Matt Yglesias

Endgame

The ocean made me feel stupid:

— Kalashnikov manufacturer facing bankruptcy.

— My colleague Joe Romm is a hero of the environment.

— I had no idea microwave ovens used to look like this.

— Colleges need to go beyond financial aid if they want to increase their socioeconomic diversity.

— Nike quits a Chamber of Commerce Post over their climate shenanigans.

Song of the day is Jens Lekman “The Opposite of Halleluja”.

Lutefisk

Karl Rove is being inducted into the Scandinavian-American Hall of Fame:

Former White House political adviser Karl Rove says he has an appreciation for all things Norse.

Except lutefisk.

Rove says any food that has lye in it “takes an acquired taste.” Rove is to be inducted into the Scandinavian-American Hall of Fame in Minot on Wednesday, despite criticism from state Democrats.

Fair enough on the lutefisk but it can’t be worse than hakárl. The real question is what other Nordic things are we supposed to believe Rove does like. Is he a big Jens Lekman fan? He enjoys high taxes and generous social welfare provision?

Socialized Medicine is Good Enough for Congress

Attending Physician of the United States Congress, Brian Monahan

This sure is a nice perk congress has granted itself:

Formally called the Office of the Attending Physician, the clinic — and at least six satellite offices — bills its mission as one of emergency preparedness and public health. Each day, it stands ready to handle medical emergencies, biological attacks and the occasional fainting tourist visiting Capitol Hill.

Officially, the office acknowledges these types of services, including providing physicals to Capitol police officers and offering flu shots to congressional staffers. But what is rarely discussed outside the halls of Congress is the office’s other role — providing a wealth of primary care medical services to senators, representatives and Supreme Court justices.

What’s noteworthy here isn’t just the existence of the perk, it’s the specific form. Congress could have voted itself higher salaries. Or better travel benefits. Or larger appropriations so the congressional cafeterias can serve better food. But or just more generous health insurance. But what they wanted here was socialized medicine—health care that’s not only financed by the state but directly provided by government employees. This kind of state-provided health care is basically universal in the UK, it accounts for an important chunk of the health care in Sweden, and it’s what we give to our veterans in the United States. But most members of congress claim regard it as a horrifying prospect. And yet in practice they appear to like it just fine

A Surge of Swedes

More troops headed to Afghanistan. Swedish troops:

Sweden wants to send more troops to Afghanistan after an assessment by the Armed Forces concluded that the current force of 500 soldiers is too small. The Swedish military wants instead to boost the number of troops on the ground in Afghanistan to 630 by 2011, according to Sveriges Television (SVT).

Note that though the mission in Afghanistan is sometimes described as a NATO operation, Sweden is not a NATO member and if I understand correctly is instead operating their under the aegis of the European Union.

Swedish military fun fact is that Sweden is one of the few countries to use the Swedish-build Saab 39 Gripen which is designed to be able to take off and land on ordinary public roads in order to fight an aerial insurgency in a hypothetical Soviet-occupied Sweden.

Real Talk From Wayne Gilchrest: “Arrogange and dogma . . . are pervasive in the Republican Party”

Wayne Gilchrest

Alex MacGillis’ interesting profile of moderate Republican former Rep. Wayne Gilchrest mostly focuses on non-political topics, but Gilchrest does offer a few spots of real talk:

In that regard, his retreat to the Shore had nationwide echoes. He was one of a legion of moderate Republicans who fell away from the party as it narrowed around a more orthodox, pugnacious and Southern strain of conservatism. “I can remember sitting and having dinner with the other Republicans,” he said while driving to the shelter, “and thinking, if I was on the outside, I would not be having dinner with these guys.” [...]

When he started in Congress, Republicans “weren’t yet what they turned out to be,” he said. “It was the last of the WASPy New Englanders, with their sense of public service. . . . But then all of a sudden, they just got taken over. I hate to say this, but ignorance, arrogance and dogma are pervasive in the world, and they certainly are pervasive in the Republican Party.”

Gilchrest was defeated by a conservative challenger in his 2008 primary, then that guy got beaten by a Democrat. To some extent, then, this may just be sour grapes. But those are still some very tough words for guys who were his colleagues 12 months ago.

Anti-India Militants Still Going Strong

Lydia Polgreen and Souad Mekhennet have a great piece in the NYT looking at the continuing strength of Lashkar-e-Taiba, the group responsible for the Mumbai attacks. I think the main moral of the story is basically that we shouldn’t overplay the idea that militant organization’s success in Pakistan represents a lack of capacity to clamp down on them. When the Pakistani security services want to take action, as they have against the Pakistani Taliban recently, they’re pretty effective. When they don’t—and it seems they don’t in this case—then nothing happens.

