Monday, April 26, 2010

Financial Reform Should Start With Foundation

Paul Krugman addresses the problem with the financial "reform" in this oped:

The problem with this bill is that there is not enough reform of the credit-rating agencies. If Congress were truly serious about reform, this would be where to start. Not only at the corporate level with Standard & Poors and Fitch's, but with the credit reporting agencies that report on individuals to lenders. Both of these systems are set up to serve the interests of big business, rather than to protect the public or the individual citizen. The purpose of both credit rating agencies and credit reporting agencies have veered off course and are in need of heavy regulation to get them right again.

Credit rating agencies started out as a way to help lenders rate the risk of lending to certain companies, funds or capitalize large business deals. They have become a tool to push through bad business deals.

Credit reporting agencies started out as an unbiased way to rate individual's credit worthiness. It has turned into a tool to allow creditors to charge ridiculous rates of interest and to strongarm people who would otherwise not use credit to do so.

Nobody questions the right of credit reporting agencies to gather sensitive financial information on individuals and then provide that information about individuals to possible creditors (now expanding to employers and insurers). Nobody questions the idea that these agencies have the right to use this information to produce a credit score that we all have to pay to see. Have you ever had erroneous information on your credit report and tried to have it removed? It can be a nightmare multiplied by three. Why do the credit reporting agencies get to decide whether I have enough credit accounts opened? Wouldn't it make more sense for each of US to decide whether we need credit cards or no? And why shouldn't the credit reporting agencies be civilly liable for reporting erroneous information on our credit reports that cause us thousands of dollars on a mortgage or car loan?

We have little or no control over the information that is gathered or reported, the accuracy of the information gathered or reported or the credit score that is created by this information. But the credit score controls the amount of interest we will pay on our mortgages and car loans, how much our insurance premiums will cost and sometimes whether we get a job or not. Who pays these companies to report on us? The lenders. Who benefits if we all have low credit scores? The lenders. There is a built-in motivation for the credit-scoring agencies to adjust their algorithms to keep scores low so that lenders can make more money from credit transactions.

How in the world did we all allow ourselves to become enslaved to something over which we have absolutely no control? And isn't it time that something was done to stop this nonsense?

Credit scoring and credit rating are both the foundations upon which credit is built or destroyed, approved or denied. If there is to be reform, don't you think it makes sense to start with the foundation?

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