Wednesday 18 October 2017

Stephen Kinsella: Ratings agencies don't deserve our trust -- so why are we getting excited?

Pedestrians walk past the Moody's Investors Service Inc. logo displayed outside of the company's headquarters in New York, U.S
Pedestrians walk past the Moody's Investors Service Inc. logo displayed outside of the company's headquarters in New York, U.S
Stephen Kinsella

Stephen Kinsella

In 1873 the philosopher Friedrich Nietzsche wrote that "knowing is nothing but working with one's favourite metaphors".

A metaphor is a way of understanding one thing by relating it to another. When we hear Munster beating Edinburgh in rugby, and the commentator describing Munster legend Paul O'Connell as "a beast", we understand he's not saying O'Connell is an animal literally (the Edinburgh pack might disagree), but that he was ferocious. We use metaphors to understand the world. Metaphors form a self-referential net to guide our behaviour when we believe them.

The market is so complex we generally resort to metaphors to understand its workings. Sometimes the metaphor takes place within a story. One way to understand the market is as a 'village fair', where buyers haggle with sellers to get the best price. In this metaphor the prices adjust, so if sellers have too much stuff, the price comes down. If sellers have a shortage of stuff to sell, the price goes up. Another metaphor is the 'bear pit' of Wall Street, where 'the market' generally works out the right price someone should pay for an asset. If you believe either of these metaphors, then the answer to any problem is to allow the market to work the problem out.

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