The New York Times v. The Free Agent

Following up, no doubt, on The Free Agent’s recent rumination on bond rating services, the New York Times posted an editorial yesterday on the same subject.  Unsurprisingly, it ignores the crucial role played by the SEC in giving the agencies a false varnish of objectivity, and—insert exhausted sigh—recommends as a solution, more government control, even taxpayer-financing.  (Look for a future post from The FA on how the current “public good=taxpayer financing” craze will inaugurate an era of “public bads”.)

According to the unattributed column, the financial reforms under consideration by the Senate include requiring bond rating companies to register with the SEC, which they are already required to do, and enable the SEC to disqualify raters who are—prepare the vague-o-meter—“consistently wrong”.  (Let’s enjoy a flight of fancy for a moment, and imagine Moody’s would-be call to Barney Frank four years ago, informing him of the downgrading of Fannie Mae’s bonds!)

As is so often the case, a simple question clarifies things—who is the customer for bond ratings?  As The Free Agent said, in the 1970s, the customer became, not the would-be investor, but the bond issuers themselves.  Contrary to the Times column, there is no conflict of interest, just a mistaken belief that the Big Three raters serve investors.  And the biggest culprit in this illusion is the SEC, which blesses the raters, who bless the bonds, which regulators allow banks, insurance companies, and broker-investors to purchase.  The proverbs are coming faster than The Free Agent can type: ‘he who pays the piper calls the tune’, ‘you get what you pay for’, ‘there’s no such thing as a free lunch’!

Coincidentally, another article in the same issue refers to the prevalence of high-fructose corn syrup in American food manufacturing without a single mention of the federal government’s custodial care of the sugar industry.  (At least it acknowledges corn as “a lavishly subsidized crop”.)  The mosaic of subsidies, tariffs, and import quotas date back to the early Nineteenth Century when Southern plantation owners observed that the U.S. climate wasn’t particularly suited to sugar cane cultivation, and therefore, direct and indirect subsidies from all Americans were in order.  The current controls include crop assignment (the FDA allocates how much sugar in the US will come from beets and cane), import quotas, loan guarantees, and even the purchase of farmland from growers.  These interventions keep unviable farms afloat (gear up for a bicentennial celebration of sugar tariffs in 2016!), drive sugar-dependent manufacturing out of the country, and force American consumers to pay twice the world average price for sugar.  (In 2005, sugar cost 14¢ around the world, 28¢ in the US, and 16¢ in Canada, which is committed to a free market in sugar.)  The estimated cost to American consumers for sugar protectionism ranges from $2 billion a year (Cato Institute) to $0 (American Sugar Alliance, which counts only checks cut from the US Treasury to sugar farmers).  Even Ronald Regan couldn’t fight the sugar lobby.  His attempt to end quotas in order to open the US market to our impoverished Caribbean neighbors ended in tears for any free marketer—same old protectionism, with a couple hundred million in guilt welfare thrown in.

Which brings us to the anti-corn syrup lobby.  The Free Agent’s all in favor of consumers choosing what ingredients they like, but corporate welfare just doesn’t sweeten the deal.