The Trouble With Counterterrorism

(Bundeswehr photo)

A Germany military officer said something to our group earlier that I thought was interesting, and particularly interesting coming from the Germans who don’t have the reputation in the United States for being really enthusiastic about boots on the ground.

He was talking about the idea, that you also often hear floated in the United States, that instead of an ambitious “nation building” counterinsurgency strategy in Afghanistan we ought to be embarking on a more limited campaign of targeted counterterrorism strikes against al-Qaeda. He said the problem with this is that even though people think of it as a more modest approach, it’s really a strategy for endless war. Unless through some weird stroke of luck you manage to kill everyone simultaneously or something, you’re going to need to keep doing it over and over and over and over again until the end of the time. If you’re talking about Israel fighting Hezbollah across the border, this may be an acceptable result since Israel isn’t going to stop being adjacent to Lebanon anytime soon. But unless NATO wants a perpetual military presence in Afghanistan, you either need to just leave and let the chips fall where they may or else you need to be making increase capabilities on the part of friendly Afghans the main objective of the strategy.

Whether that amounts to “counterinsurgency” as it’s currently understood in the US conversation, I couldn’t quite say. One concern I think we have to have about the idea of “training” as we’re currently doing it is that we seem to mostly be training Afghan military units to operate as adjuncts to US forces. Counterinsurgency done that way is about building Afghan capabilities, but also about building Afghan dependence on their patrons—trying to turn an allied government into a kind of perpetual vassal. I’d feel better about the theory that COIN is the only way to ever create a safe exit from Afghanistan if there were some more clearly articulated vision of exit with our work clearly oriented to making the Afghans as capable as possible of doing without us.

Are We Still All Georgians Now?

This seems like some eminently reasonable conclusions:

A nine-month European Union investigation into the 2008 war in the Caucasus has concluded that Georgia triggered the conflict, but that Russia prepared the ground for war to break out and broke international law by invading Georgia as a whole.

Conclusions to the roughly 1,000 page report, released on Wednesday by Swiss diplomat Heidi Tagliavini, also found that Russia-backed South Ossetian militias committed atrocities and “ethnic cleansing” of Georgian villages during and since the war. It faulted Russian forces in control of the territory that either “would not or could not” control the South Ossetians.

The report found no evidence to back Russian claims that Georgia committed genocide on the night of Aug.7-8.

As you may recall, last August it immediately—and somewhat mysteriously—became dogma in American political and media circles that the conflict was a front-line struggle between freedom and dictatorship in which everyone was supposed to embrace Georgian nationalism as a core element of US grand strategy. The reality, as we can see in this report, is that Georgia very unwisely chose to launch a war with its obviously-much-larger neighbor. Sober-minded people criticized Russia for a response that swiftly went well beyond what international law permits, but it would be very unwise for the United States to take actions that encourage small friendly countries to think that they can roll the dice and be backstopped by the United States on fights about issues that, like control of South Ossetia, have nothing to do with our interests.

Where the Foreigners Are

An interesting fact about Sweden is that an extremely high proportion of its population is foreign born. It’s not the highest in the world—Canada and Australia take the crown—but the foreign-born are a larger proportion of the population than in the United States:

A large number of those immigrants are from other European countries, but apparently Sweden has one of the world’s largest Assyrian populations.

Does Nationwide Fundraising Combat Parochialism?

I haven’t thought about it in detail, but it’s long seemed to me that restricting politicians so as to make it that they can only raise funds from people who are actually their constituents would be a reasonable idea. Ezra Klein offers some doubts:

But it would also increase one of the system’s other problems: Parochialism. Baucus might represent Montana, but as Chairman of the Finance Committee, he’s legislating on behalf of America. If he wanted to anger some of the conservative interests in his state and take a more national view, he could, in theory, raise national money to fund his reelection campaign and defend himself against state-based interests. Removing that option seems likely to ensure total capture by local powerbrokers, which may indeed be worse, or at least more incoherent, than capture by national interests.

I guess I just have some doubts about that in practice. It’s very hard for me to think of a legislator who’s anything less than 100 percent responsive to local business interests under the current system.

The main impact of the rule being considered would, it seems to me, be to make House incumbents much more electorally vulnerable. Most House members would simply find it very difficult to raise a great deal of money from in-district contributions. That would necessarily tend to level the playing field between incumbents and challengers. Which is probably why we won’t see it happen. But it would also probably be a good idea.

