CHAPTER
THREE
Mr. Untermyer: You and Mr. Baker control the anthracite coalroad
situation, do you not, together?
Mr. Morgan: No;
we do not.
Mr. Untermyer:
Do you not?
Mr. Morgan: I do not think we do. At least, if we do, I do not know
it.
Mr. Untermyer: Your power in any direction is entirely unconscious
to you, is it not?
Mr. Morgan: It
is sir, if that is the case.
Pujo congressional hearings, 1912
Investment
judgments, as we have seen, are increasingly centralized in rating agencies,
rating knowledge is a social phenomenon becoming increasingly instrumental,
and governance is assuming new forms more conducive to private interests and
increasingly less subject to democratic intervention. In the following analysis
of unconscious power, the conceptual and, in some cases, empirical basis of the
mid-range arguments about rating and investment, knowledge, and governance are
developed. From these arguments and the conceptual exploration undertaken here,
a mapping of the norms that underpin rating work can be derived. This
"map," or mental framework of rating orthodox}', sets out the
assumptions implicit in rating agency judgments, offering an organized understanding
of rating norms and practices. Along with assumptions that comprise the
dominant mental framework, the map also sets out opposites of these orthodox
principles, to make the orthodoxy approximate contestable claims rather than
fixed characteristics. The mental framework of rating orthodoxy is subsequently
used in the empirical explorations of chapters 4-6, which consider corporate,
municipal, and global rating.
Unconscious Power 51
All models of
how to think about the world are vulnerable to the criticism that they are arbitrary.1
The focus on investment, knowledge, and governance reflects a view that these
things matter in the conditions of early twenty-first century capitalism, when
considering the role and implications of rating agencies' judgments.
Investment is changing in form, and this
transformation increases the potential power and influence of rating agencies.
In chapter 1, it was argued that the centralization of investment judgment is
a key development underpinning rating power and authority. The basis of this
centralization is considered here in three parts. One is the growth of
disintermediation. Another concerns the forms of investment bond rating
encourages. But before these points can be made, foundational arguments about
the significance of bond rating should be examined, along with criticisms of
these views and the case for a political-economy understanding of the agencies
and what they do.
The views about
rating that circulate in financial markets can be gleaned from many different
sources, such as newspapers, other media, and surveys of market participants.2
Bond traders and pension fund managers have seemingly contradictory views of
rating agencies. They are at times critical of the agencies' work. As Scott
suggests regarding the public roles played by the powerful and the powerless,
separate from a positive public discourse about the dominant is typically a
"hidden transcript," a critique of power existing as a sort of
back-chat, spoken out of sight of the dominant.3 Back-chat only
becomes public, suggests Scott, in times of crisis or unusual stress. But
back-chat is just that. Financial market actors take the rating agencies
seriously. Market participants usually treat the rating agencies and their
views as matters of considerable interest. What the raters think is important
to people in the capital markets, because people in the markets believe that
the rating agencies know what they are talking about.
In addition to
respect for the agencies' reputation, there is also an awareness of the
markets' influence on the agencies.4 As Gary Jenkins, head of credit
researeh at Barelays Capital, London, observed, "Love them or loathe them,
if they did not
1. The ontology used here
is based on work by Cox; see his "Social Forces, States, and World Orders:
Beyond International Relations Theory," in Robert W. Cox with Timothy J.
Sinclair, Approaches lo World Order (Cambridge: Cambridge University Press,
1996), 85-123.
2. For example, the
surveys undertaken bv Cantwell and Company since 1997 (interview with Joseph E.
Cantwell, New York City, Mareh 2000); also see www.askcantwell.com.
3. James Scott,
Domination and the Arts of Resistance: Hidden Transcripts (New Haven: Yale
University Press, 1990), xii.
4. A recent confirmation
of the growing importance of ratings can be found in the Japan Center for
International Finance's 2001 survey on attitudes to bond rating,
"Characteristics and Appraisal of Major Rating Companies (2001 ed.), 1;
see www.jcif.or.jp/e_index.htm.
52 The New Masters, of Capital
exist, we would have to invent
them."'' F.ven if a trader or a bond issuer does not respect a particular
judgment, they might anticipate the effect of the agencies' judgment on others
and may act on that expectation, rather than on their own views of the actual
quality of the judgment. The intersubjective process described here is
sometimes termed "Keynes' beauty contest," after J. M. Keynes'
discussion of the similarities between financial market behavior and the
tabloid newspaper beauty contests of the 1930s. In these competitions, the
objective was not to guess who was the most attractive young woman but to
approximate who was generally thought to he the prettiest by all competition
entrants. On professional investment, Keynes argued, "We have reached the
third degree where we devote our intelligences to anticipating what average
opinion expects the average opinion to be."6
Rating agency
outputs comprise an important part of capital market infrastructure. They are
key benchmarks in the cognitive life of these markets—features of the
marketplace—which form the basis for subsequent decision-making by participants.
