Interesting “Planet Money” podcast on “How The U.S. Gave S&P Its Power”. I especially found that part illuminating:
But the business [of the rating agencies] started to change in the late 1960s. Instead of charging investors, the rating agencies started to take money from the issuers of the bonds. White blames the shift on the invention of “the high-speed photocopy machine.”
The ratings agencies were afraid, he says, that investors would just pass around rating information for free. So they had to start making their money from the company side. Even this seemed to work pretty well for a long time.
The short term consequences of intellectual piracy may be easy to rationalize: I can imagine that, back in the 60s, stiffing the rich and powerful credit rating agencies by using new technology (the copy machine) to duplicate a report didn’t feel very consequential and maybe even cool. But then there are long term consequences. Like, in this case, a reversal of the money flow which ended up with the issuers themselves paying the rating agencies. A fundamentally unsustainable system which, many years later, gave us credit agencies who coached their customers, the issuers, on how to craft deceptively-rated securities.
We have many examples of too much government intervention (like tax policies that encourage borrowing) setting up the conditions for a crisis, but this appears to be an example of the reverse: a lack of government intervention (to ensure that the IP of credit agencies is respected) being part of what caused a systemic problem to form.
There are similar situations being created today. I cringe when I see advertising (and gathering of personal data) becoming such a prevalent monetization model, by lack of more direct alternatives. I don’t know what form the ensuing crisis will eventually take, but it may be just as bad as the debacle of the credit rating system.
I’m not saying more IP protection is always better. The patent system is an example of the contrary. It’s a difficult balance to achieve. But looking at the money flow is a good gauge of how well the system is working. The more directly the money flows from the real producers to the real consumers, the better and the more sustainable the system is. Today, it isn’t so for credit rating agencies, nor for much of the digital economy.