0.7!

Woo economy’s not as bad as we thought:

The Commerce Department reported that the gross domestic product — a billboard number that tallies the country’s economic output — shrank by an annual rate of 0.7 percent from April through June, a revision from earlier estimates of a 1 percent contraction. [...] The numbers for the second quarter appeared to get a lift from the government’s $787 billion stimulus package. Federal, state and local governments spent more, and business spending on equipment and software was better than first reported.

And fortunately the stimulus funds aren’t drying up imminently. Still, there are a lot of real questions about how quickly growth will translate into labor market improvements and thus improving living standards for most people.

60 Votes for What?

A good question from Ezra Klein:

To my surprise, Schumer readily accepted that analysis. “We don’t have the 60 votes on the floor for the public option,” he agreed. “I will be the first to admit that.” He thought some smart deal making and horse-trading might get them to 60. But they weren’t there yet.

There are two questions here. The first is “60 votes for what?” Do they not have 60 votes in favor of a health-care plan that includes a public option? Or do they not have 60 votes against a filibuster of a health-care plan that includes a public option? If it’s the former, that’s okay: You only need 51. If it’s the latter, that’s a bigger problem. But I’d be interested to hear which Democrats will publicly commit to filibustering Barack Obama’s health-care reform bill. If that’s such a popular position back home, why aren’t more Democrats voicing it loudly?

And to slice the salami even thinner, consider two separate questions. One is if there’s a health care bill on the Senate floor that does not feature a public option and an amendment is brought to the floor to add one, are there 60 votes to break a filibuster and pass the amendment? Another question is whether if you brought a bill to the floor which included a public option, would Democrats filibuster the overall bill? Those are separate things. To say “I’m against such-and-such” is not equivalent to saying “I’m against any bill that includes such-and-such.” Obviously you can’t get 60 people to each get their way on each and every provision of health care. Is Blanche Lincoln so hostile to a public option that she would filibuster a massive health care package she otherwise likes just to avoid it?

Bicycle Turning Lanes

Lord knows I love seizing bits of the roadway away from motorists but this creation of a separate left-hand turn lane for cyclists strikes even me as overkill:

Not that I mind or anything, but this kind of seems like a solution in search of a problem.

Endgame

We’re not living in America:

— How the Dutch manage without a public option and why the Senate Finance Committee is unlikely to deliver that either.

— It’s striking how much untranslated English is in the ads on Swedish television.

— Maybe the NAIRU is going up but pre-crisis we never actually discovered how low NAIRU was.

— US Chamber of Commerce goes from questioning climate change science to lying about its record of questioning climate change science.

— Don’t donate to Harvard.

Sweden is the world’s number three music exporter, after the much larger USA and UK. This is The Sounds, “Living in America”.

Fun With Only

Something that kind of bugs me in the policy analysis game is the way that very small terminological choices can do a lot to spin some research. For example, should denser building be part of our strategy for combating climate change? I say yes. Then I see Reihan Salam quote this:

Even if 75 percent of all new and replacement housing in America were built at twice the density of current new developments, and those living in the newly constructed housing drove 25 percent less as a result, CO2 emissions from personal travel would decline nationwide by only 8 to 11 percent by 2050, according to the study. If just 25 percent of housing units were developed at such densities and residents drove only 12 percent less as a result, CO2 emissions would be reduced by less than 2 percent by 2050.

Obviously I can’t evaluate the underlying research, but why is that “only” 8 to 11 percent. Obviously, changing the nature of new construction is going to be somewhat limited in its impact since it won’t have any impact at all on existing structures which will be the large majority of structures for most of the 2009-2050 period. The big appeal of denser building as an emissions-reducer, to me, is that there’s good reason to think that this would be a good idea even absent the climate change issue. Dealing with climate change will require us to do a bunch of stuff that wouldn’t be smart policy if it weren’t the case that CO2 emissions are harmful. But it makes a lot of sense to make sure we do the “dual use” stuff that can improve the quality of our lives in other ways.

At any rate, Reihan comments:

Increasing density is a cause embraced by many environmentalist, including more than a few conservative environmentalists. Yet reducing the weight of personal automobiles might be a more effective strategy.

He follows up with some persuasive evidence that lighter vehicles could do a lot of good. But this obviously isn’t an either/or choice. Indeed, the two policy options have nothing much to do with each other. It seems to me that reducing emissions to an acceptable level is going to require something like a thousand cuts. There’s no sense dismissing particular strategies as “only” cutting a 10 percent chunk out of a given sector. A comprehensive strategy is built out of chunks.