In this sense, rating agencies are important not so much for any particular rating
they produce but for the fact that they are a part of the internal organization
of the market. So, we find traders referring to a company as an "AA
company," or to some other rating category, as if this were a fact, an
agreed and uncontroversial way of describing and distinguishing companies,
municipalities, or countries.7
The rationalist
way to think about what rating agencies do is to see them as serving a
function in the economic system. In this view, rating agencies solve the problems
that develop in markets when banks no longer sit at the center of the borrowing
process.8 Rating agencies serve as "reputational
intermediaries," like accountants, analysts, and lawyers, who are
"essential to the functioning of the system" and monitor managers
through a "constant flow of short-term snapshots."''
Another way to
think about the agencies' function is to suggest they establish psychological
"rules of thumb" that make market decisions less costly for
participants.10
5. Jenkins quoted in Charles
Batchelor, "Companies and Regulators Go on Offensive in the Global Ratings
Game," Financial Times, July 5, 2003, 3.
6. John Maynard Keynes,
The General Theory of Employment Interest and Money (London: Macmillan, 1936),
156.
7. In a 1992 interview, President
Leo O'Neill of Standard & Poor's explained how bond traders would, on the
one hand, dispute particular ratings with S&P and, on the other, refer to
companies unproblematicallv as AA, A, and so on. Ratings were the common sense
of the markets.
8. See, e.g., Richard S.
Wilson, Corporate Senior Securities: Analysis and Evaluation of Bonds,
Convertibles, and Preferreds (Chicago: Probus, 1987), 321-59; also see L.
Macdonald Wakeman, "The Real Function of Bond Rating Agencies," in
Joel M. Stern and Donald H. Chew, Jr., eds., The Revolution in Corporate
Finance, 3rd ed. (Oxford: Blackwell, 1997), 25-28.
9. Peter Gourevitch,
"Collective Action Problems in Monitoring Managers: The Enron Case as a
Systemic Problem," Economic Sociology- European Electronic Newsletter 3,
no. 3 (June 2002); 1,11, available at www.siswo.uva.nl/ES,
accessed June 12, 2002.
10. Jeffrey
Heisler, "Recent Researeh in Behavioral Finance," Financial Markets,
Institutions and Instruments 3, no. 5 (December 1994): 78; also see Jens
Beckert, "What Is Sociological about Economic Sociology? Uncertainty and
the Embeddedness of Economic Action," Theory and Society 25 (1996):
803-40.
Unconscious Power 53
A functionalist
historical analogy can be drawn with the law merchant, who dispensed
commercial law in medieval times. The role of the law merchant developed as a
means of enforcing contracts through judgments on trade disputes and recordkeeping
of these actions made available for scrutiny by those engaging in intra-Euro-
pean trade. This mechanism backed up the reputation of traders when their names
were not well known to potential new trade partners in geographically distant
places, enabling, for example, a Burgundian trader in ribbons to sell to a Catalan
haberdasher. Rating agencies share the information-provision and disciplinary
characteristics of the law merchant. They, too, can be interpreted as part of a
system that keeps an eye on who is violating the prevailing norms of financial
and commercial practice.1'
Serving a
"function" does not mean the institutions are free of criticism.
Kerwer has suggested that the enforcement function evident in the work of
rating agencies complements prevailing "standards"—or expertise-based
voluntary rules—about creditworthiness. But this only works when the
standard-enforcer is also accountable, he points out. Because rating agencies
are not themselves seriously regulated, an "accountability gap"
exists in rating.12 Kerwer concludes that there are insufficient incentives
to maintain the agencies' functional focus.
The rating
agencies have a strong interest in developing and preserving their eminence as
sources of judgment. This interest gives the agencies incentives to be as
helpful as possible to investors. Paradoxically, they also have an interest in
avoiding full disclosure of their information sources and ways of forming
judgments. The agencies seem intent on preserving a sense of mystery
surrounding the rating process in general—and any rating in particular—so as to
reinforce their role in the capital markets.
Purely
functional explanations for the existence of rating agencies are potentially
deceptive. Attempts to verify (or refute) the idea that rating agencies must
exist because they serve a purpose have proven inconclusive. Rating agencies
have to be considered important actors because people view them as important
and act on the basis of that understanding—even if it proves impossible for
analysts to actually isolate the specific benefits the agencies generate for
these market actors.
Investors often
mimic other investors, "ignoring substantive private information."13
People may collectively view rating agencies as important, irrespective of
11. Paul R. Milgrom,
Douglas C. North, and Barry R. Weingast, "The Role of Institutions in the
Revival of Trade: The Law Merchant, Private Judges, and the Champagne
Fairs," Economics and Politics 2, no. 1 (Mareh 1990): 1-23; also see A.
Claire Cutler, "Locating 'Authority' in the Global Political
Economy," International Studies Quarterly 43, no. 1 (1998): 59-81, and
Private Power and Global Authority: Transnational Merchant Law in the Global
Political Economy (Cambridge, UK: Cambridge University Press, 2003).
12. Dieter Kerwer, "Rating Agencies:
Setting a Standard for Global Financial Markets," Economic
Sociology—European Electronic Newsletter 3, no. 3 (June 2002): 5.
13. David S. Scharfstein and Jeremy C. Stein,
"I Ierd Behavior and Investment," American Economic Review 80, no. 3
(June 1990): 465.
