This, along with a other notable quotations, about the policy role of credit rating agencies, kicked off Associate Professor Paul Vaaler's October 28th research forum last Friday in the Science Teaching and Student Services Building among economics PhD candidates, public policy faculty, business graduate students and other CIL partners.
We rarely consider the roles of credit rating agencies on public budgeting, and often, take for granted our rating stability in this nation (note the panic this summer!). We even turn our noses up at rating agencies who, time and time again, have failed to alert investors to financial crises around the corner. However, these credit agencies can make or break an economy, and therefore in elected politics, an elected official or administration.
So here are the basics: According to foundational political budget theories, if left to their own devices, incumbent politicians would over spend before an election to inflate the economy and then contract post-election. This would buy votes in the short term, but not help make long term investments to better the nation. In their work, Vaaler and his co-author Marek Hanusch highlight the ways that credit agencies value long term non-election year investments as positives for economic development, but election year short term expenses negatively, which counter acts the typical political budget cycle. As Vaaler explained, this outside influence certainly changes the way countries worldwide budget their money because credit ratings are the key to international investment and creditability, even more so than the potential benefits of inflating the economy artificially. The strange part is that these all-important ratings which reign in political power grabs, are entirely dependent on the sovereign, mostly unregulated, agencies and the influence of their investment ratings. This interaction is both fortuitous and strange, something Vaaler seemed to relish in his discussion on the integrated and complicated nature of rating agencies.
As the forum ran right up against the end time, and many had to disperse, some questions remain for me (please discuss at will!): Why do we continue to put influence in these agencies who have failed so hugely over and over? Is there a better way to rate sovereign nations? What other 'outside players' have strong influence on policy, and how does that interact with direct political influence?
Though credit rating agencies are not my forte, Professor Vaaler made a mysterious portion of the financial markets relevant to every day policy making, and reminded us to keep our eyes open when analyzing why things happen the way they do in politics. Perhaps the stakeholders and influences are even broader than we expect or desire.