Germany’s Eerie Confidence

It seemed to me that part of the subtext of Germany’s election was a population that was underestimating the extent of the economic problems it’s facing. I think these new numbers showing consumer confidence rising underscore that point.

The thing about Germany is that even though the country experienced growth last quarter, it’s growth from a terrible base—the collapse in output was one of the largest in the world. The central bank thinks it’ll take five years for per capita GDP to retake its pre-crisis highs. There’s no real reason for consumers to feel confident. But unemployment hasn’t spiked, and people see the crisis as something that happened “in America” and is sparing Germany. Nevertheless, the only reason unemployment hasn’t spiked is because of the government-sponsored kurtzarbeit scheme in which the government basically gives firms a large enough subsidy to make it worth their while to hoard labor during the downturn. Thus instead of laying off half your workforce, everyone just works part time on nearly full salary with the government paying some of the tab.

That, however, isn’t something the German government can afford to keep doing. It was a useful tool to get Angela Merkel through the election, but it’ll have to stop soon and unemployment will probably skyrocket. What’s more, the longer it lasts the more Germany is delaying any real restructuring in its economy. Pre-crisis Germany was very oriented toward exports to the United States and Eastern Europe, but neither of those places can afford to import as much as we used to. If Germany stays export-oriented it will need to export to someplace else and that probably means exporting somewhat different stuff.

Unlock

Obviously there are people in the USA who can and do do this:

But is it legal to advertise these services and provide them commercially? Seems to be in Sweden.

What Civic Engagement Looks Like

Via Chris Bowers, Gallup has numbers showing that Americans are paying closer attention to the news lately:

It’s probably worth emphasizing that a lot of the things that bien pensant types deplore—like this past summer of crazy rallies and political polarization more generally—are inextricably tied up with things that bien pensant types claim to want, namely an increased level of civic engagement. The politics of the late-19th century was incredibly vicious, polarized, and un-edifying. It was also an era of high turnout and booming newspapers.

Also interesting to note that Republicans, being older, wealthier, and maler also follow the news more closely:

I’m inclined to think that if the production of political news and commentary weren’t so dominated by the white dude demographic, that political news might get a larger audience among progressives. That, in turn, could help close some of the “enthusiasm gap” issues that frequently plague progressive activists.

John Ensign Makes the Case for Transportation Reform

Steve Benen observes a curious exchange at the Senate Finance Committee:

“Are you aware that if you take out gun accidents and auto accidents, that the United States actually is better than those other countries?” Ensign said. Sen. Kent Conrad (D-ND) had been citing the health care systems of France, Germany, Japan and Canada as more effective, but with lower costs.

Conrad responded that one can bend statistics in all sorts of ways.

“But that doesn’t have anything to do with health care. Auto accidents don’t have anything to do with h–,” Ensign said, cutting himself off. “I mean we’re just a much more mobile society. … We drive our cars a lot more, they do public transportation. So you have to compare health care system with health care system.”

What Ensign is saying here—that gun accidents and car accidents fully account for the life expectancy gap between the US and other countries—isn’t true. But the more modest claim that lifestyle factors play a larger role than health care in determining health outcomes is true. That said, it seems like the reasonable thing to conclude from the charitable reading of Ensign’s argument is that we ought to reform American transportation policy to take advantage of the public health benefits of a more European-style approach. But Ensign doesn’t see it that way. He’s never done anything to help move the country to a less car-dependent way of life. Even though his estimate of the public health benefits of such a switch is much larger than my estimate!

It’s very strange. Unless you think Ensign has just dredged this argument up opportunistically for the sake of a one-off political fight and he neither knows anything about the subject nor cares at all.

The Long-Term Unemployed

Alan Berube offers this look at long-term unemployment:

While national data don’t reveal exactly where those 5 million workers live, recently released data from the Census Bureau offer a window on the labor markets that were already highly troubled in 2008, which almost certainly contain outsized shares of the long-run unemployed today. This map examines two measures for the 100 largest metro areas in the United States in 2008: unemployment (the share of adults not employed and actively looking for work), and labor force participation (the share of adults employed OR actively looking for work). It restricts these measures to working-age adults (age 25 to 64) who have a high school diploma or less, the educational group most severely impacted by the downturn. Where unemployment rates were already high in 2008, or labor force participation rates were low (signaling dropouts from the labor market), problems are likely to be even greater in 2009.