54 The New Masters o f Capita!
what "function" the agencies are
thought to serve. Markets and debt issuers therefore have strong incentives to
act as // participants in the markets take the rating agencies seriously. In
other words, the significance of rating is not to be estimated like a mountain
or national population, as a "brute" fact that is true (or not) irrespective
of shared beliefs about its existence, nor do the "subjective" facts
of individual perception determine the meaning of rating.14
What is central
to the status and consequentially of rating agencies is what people believe
about them and act on collectively, even if those beliefs are demonstratably
false. Indeed, the beliefs may be quite strange to the observer, but if people
use them as a guide to action (or inaction) they are significant. Dismissing
such collective beliefs, as structural Marxists once did, as "false
consciousness" misses the fact that actors must take account of social
facts in considering their own action. Reflection about the nature and
direction of social facts is characteristic of financial markets on a
day-to-day basis. In investment, rating agencies are important most immediately
because there is a collective belief that says the agencies are important and
that people act on. Whether rating agencies actually add new information to the
process does not negate their significance, understood in these terms.
Disintermediation
Changes in the financial markets have made
people think the agencies are increasingly important. What banks do has
undergone transformation under pressure from financial globalization.'1
A pattern of disenibeddcd investment has increasingly emerged, at least for
"large and respectable borrowers."16
What is
disintermediation? Bank loans have traditionally been the dominant means
through which funds were borrowed and lent. Banks acted as financial intermediaries
in that they brought together suppliers and users of funds. They borrowed
money, in the form of deposits, and lent money at their own risk to borrowers. Those
who deposited money in banks and those who borrowed from them did not establish
a contractual relationship with each other but with the bank.1'
14. John Gerard Ruggie,
Constructing the World Polity: Essays on International Institutionalization
(New York: Routledge, 1998), 12-13; Ruggie draws on John Searle, The
Construction of Social Reality (New York: Free Press, 1995). See also Peter L.
Berger and Thomas Luckmann, The Social Construction of Reality: A Treatise in
the Sociology of Knowledge (New York: Anchor, 1966).
15. See Franklin R. Edwards
and Frederic S. Mishkin, "The Decline of Traditional Banking: Implications
for Financial Stability and Regulatory Policy," Federal Reserve Bank of
New York Economic Policy Review 1, no. 2 (July 1995): 27-45.
16. Daniel Verdier, Moving Money: Banking and
Finance in the Industrialized World (Cambridge: Cambridge University Press,
2003), 17.
17. On the concept of
disintermediation, see Graham Bannock and William Manser, The Penguin
International Dictionary oj Finance, 4th ed. (London: Penguin, 2003), 86;
Timothy J. Sinclair, "Disintermediation," in R. J. Barry Jones, ed.,
Routledge Encyclopedia of International Political Economy (New York: Routledge,
2001), 355-56.
Unconscious Power 55
Figure 3. Trends in financial assets of
institutional investors
US$ Bill 40,000
35,000
30,000
25,000
15,000
5,000
0
Source: Organization for Economic
Cooperation and Development, Financial Market Trends, No. 80, September 2001,
p. 52.
Disintermediation
has occurred on both sides of the balance sheet. Depositors are finding more
attractive things to do with their money, just as borrowers have increasingly
sought investment funds from sources other than banks. Mutual funds, which
sweep depositors' money directly into financial markets, now contain $2 trillion
in assets—not much less than the $2.7 trillion held in U.S. bank deposits.18
In 1994, 28 percent of American households owned a mutual fund, up from 6
percent in 1980. However, the proportion of household assets held in bank
deposits fell from 1980 to 1990, from 46 to 38 percent.
The shift on the
borrowing side is just as marked. In 1970, commercial lending by banks made up
65 percent of the borrowing needs of corporate America. By 1992, the banks'
share had fallen to 36 percent, with the balance made up of various securities.1''
Globally, bank lending decreased from 37 percent of total capital movements in
the 1977-81 period to 14 percent in 1982-86. Portfolio investment, as opposed
to direct forms of investment in plant and machinery, grew from 36 percent in
1972-76, to 65 percent of total investment in 1982-86. Most of this was funded
through securities offerings.20
3 Loans H Shares
PI Honds I | Others
ff, n, n
Fn ff n rf
~T
1990 1991 1992 1993 1994 1995 1996 1997 1998
1999
18. "Recalled to Life: A Survey of
International Banking," Economist, April 30, 1994, 11.
19. Ibid.
20. These figures are taken
from the International Monetary Fund, Balance of Payments Yearbook
(Washington: International Monetary Fund, various years), as cited in Randall
D. Germain, "From Money to Finance: The International Organization of
Credit," paper presented to the 1992 annual meeting of the Canadian
Political Science Association, Prince Edward Island, Canada, June 1992,14.
