We must free ourselves from the tyranny of the credit rating agencies

The disastrous record of the rating agencies proves that they do not deserve their exalted position.

"We have not overthrown the divine right of kings to fall down for the divine right of experts."

Harold Macmillan

When Macmillan warned about a tyranny of "experts", he probably didn’t have the credit rating agencies in mind.  But in 2012, it probably applies to them more than any other category of experts. These anonymous bodies hold enormous power over democratically elected governments. Their musings are often enough to force a government turn away from the democratic mandate on which they were elected. Only yesterday, Moody’s caused panic by stripping France of its AAA status.

Have these anonymous, powerful experts deserved the credibility and the exalted position they are given by the media and politicians? Have they shown real foresight that merits their ability to lecture elected politicians? In almost all cases, the answer is no. 

In December 2009, Moody’s decided to address growing concerns about the indebtedness of the Greek government.  Its declaration was clear, decisive and wrong, with its report being titled, "investor fears over Greek government liquidity misplaced." Moody’s suggested that, "the risk that the Greek government cannot roll over its existing debt or finance its deficit over the next few years is not materially different from that faced by several other euro area member states." It then went on to declare that, "there is an extremely low probability that the government's liquidity will pressured."

Only six months later, the first EU/IMF bailout package – of €110bn was agreed. And this slip up from the credit agencies came just over a year after their failure to predict the financial crisis that pushed most of the western world into recession. Lehman Brothers and AIG were still AAA or AA rated just before they collapsed.  At the congressional hearings into the pre-recession failure of the credit ratings agencies, they were accused of offering "opinion", rather than analysis.

Nor was this a one off. Sukhdev Johal has analysed what happened to corporate debt rated AAA by Standard & Poor.  Within three years, some 32 per cent of this debt has been downgraded and a massive 57 per cent had been downgraded within seven years. That doesn’t really suggest that the lionised credit rating agencies have much credibility in either the short or the long term.

There are important discussions to be had about the way in which European economies should be heading and crucial debates about a variety of policy directions. But we should stop kidding ourselves about the credit ratings agencies and stop thinking that their declarations should be decisive.

You can follow David on Twitter @djskelton

A sign for Moody's rating agency is displayed at the company's headquarters in New York. Photograph: Getty Images.

David Skelton is the director of Renewal, a new campaign group aiming to broaden the appeal of the Conservative Party to working class and ethnic minority voters. @djskelton

Photo: Getty Images
Show Hide image

How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.