It seems very unlikely that any more than a tiny fragment of the unemployed in these areas have obtained a job in 2009, so these are going to be loci of very long-term unemployed people. And evidence suggests that there are specific challenges associated with getting people back into the labor market who’ve been out for a long time. If someone gets laid off in a brief downturn, then when an upswing comes firms will want to hire people and he’ll go to work. But people who stay out of employment for long enough tend to be very resistant to getting back in after a certain point in a way that can be a drag on the economy and the social fabric as a whole for quite a while.

The Qom Facility and International Law

Spencer Ackerman interviews some experts on the subject of whether Iran’s Qom nuclear facility could really have any non-weapons purpose and the basic consensus is that realistically it couldn’t. If the facility is of the scale that we’re being told it is, it’s too small to be something any reasonable person would want for electricity generation purposes. The trouble, as I was told yesterday by a European diplomat with experience on the legal aspects of such matters (and on the merits much more hawkish views on Iran than I have) is that these kind of appeals to common sense don’t have any clear legal force in terms of Iran’s commitments under the Non-Proliferation Treaty.

You can look at the economic logic of a civilian project and make inferences about what’s really motivating it, but that’s not what the standard is. The good news (again in legal terms) is that the UN Security Council has more-or-less carte blanche to regard situations as a threat to international peace based on their judgment, so it’s not as if legally-grounded international action is hamstrung by these considerations. But it’s a bit of a problematic situation; the fact of the matter is that the NPT gives countries a lot of latitude in terms of their nuclear activities.

Swedish Special Forces FAIL

Oops:

The mission, performed in conjunction with the Swedish home guard (Hemvärnet), called for the soldiers to capture a house.

However, the elite unit somehow managed to hit the wrong target, and instead bombarded a house located about 200 metres from their intended target.

Collateral damage included blown out doors and window frames, before the soldier’s discovered their mistake.

The elite unit in question is the Life Regiment Hussars who are also known as K3:

(Swedish government photo)

The Life Regiment Hussars, K 3, has light, highly mobile units with substantial strike power. K 3 also has long experience in the area of intelligence.

K 3 trains an airborne battalion and an intelligence battalion. The airborne battalion is a rapid response unit with high mobility that enables the unit to be first on the scene of a mission. The intelligence battalion is able, through the use of advanced technology, to control and guide attacks by aircraft and artillery against a wide range of targets. The regiment is also responsible for the operation of unmanned aerial vehicles, UAVs.

On a more upbeat note, here are Swedish forces engaged in training and equipping the Afghan government.

The Blessing of Worthy Adversaries

Steve Erlanger writes about social democracy’s funk on the Continent:

Europe’s center-right parties have embraced many ideas of the left: generous welfare benefits, nationalized health care, sharp restrictions on carbon emissions, the ceding of some sovereignty to the European Union. But they have won votes by promising to deliver more efficiently than the left, while working to lower taxes, improve financial regulation, and grapple with aging populations.

Europe’s conservatives, says Michel Winock, a historian at the Paris Institut d’Études Politiques, “have adapted themselves to modernity.” When Nicolas Sarkozy of France and Germany’s Angela Merkel condemn the excesses of the “Anglo-Saxon model” of capitalism while praising the protective power of the state, they are using Socialist ideas that have become mainstream, he said.

What’s more, not only has the European right shifted left, but the European left has tended to be divided by the rise of far-left movements. The result is a nearly impossible tactical situation for center-left parties in countries like France, Germany, and the Netherlands. Add to that the fact that the UK is very dependent on the financial industry and people are naturally weary of Labour after 12 years in office, and things are looking bleak.

But viewed from the United States of America, I think American progressives ought to count ourselves as lucky if we’re ever faced with such problems. At the end of the day it’s rare to see big-time progressive change happen simply because left-of-center parties constantly win elections. Instead you win by redefining the center and making commitment to the Civil Rights Act or the National Health Service a shared commitment of all major parties.

Defense and the Long-Term Budget Outlook

Paul Krugman writes about the long term deficit:

What I read from this is that between the slightly unsustainable deficit in 2019 and the demography to follow, we’ll eventually have to find 3.5% — call it 4 — in fiscal consolidation even if health reform ends excess cost growth.

That’s a big but not disastrous number. We could raise that much in taxes alone without inflicting huge economic damage. We could make up some of the number if health reform does more than end excess cost growth, and rolls spending as a percent of GDP part way back toward European levels. We could cut Social Security benefits — although if you look at the numbers, it would take draconian cuts to make a major dent that way.