56 The New Masters, of Capital
Emerging markets
were traditionally dominated by bank-intermediated financial systems.2'
But a surge in domestic corporate bond issuance has taken place, especially in
Asia and Latin America since 1997. As the Mareh 2003 Global Financial Stability
Report noted, "Domestic corporate bond issuance rose from 5 percent of
total corporate domestic and international funding in 1997-99 to 31 percent in
2000-01."22 Domestic bank lending fell from 52 percent of
corporate finance in 1997-99, to 40 percent in 2000-01. The authors of the
report concluded that the trend to disintermediation is continuing.23
In developing countries, the efficiency of capital market financing is
strongly promoted by World Bank and IMF officials.24
While the
tendency in financial markets is toward disintermediation, the speed of this
process varies widely throughout the world.2' Because of the shift
from bank loans, stimulated in part by the advent of the Euro, the value of
French corporate bonds grew from €2.5 billion in 1993 to €64 billion at the end
of 2002.26 In some places, despite the continued reliance on bank
loans, "the trend is toward a disinter- mediated, liquid, securitized
structure."2' Even in Germany, the center of bank lending
traditionalism, change is taking place.
In the 1990s,
German banks tried to avoid the negative implications of global disintermediation
for their market share by buying investment banks in London, through which they
could participate in securities underwriting and trading. German companies are
finding traditional bank lending inside Germany more expensive as local
state-backed banks have had access to cheap capital "dramatically
curtailed," making German credit more expensive.28 In this
liberalized financial market, German companies have to seek capital market
funding (or go without).
21. International Monetary Fund, Global
Financial Stability Report: Market Developments and Issues, Mareh 2003
(Washington, DC.: IMF, 2003), 75.
22. Ibid.
23. Ibid., 75, 11.
24. On the World Bank's
encouragement of capital market growth in emerging markets, see Clemente del
Valle, "Government and Private Bond Markets: 'The Virtuous Circle,' "
paper presented to the 4th OECD/World Bank Bond Market Workshop on Developing
Corporate Bond Markets, Washington, D.C., Mareh 7, 2002; for the IMF, see Gercl
Hausler, "The Globalization of Finance," Finance & Development
39, no. 1 (Mareh 2002), available at www.imf.org,
accessed April 28,2003.
25. E.g., see Reinhard H.
Schmidt, Andreas Hackethal, and Mareel Tyrell, "Disintermediation and the
Role of Banks in Europe: An International Comparison," Working Paper no.
10, January 1998, J. W. Goethe University, Frankfurt, Fachbereich
Wirtschaftswissenschaften.
26. Kevin J. Delaney, "France Inc. Is
Fuming at Top Rating Agencies," Wall Street Journal Europe, November 20,
2002, Ml.
27. International Monetary Fund, International
Capital Markets: Developments, Prospects, and Policy Issues (Washington, DC.:
IMF, 1992), 2-3.
28. James Sproule, "What's Putting the
Crunch on Germany?" Wall Street Journal Europe, September 1, 2003, A7.
Unconscious Power 57
With the trend
to disintermediation, "the largest banks have shifted into other lines of
business."2'' Banks are not withering away, but they are
increasingly engaged in other financial services.™ Banks remain banks in name,
but the actual activities that define a bank are changing.31 Today,
bank lending is a small feature of the work of diversified financial services companies.32
Thousands of banks that once made lending decisions on wholesale credit are now
better described as financial market participants rather than market
authorities. As the Economist suggested, "Banks have become increasingly
market-based."33 Banks "bundle assets (loans) into
securities and trade them; increasingly, they earn income from fees as well as
from interest."
Investment Forms
What is the significance of this new way of
borrowing and lending capital depicted in figure 4? It produces norms and
practices that tend to encourage a specific investment structure, at the same
time raising the profile of the agencies and making them a focus of
controversy.34 Variation across nations has historically
characterized investment forms. Zysman identifies three major sets of postwar
financial arrangements." The first of these, what he calls the capital
market form, is typified by competitive price allocation, arm's length
relations between government and industry, company-led market strategies, and
the absence of conscious development policy. The second form, credit-based with
government-administered prices, is designed to facilitate government
intervention and state-led industrial adjustment. The last system Zysman
identifies is a variant on the credit-based system, in which financial
institutions use market power to influence industrial investment decisions by
corporations. Zysman sees the United States as the best example of the first
system, Japan and France as exemplifying the second, and Germany as an
expression of the third.
29. Charles Gaa, Robert
Ogrodnick, Peter Thurlow, and Stephen A. Lumpkin, "Future Prospects for
National Financial Markets and Trading Centres," Financial Market Trends
no. 78 (Mareh 2001): 37-72, 52.
30. Biagio Bossone,
"Do Banks Have a Future? A Study on Banking and Finance as We Move into
the Third Millennium," Journal of Banking and Finance 25 (2001): 2239-76,
2260.
31. Banks increasingly seek
to earn income from fees for services and the development of new analytical
products rather than traditional lending activity. Rebecca Bream, "Banks
at Forefront of Rise in Credit Products," Financial Times, December 29,
2000, 21.
32. "Crisis? What
Crisis?" in "Capitalism and Its Troubles: A Survey of Internat ional
Finance," Economist, May 18, 2002, 6.
33. "The Trouble with
Banks," in "A Cruel Sea of Capital: A Survey of Global Finance,"
Economist, May 3, 2003, 12-14.
