Results-driven research is rife in economics. That’s why you’ll sometimes see someone termed an “independent” analyst — it’s an open secret that the researchers are constrained to find management’s answer. The funniest one we ever say was the set of charts here in Doom post “Bernson’s Rebounds” (11/9 ‘06). It’s obvious in retrospect (heck, it was obvious then) that Fannie’s in-house economists were forced to forecast a screaming turnaround (in mid ‘07!) in order to avoid a (correct) prediction of massive problems dead ahead.

Now the following since-forgotten story was the moral equivalent of a lightning flash revealing an army of advancing orcs. When the bond raters discovered that their triple-A rating on a deal was an artifact of a computer coding error their researchers modified their research to preserve the AAA. Igor says “clueless,” but he must be too full of turkey to think of anything nastier to say.

“Moody’s Begins Probe on Report Bug Caused Aaa Grades”, by John Glover and Abigail Moses, Bloomberg, May 21, 2008.

Some senior staff at Moody’s were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit-default swaps, should have been ranked four levels lower, the Financial Times said, citing internal Moody’s documents. Moody’s altered some assumptions to avoid having to assign lower grades after it corrected the error, the paper said.

And speaking of rose coloured glasses, it came out a couple of months ago that the Fed has effective control of all the academic economic journals in the US, and the university research too, through the simple expedient of being the dominant funding source. Audit? They don’t get scrutinized by anybody outside of a few Congressmen and bloggers. Certainly not professionally trained researchers
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To briefly comment on the matter at hand, I’m seeing an awful lot of soothing jawboning from folks like Pimco’s El-Erian who’d be tucked up with a beer watching football if this weren’t dead serious. Remember that America’s CMBS is presently teetering, and “The World” is the goofiest commercial RE development since that Giza project finished up around 2540 BC. Got contagion?
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twist (later update) -

Just found this piece by a big LSE prof (he even brings up Giza! ). Doesn’t it warm your heart that morality only extends to private persons on this earth, and not to guys big enough to be “entities”?

“Polite suggestion to the Dubai sovereign that creditors of Dubai World not be bailed out”, by Willem Buiter, Financial Times, November 27, 2009.

The debt of the Dubai World Group and of Nakheel was not Dubai sovereign debt or sovereign-guaranteed debt. The sole shareholder may be the state of Dubai (indistinguishable from its ruling family), but limited liability applies to governments as well as to private entities. The government of Dubai is under no legal or moral obligation to provide an ex-post guarantee of the debts of the Dubai World Group and Nakheel. The creditors will have to manage this contingency the way God meant them to: hoping for the best, but living with the restructuring and taking their losses. Requiring the debt holders to live with their losses will not damage the reputation of the Dubai sovereign. The only way a bail out by the Dubai sovereign of the debt holders of Dubai World and Nakheel would enhance the sovereign’s reputation would be by enhancing its reputation as a sucker.

As for “kicking the credit crisis down the road”. . .yes, this is true – California only 4 months ago “balanced” their budget with smoke and mirrors (hoping it would last beyond election time) only to have a 21 Billion hole in the budget come back again because “expected improvements” in the economy didn’t materialize. . .hmmmmmm

Any official these days who balances a budget with “expected improvements in the economy” as part of the plan is likely smoking dope, or has an escape plan to Switzerland in place.