Brad DeLong is not impressed with Roger Lowenstein's conclusion that the problem was the rating agenies' over-reliance on historical data:

The problem is not that the rating agencies' formulas look backward while life is lived forward. Rating agencies' business is to look backward: to say that this bond looks, historically, like that class of bonds which have in the past defaulted at such-and-such a rate.
DeLong believes the allocation of responsibilities between rating agencies and invetors should be:
The proper business of investment is to take the rating agencies' work as a guide and ask two of the three standard questions:
  • What is there in the situation that could make things different this time--that could generate "ahistorical behavioral modes"?
  • How much of the risk that things are different this time are we willing to bear?
  • If this is such a good deal for me to buy it at this price, why is the seller selling--why isn't it a equally good deal for the seller to hold on to it?
Essentially, DeLong's view is that rating agencies should be responsible for all backward-looking analysis, and investors should be responsible for all forward-looking analysis. I don't think it's nearly as cut-and-dry as DeLong suggests. A registered rating agency has a duty to issue credit ratings that reflect the agency's "opinion, as of a specific date, of the creditworthiness of a particular company, security, or obligation." Whether a credit rating must be purely backward-looking depends on how you define "creditworthiness." DeLong would define creditworthiness in purely historical terms: "Rating agencies' business is to look backward: to say that this bond looks, historically, like that class of bonds which have in the past defaulted at such-and-such a rate." But that's an inaccurate definition of "creditworthiness" by any standards. In assessing creditworthiness, lenders are concerned with the borrower's ability to pay in the future. A borrower's history of paying back loans is usually the best indicator of his future ability, but it's certainly not the only indicator. DeLong is confusing an indicator of creditworthiness with actual creditworthiness. A determination of the creditworthiness of a security is necessarily forward-looking. It may rely on historical data as indicators of creditworthiness, but to say that rating agencies' job is only to rely on historical data is to badly misstate their purpose (i.e., their legal duty as registered rating agencies). Should rating agencies be responsible for forward-looking analysis? Maybe not. But you simply can't say that investors were wrong to rely on credit ratings for forward-looking analysis at all. Investors clearly relied too much on credit ratings for forward-looking analysis, but that's a different issue. The fact credit ratings -- as assessments of creditworthiness -- necessarily include forward-looking analysis shifts at least some of the blame back on the rating agencies. Rating agencies are to blame for issuing bad credit ratings, and investors are to blame for relying too much on credit ratings for forward-looking analysis. Investors bear more of the blame because they should have known how much to rely on credit ratings for forward-looking analysis, based on the particular rating agency's methodology in issuing credit ratings. But make no mistake: rating agencies bear some of the blame.

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