34. Timothy J. Sinclair,
"Synchronic Global Governance and the International Political Economy of
the Commonplace," in Martin Hewson and Timothy J. Sinclair, eds.,
Approaches to Global Governance Theory (Albany: State University of New York
Press, 1999); and Delaney, November 20, 2002.
35. John Zysman,
Governments, Markets, and Growth: Financial Systems and the Politics of Industrial
Change (Ithaca: Cornell University Press, 1983), 18, 94.
58 The New Masters, of Capital
Figure 4. Financing methods: Intermediation
and disintermediation
Source: Modified from Arie L. Melnik and
Steven E. Plaut, "High-Yield Debt as a Substitute for Bank Loans," in
Edward I. Altman (ed.) The High-Yield Debt Market: Investment Performance and
Economic Impact (Homewood, IL: Dow Jones-Irwin, 1990), p. 211.
Within these
sets of arrangements, two broad forms of investment can be identified: the synchronic
and the diachronic. Saussure distinguishes the synchronic from the diachronic
in his study of language. ™ The synchronic refers to the logic of a language,
or the relations of coexistence among its elements. The diachrony of language
seeks the origins and processes of language development.
These ideas were
subsequently applied to social analysis by Sorel and, later, Piaget. Sorel
linked the prominence of the synchronic study of all things with the maximizing
proclivities of the newly emerging middle classes of his time/7 Synchronic
thought, Sorel argued, is best understood as a technology of accumulation.38
36. Ferdinand de Saussure, Course in General
Linguistics (La Salle, 111.: Open Court, 1983).
37. Georges Sorel, Reflections on Violence,
trans. T. E. Ilulme and J. Roth (New York: Collier, 1961), 141.
38. Piaget makes the case
for understanding both the synchronic and the diachronic. But he argues that
one does not necessarily follow the other, though the two are interconnected.
(Jean Piaget, Sociological Studies [London: Routledge, 1995], 50).
Unconscious Power 59
The synchronic
form is characteristically concerned with the short term and with the profits
that can be accumulated in financial markets. The diachronic investment form
links financial activity directly to investment in productive assets that
improve the social stock of material capabilities. In broad terms, the United
States, Britain, and other English-speaking countries fall into the synchronic
category. Most European and emerging market countries are best characterized in
diachronic terms. Rating agencies promote the tendency toward convergence
around synchronic investment norms and, therefore, to a consolidation of the
investment practices Zysman identifies.39
Zysman
underestimates the degree to which the capital market is actually organized.
The ascendant financial type can best be described as the institutionalized capital
market form, in which rating agencies and related institutions construct an
analytical basis for market transactions. These institutions promulgate
synchronic norms. Market interactions that take place via the institutionalized
capital market form typically reflect synchronic norms and thus are relevant in
adapting policy frameworks in corporations, municipalities, and sovereign
governments. Centralization of investment judgments is characteristic of
institutionalized capital markets, even if a comparison of bank lending and
capital markets at first suggests a less centralized system than a
bank-dominated one. With this substantive centralization, operating assumptions
are premised on synchronic norms.
Knowledge is a key clement in the political
economy of rating. Rating agencies produce knowledge that is socially and
politically partial, and then objectify this knowledge, making it
authoritative. In turn, rating knowledge takes on a particular, instrumental
form consequential for all.
People think of
knowledge as separate from social relationships, as neutral and abstract. But
knowledge—its creation and the particular forms it assumes in different times
and places—is a product of conflicts between social interests.40
Researeh on epistemic communities, discussed in chapter 1, has highlighted the
extent to which the intellectual work these communities undertake, such as
problem identification and policy advice, represent efforts at social control
over knowledge.41
39. On convergence (and the
resilience of national capitalist models), see Suzanne Berger and Ronald Dore,
eds., National Diversity and Global Capitalism (Ithaca: Cornell University
Press, 1996).
40. See the discussion of science as an ideology
in Jorge Larrain, The Concept of Ideology (Athens: University of Georgia Press,
1979), 14.
41. Peter A I. Haas,
"Epistemic Communities and International Policy Coordination,"
International Organization 46, no. 1 (Winter 1992): 2. The political
significance of this activity is clarified by Diane Stone, Capturing the
Political Imagination: Think Tanks and the Policy Process (London: Frank Cass,
1996).
60 The New Masters, of Capital
Strange is also
concerned with knowledge, how it is made and who benefits from it. She argues
that a "knowledge structure" exists at the heart of the world
economy, alongside other major structures associated with finance, production,
and security.42 Her view implies that rating knowledge becomes
significant as knowledge, not so much because of its quality or informational
value—but because it addresses issues that powerful social interests consider
important.
Valuable
knowledge—powerful knowledge—is so because it is socially validated. Knowledge
is not inherently valuable or powerful but only when it is instrumental to,
say, a specific phase of capitalist development. That is why knowledge of the
Internet was valuable to young IT graduates in the mid-1990s but after the
"dot.com" crash of the late 1990s, much less so. The knowledge itself
did not change. I low that knowledge fitted into capitalism did—dramatically.
