.
2) This in turn presumes that a market is close to perfect competition, allowing better competitors to weed out the weaker ones. This is nowhere close to the case with the ratings agency business, which seems to me to be quite close to a classic oligopoly.
3) Because the ratings markets diverge from perfect competition, personal, political, sociological factors become considerably more important. (In fact, one can argue that if one is trying to model the behavior of an individual firm, these factors are always important: it’s just whether there is enough competition for the smart ones to weed out the dumb ones. See #2).
4) Note that Matt’s discussion contains an important caveat, which Matt will include because he’s intellectually honest, but most of his Chicago friends will not. Matt says that this all depends upon whether enough accurate information exists to do an accurate forecast. Fair enough, but we have no information — as in none — as to whether it is true. The US government has never defaulted. It is hard (although not impossible) to rate the probability of an event with an n of 0. Mark’s skeptical take on Matt’s post seems apposite here: given that there is no evidence that S & P can actually do this, it is simpler to assume that they are doing it to please their right-wing customers.
5) Matt says, “In my preferred world, rating agencies would be randomly assigned to the party that they will rate. This would negate conflict of interest issues that clearly arose and helped to cause “junk” to receive a AAA rating.” That is my preferred world as well. But you know what? It is also Senator Franken’s preferred world, and the ratings agencies spent millions lobbying to kill it, and in any event achieved enough to delay it for a couple of years and perhaps get a future GOP administration to kill it outright. To me, that doesn’t look like someone trying to provide credible information: it looks like someone doing everything it can to avoid being held accountable for its information.