Predictable Outcome Only Because It Has Been Predicted


Posted on : 10/25/2011 08:13:00 AM | By : Dann | In : , , ,

Fans of "Atlas Shrugged" by Ayn Rand are doubtlessly familiar with the process that led to a government that would attempt such a thing.  They are also familiar with the most likely result.

This week alone has seen a ratings downgrade for Spain as well as a threat by agencies to review France's AAA status -- and the markets have taken notice. Once again, it would seem, ratings agencies are making things difficult for European countries.

Now, the European Union is considering doing something about it.

European Internal Market Commissioner Michel Barnier is considering a move to ban the agencies from publishing outlook reports on EU countries entangled in a crisis, according to a report in Thursday's issue of the Financial Times Deutschland newspaper.

Of course, that isn't good enough.  The EU also wants to put ratings agencies in a "no-win" position by:

The internal market commissioner appears to be taking a tough stance against the agencies. He is also pushing the 27 EU member states to take steps to ensure that investors can pursue civil action against agencies for "deficient ratings." He is also calling for addition ratings requirements for complexly structured financial products and steps that would create greater competition among ratings agencies.

Investors will find a place to invest.  If they cannot rely on ratings information for EU governments, then they will simply take their money elsewhere.  Given the need for financing and re-financing of government debt, this lack of cash will have predictable results.

Either the governments will start printing fiat Euros and thus begin a cycle of high inflation.  Or the governments will discover that dog catchers do not require 42 levels of supervision and a 1300 page handbook to catch dogs and cut their budgets accordingly.  Historically, the latter option has been the most effective solution as well as the most difficult to implement.

Ms. Rand provided the blueprint for the result of the former option.

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