The economic crisis’ hidden wound
In the run up to the crisis, bond ratings agencies, auditors, real estate brokers, and financial analysts/professionals all said “come on in, the water’s fine!”. But now nobody trusts their information, which is contributing to the financial system seizure and could ultimately be the worst problem in a series of really bad problems.
Economists View/Mark Thoma: …investors can no longer trust what ratings agencies tell them. A crucial piece of information, information designed to break informational asymmetries between firms and investors, turned out to be unreliable. In addition, investors can no longer believe the numbers they see on bank books. The numbers might say the bank is solvent, but how reliable are those numbers? And even if the numbers are meaningful today, will they be meaningful tomorrow? Is there any way to actually value the assets a lot of these banks have on their books when there is essentially no market for them, no way to engage in price discovery?
Investors no longer trust analysts and the models they use. They watched the business channel dutifully and all they heard was about the gold mine in housing. Sure, there were a few voices on the other side, but they were in the minority and mostly marginalized. All that bullish advice about housing turned out to be wrong. And there’s no reason investors should trust the models used to process information either. The models used for risk assessment turned out to be far wide of the mark – a costly deviation – and if you go back and look at the Fed’s forecasts of coming economic conditions (or the forecasts coming from the regional banks), it’s very clear the models were underestimating the severity and length of the downturn, enough so to be relatively useless. At a more individual, face to face level, I suspect their are many homeowners who believed what their real estate or mortgage broker told them are now wondering how they could have been so foolish. They won’t believe them next time. They won’t know what to believe.