Instrumental Knowledge
Rating agencies fit into a specific capitalist
knowledge structure. Market participants view rating agencies as endogenous
(rather than exogenous) to global finance.41 Rating agencies are
therefore seen by market participants as legitimate rather than imposed
entities. In chapter one, we referred to this specific understanding of the
nature and role of the agencies as embedded knowledge networks, the bigger set
of mechanisms to which the rating agencies belong. How rating agencies
construct, reinforce, and reconstruct this collective view of rating agencies
as embedded knowledge networks is a crucial feature of global finance. The
risk is that embedded knowledge networks lose their embedded identity as they
move into new territories. As we will see, this is a constraint on the
expansion of the major U.S. agencies into emerging markets (as it was for them
in Europe).
The specific
form of knowledge promoted by rating agencies is instrumental in character,
focused on immediate gain rather than growth based on sustainable social
reproduction. The instrumental form of knowledge is linked to a synchronic
understanding of the world.
What are the
characteristic elements of the synchronic, instrumental form of knowledge?
There are two central principles. The first principle is the universaliza- tion
of self-regulating markets and the exoticization of other modes of social interaction.
Although never realized in the concrete, the notion of a self-regulating
market, a market free from state interference and redistributive costs, has
become a
42. Susan Strange, States and Markets 2nd ed.
(London: Pinter, 1994), 30.
43. Granovettcr, writing
against the assumptions of the New Institutional Economics, emphasized
endogeneity. He suggested that economic action is "embedded in ongoing
networks of personal relations rather than carried out by atomized
actors." In these circumstances, economic institutions (like all
institutions) do not develop spontaneously but are constructed (Mark Granovettcr,
"Economic Institutions as Social Construction: A Framework for Analysis,"
Acta Socio- togica 35 [1992]: 3-11,4).
Unconscious Power 61
central organizing focus in Western
societies since the 1970s. Other forms of social organization are, it seems,
increasingly to be judged against this norm. The resurgence of the self-regulating
market norm makes any sense of intentional community action open to question
not on its merits but, more important, in principle.
The second
principle of synchronic, instrumental knowledge is its tendency to identify
time and space merely as obstacles, of no value, and therefore as problems to
be overcome. Synchronic, instrumental knowledge is centrally concerned with
faster turnover, just-in-time practices, the application of financial analysis
tools such as the capital asset pricing model (CAPM), and the maximization of
efficiency gains. However, the evaluation of investment opportunities using
techniques like CAPM or discounted cash flow (DCF) analysis, to the exclusion
of other types of information and forms of judgment, perhaps undervalues
"less quantifiable strategic benefits," such as the acquisition of
market share.44
Knowledge is a
key dimension of the rating world. Rating knowledge is partial and political.
Some knowledge is validated and considered a source of influence yet is
represented as objective. The form of knowledge rating agencies use is
synchronic and instrumental. The utilization of this knowledge form, when
linked to the gatekeeping role of the agencies, is consequential. Those
seeking the acclamation of the agencies have strong incentives to adopt the
synchronic instrumental knowledge form, with attendant consequences.
Most Americans think that the large,
well-known credit rating organizations like Moody's and Standard & Poor's
are purely private enterprises: they are unaware of the fact that these
organizations are, in fact, more properly viewed as quasi-governmental
entities.
Jonathan R. Macky, U.S. Senate,
Mareh 20, 2002
It is one thing to claim that rating
agencies are consequential at some times and in some places. It is another to
claim that they are political in nature. How are ratings politically important?
Macey's argument about the agencies' quasi-governmental status is significant
here. But politics also influence the rating process.
Rating is not
the technical activity it is thought popularly to be. Instead, it is highly
indeterminate, qualitative, and judgment laden. Rating is, first and foremost,
about creating an interpretation of the world and about the routine production
of practical judgments based on that interpretation. This interpretation is
made within the terms of the socialization and interests of rating agency
officials, who are part of a wider financial and analytical community. The
authoritative rather than persuasive
44. Michael T.Jacobs, Short-Term America
(Boston: Harvard Business School Press, 1991), 179.
62 The New Masters, of Capital
nature of bond rating conceals the
qualitative processes of rating determination. Those processes, if widely
known, would perhaps lead to a more skeptical use of rating information by
investors.