Actually reducing health spending as a percent of GDP strikes me as very unlikely to happen. The politics of just getting cost growth under control are very difficult. But one thing I’m surprised Krugman didn’t mention is the Department of Defense. The Pentagon’s budget has, in percent of GDP terms, varied a lot over the years:

The Heritage Foundation purports to think it’s strange that defense spending is lower (as a percent of GDP) than during its Cold War averages “despite the War on Terror.” One might respond to this by trying to compare the budget of al-Qaeda to the budget of the Soviet Union. For that matter, you could try to compare the budget of al-Qaeda to the budget of Czechoslovakia or East Germany or whatever other random Warsaw Pact member you choose.

Maintaining a level of defense spending well above anything that seems to meet a strict self-defense test has a lot of advantages for the country. But those are advantages that need to be weighed against the costs in terms of higher taxes or lower spending on things like Social Security.

Reform the Market for Ratings Agencies

Kevin Drum wonders what can be done about the ratings agencies:

Beyond that, I’m also a bit flummoxed about what the answer to the ratings agency problem might be. There’s probably a reasonable regulatory solution for fraud and negligence, but there seems to be wide agreement that the real problem is incentives: since issuers are the ones paying for ratings, it’s inevitable that agencies are going to lean into the wind to provide ratings the issuers like. I’ve read dozens of proposals for ratings agency reform, but the only one that really gets at this fundamental conflict-of-interest problem is to simply do away with them and turn debt rating into a government function. I’m a little skeptical of that, though, since it’s not at all clear to me that a government agency could hire the kind of talent it takes to keep up with Wall Street’s rocket scientists. What’s more, it’s not at all clear to me that anyone — Fed regulators included — would have rated SIVs much differently during the boom years than the ratings agencies did.

I’ve been told by people working in finance that in their opinion it would be feasible to use regulation to simply switch the payment scheme around and make it so that buyers of securities rather than issuers were the ones paying the ratings agencies. It’s not totally clear to me that that’s correct (for any given security you have one seller and many potential buyers so it seems it would be much more efficient to have the sellers pay) but that’s what I was told.

But I think the larger issue with the ratings agencies isn’t so much that they’re underregulated as it is that regulations we’ve put on other actors in the marketplace have created a ratings agency cartel. The underlying the premise of the idea that private ratings agencies can work is that agencies that fail to do a good job will fail as businesses. That can’t happen if there are only three ratings agencies and it’s impossible for new competitors to enter the market. As Mark Calabria explains in a paper whose general conclusions I wouldn’t embrace:

The modern regulation of credit rating agencies began with the SEC’s revision of its capital rules for broker-dealers in 1973. Under the SEC’s capital rules, a broker-dealer must write down the value of risky or speculative securities on its balance sheet to reflect the level of risk. In defining the risk of held securities, the SEC tied the measure of risk to the credit rating of the held security, with unrated securities considered the highest risk. Bank regulators later extended this practice of outsourcing their supervision of commercial bank risk to credit rating agencies under the implementation of the Basel capital standards.

The SEC, in designing its capital rules, was concerned that, in allowing outside credit rating agencies to define risk, some rating agencies would be tempted to simply sell favorable ratings, regardless of the true risk. To solve this perceived risk, the SEC decided that only Nationally Recognized Statistical Rating Organizations would have their ratings recognized by the SEC and used for complying with regulatory capital requirements. In defining the qualifications of an NRSRO, the SEC deliberately excluded new entrants and grandfathered existing firms, such as Moody’s and Standard and Poor’s.

In trying to address one imagined problem, a supposed race to the bottom, the SEC succeeded in creating a real problem, an entrenched oligopoly in the credit ratings industry. One result of this oligopoly is that beginning in the 1970s, rating agencies moved away from their historical practice of marketing and selling ratings largely to investors, toward selling the ratings to issuers of debt. Now that they had a captive clientele, debt issuers, the rating agencies quickly adapted their business model to this new reality.

The damage would have been large enough had the SEC stopped there. During the 1980s and 1990s, the SEC further entrenched the market control of the recognized rating agencies. For instance, in the 1980s the SEC limited money market funds to holding securities that were investment grade, as defined by the NRSROs. That requirement was later extended to money market fund holdings of commercial paper. Bank regulators and state insurance commissioners followed suit in basing their safety and soundness regulations on the use of NRSRO-approved securities.

This kind of situation could conceivably work if there were a large number of NRSROs but instead there are only three. And they essentially have the entire market in global finance captive. It’s a recipe for disaster.