Word: bonde
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...these aggressive actions will be sufficient to avoid a major U.S. slowdown or recession, given the deadweight of the sinking housing market. With the standard playbook and tools like the Taylor Rule less relevant to the immediate challenges at hand, central bankers are finding themselves looking at stock and bond markets to help them decide what to do. The markets in turn are looking back at central banks, trying to guess how monetary policy will affect asset prices. It reminds us of the early Ozzy Osbourne lyrics: "You, looking at me, looking at you .../ I know you know I know...
...financial calamity coming. They helped cause it. Why did collateralized debt obligations (CDOs) based partly on risky subprime mortgages lead to so much trouble? Because Moody's and S&P awarded them dubiously generous letter grades. It's the same story for the mostly incomprehensible tizzy over bond insurance...
What can we do about this? There's actually a simple answer: just declare our independence from bond ratings...
...practice of giving letter grades to bonds to reflect their riskiness was pioneered by John Moody in 1909. But the industry took its current form only in the early 1970s. That's when Moody's and its competitors switched from selling research to investors to charging bond issuers to rate their goods. This approach wasn't unheard of: you have to advertise in Good Housekeeping to get the Good Housekeeping Seal of Approval. What made it problematic was that at about the same time, the Securities and Exchange Commission (SEC) exalted the status of the ratings by writing them into...
...many securities as possible into the top ratings categories. The result is grade inflation, especially in new products like CDOs. That's how banks and investors around the world ended up owning billions of dollars in triple-A mortgage junk. It also helps explain the growth of bond insurers, companies that used their own triple-A ratings to bump ever more bond issues into the top categories--even as their businesses ceased to be triple-A safe...