Rating agencies
do not limit their analysis to quantitative debt or income data, as people
typically assume. Their view of management structure, policy, and the wider
context of the issuer—all of which are contestable issues—make the credit
rating process inherently a nondeductive matter. This judgment process implies
gatekeeping, and gatekeeping is—even when not intended explicitly—manifestly
political. Moreover, as discussed earlier, the bond rating agencies tend to
promote specific frameworks of investment practices, knowledge forms, and
governance systems. In any other context, these views would be readily
recognizable as instances of political ideology.4"1
This book does
not claim that rating agencies are biased or conspiratorial in their
operations, although this may be the case at times. The argument is that the
logic of rating is linked to a particular form of social organization and set
of interests. It does not represent a universally beneficial system, as might
be otherwise assumed. Raters try to avoid any hint of partiality and seek to
appear as scientific as they can. Nor, for the most part, are rating officials
cynical about this. As one senior rating official said, the "true
believers" in the rating agencies think they really are neutral and
objective. The "pragmatists," the informant observed, see what they
are doing much more in terms of judgment and are skeptical about the potential
for a truly objective or scientific view.46 Certainly, raters are no
more cynical than other groups who have sought to professionalize themselves
and thereby acquire social standing and a bigger share of resources.47
Even if the work
of rating agencies involved no interpretation or judgment, it would still not
be "objective" in a wider sense. The rating mode of thought is
premised on the assumptions of the given social and economic order. The significance
of the cognitive frame used in credit rating becomes clearer in the context of
international capital mobility. Credit rating serves as a vetting and
surveillance system for capital mobility, allowing mobility to occur
"securely" across geographic and cultural space. The agencies can be
thought of as representing the interests of international or external capital
to sovereign countries and corporations seeking capital. Andrews has argued
that international capital mobility is a structure, which states encounter and
must respond to, as they do the international
45. Ideology is used not in
the sense of bias, untruth, or distorted ideas. The meaning adopted here
follows Larrain, who suggests interests mobilize different ways of thinking.
There is 110 universal or pan-social interest or knowledge. (Larrain, 1979).
46. Senior rating official, confidential source,
New York Citv, April 2002.
47. On professionalization
(and its links with knowledge), see Andrew Abbott, The System of Professions:
An Essay on the Division of Expert Labor (Chicago: University of Chicago Press,
1988); and Harold Perkin, The Third Revolution: Professional Elites in the
Modern World (New York: Routledge, 1996).
Unconscious Power 63
system of states.48 In this
structure, rating agencies serve an important policing role enforcing the needs
of the structure and clarifying its signals to states, corporations, and
municipalities.
There is a
second sense in which we need to take rating agencies seriously in political
terms, premised on this first argument about the partiality of rating
judgments. That is, the judgments raters make have important distributional
consequences for society. The agencies1 output influences the global
distribution of money, jobs, and economic opportunity. Hence, they are highly
consequential actors in the global economy. What they say and do is too
important for our collective global welfare to be considered nonpolitical. The
"who gets what, when, how" questions of distribution are the sort of
political questions that cannot be separated from a broader consideration of
bond rating.49 An insistence that rating agencies are not political
is really an assertion that the market should be above social intervention. The
partiality of such an affirmation needs little emphasis.
If rating
agencies are political, do they also exercise power or something like power in
their work? Rating agencies do, at times, exercise power in the common- sense
definition of the term: A gets B to do what B would not otherwise do.50
A less- understood feature of this power is the ability to define a situation
as a crisis of creditworthiness, when the facts are really a matter of
interpretation.1' The relational form of power is complemented by a
second, more significant form of power, which is structural. This exists when
the perceived relational power of the agencies is anticipated by others who act
in advance of the agencies1 explicit judgments, to avoid any actual
exercise of power. The idea of structural power docs not capture the full
extent of rating agency influence, however.
An altogether
more hidden form of social control than either relational or structural power
resides in the agencies1 authority. The concept of authority is
often used in a narrow, legal context to describe the legitimate, lawful status
of an entity. That is not the usage here.
A key
distinction in the concept of authority is between the epistemic authority of
technical experts, scholars, and professionals, who are "an
authority," and executive authority, of political leaders, military
officers, and police forces, who are "in authority."52
What both have in common characterizes the auctoritas of Roman law,
48. David M. Andrews, "Capital Mobility and
State Autonomy: Toward a Structural Theory of International Monetary
Relations," International Studies Quarterly 38, no. 2 (June 1994):
193-218.
49. Harold D. Lasswell, Politics: Who Gets What,
When, How (Cleveland: World Publishing, 1958).
50. On power, see Steven
Lukes, Power: A Radical View (London: Macmillan, 1974); John Scott, Power
(Cambridge: Polity, 2001); and Sallie Westwood, Power and the Social (New York:
Routledge, 2002).
51. On this process of
crisis definition, see Davita Silfen Glasberg, The Power of Collective Purse
Strings: The Effect of Bank Hegemony on Corporations and the State (Berkeley:
University of California Press, 1989), 19.
52. Bruce Lincoln, Authority: Construction and
Corrosion (Chicago: University of Chicago Press, 1994), 3-4.
64 The New Masters, of Capital
namely, they produce "consequential
speech'1 that quells doubts, winning the trust of audiences. Lincoln
argues that the consequentiality of authoritative speech actually has little
to do with the form or content of what is said. There is a hierarehy that
allows some speakers to command not just audience attention but also their
confidence, respect, and trust.
I .incoin
concludes that historical circumstances are crucial to identifying the existence
of authority. Authority is best understood as an effect of these circumstances,
rather than as an entity or a characteristic of an actor or institution. Its
existence is therefore not functional, easily understood through a rationalist
lens, but always contingent on time, place, and circumstance. Capacities for
producing these effects are central to understanding authority, as are
understandings of who—what actors— have the capacity for producing the effect
at specific times in particular places.
The notion of
authority, or epistemic authority, may suggest to some a system of relations in
which no opposition is possible, in which the rating agencies control the views
and actions of all who need their services. This is not the intention in using
the concept. The authority of rating agencies is ambiguous and shifting, like
other norms. In writing about the Italian-American community of East Harlem,
Orsi discussed the role of the southern Italian notion of rispetto. Orsi
suggested rispetto was "above all ... a posture of obedience to
authority.Respect and fear were bound up together in the notion. But rispetto
was a public posture, which often concealed disagreement. This private
hostility Scott has called the "hidden transcript."^ The important
thing is that disagreement was rarely aired publicly, and the mask of rispetto
was maintained. Rispetto is a good approximation of the fear-respect relations
that exist between rating agencies and those dependent on their judgments.
Authority is not
persuasion. The major rating agencies do not seek to persuade others to agree
with their views. Indeed, as Lincoln suggests, "The exercise of authority
need not involve argumentation and may rest on the naked assertion that the
identity of the speaker warrants acceptance of the speech.Persuasive efforts
(and coercion, too) reveal a lack of authority. As Hannah Arendt observed,
authority can be defined in contrast to both coercion and persuasion.5'
Persuasion and coercion are implicit within authority but are actualized only
when authority itself is in jeopardy. Their explicit actualization gives a
signal that, at least temporarily, authority is negated.58
53. Ibid., 10.
54. Robert Anthony Orsi, The Madonna of115th
Street: Faith and Community in Italian Harlem, 1880-1950 (New Haven: Yale
University Press, 1985), 93.
55. Scott, 1990, xii.
56. Lincoln, 1994, 5.
57. Arendt cited in David
Miller, "Authority," in Miller, ed., The Blackwell Encyclopaedia of
Political Thought (Oxford: Blackwell, 1991), 29. Arendt sets out her ideas
about authority in Between Past and Future: Six Exercises in Political Thought
(London: Faber and Faber, 1954).
58. Lincoln, 1994, 6.
Unconscious Power 65
Epistemic
authority is not impermeable. The authority of rating agencies (or at least its
scope) has expanded with the growth of capital markets and the decline of banks
as major allocators of resources. Rating agencies have moved from a more persuasive
role into that of epistemic authority, or embedded knowledge network. Persuasion
implies a range of levels of respect. Epistemic authority is bivariate:
authority either exists or is absent. By its very nature, it is hard to budge
once generated, because market participants tend to discount the
"mistakes" or epistemic failures of the agencies, given their
identity as authorities. Of course, these resources could be overwhelmed by a
persistent record of perceived failure or by a change in the relationship
between raters and those who use ratings—a change in the structure of
capitalism.
Rating agencies,
especially Moody's and Standard & Poor's, worked hard to create a
reputation for impartiality. In situations where people surrender their powers
of judgment to an institution or to a group, the surrender may be quite fragile,
as in the case of a fad or fashion. '19 Or, as the notion of
rispetto suggests, it may be largely a public posture. The circumstances,
including the longevity of the rating agencies, make their particular
authoritative niche more resilient than that of most other non- state
institutions. Their position within the capital markets gives them considerable
epistemic resources. Moreover, even if individuals do become skeptical about
rating agencies, as often happens, they cannot necessarily assume others in the
markets have, too. This risk gives skeptical individuals incentives to act
based on the assumption that others also use the rating agencies as
benchmarks, unless they know this definitely not to be the case.
What is missing
in Lincoln's argument about authority is an understanding of the criteria that
determine when the elements he identifies as the "right ones" actually
become right. What generates authority is, as he suggests, a reflection of circumstances
encountered and is therefore highly individuated. But the basic relationship
between those with authority and those who acknowledge authority can be
discerned. This relationship centers on the social efficacy of the ideas those
claiming authority hold. In terms of foreign policy, it has been suggested,
ideas "provide road maps that increase actors' clarity about goals or
ends-means relationships."60 This road map analogy establishes
a concrete mechanism controlling the relationship between the authoritative
and the nonauthoritative, which might otherwise seem nebulous.
Creditworthiness
is a road map providing a mechanism for the relation between authority and
nonauthority. Creditworthiness is both a causal belief—being creditworthy
means that debt issuers are likely to repay their debts—and a principled
59. Sushil Bikchandani,
David Hirshleifer, and Ivo Welch, "A Theory of Fads, Fashion, Custom, and
Cultural Change as Informational Cascades," Journal of Political Economy
100, no. 5 (1992): 1016.
60. Judith Goldstein and
Robert O. Keohane, "Ideas and Foreign Policy: An Analytical Framework,"
in Goldstein and Keohane, eds., Ideas and Foreign Policy: Beliefs,
Institutions, and Political Change (Ithaca: Cornell University Press, 1993), 3.
66 The New Masters, of Capital
belief, in that placing a priority on
repaying debt is morally right and obligatory. As a belief, creditworthiness
becomes embedded in rules and norms, that is, institutionalized, acting like
other beliefs in the manner of "invisible switchmen" to "constrain
public policy" by "turning action onto certain tracks," thus
obscuring other tracks from view.61 Katzenstein suggests that
institutionalized norms like creditworthiness do not merely influence behavior
by prescribing ends but also indirectly organize action.62 How
creditworthiness came to be institutionalized like this is a fascinating
question, requiring what Goldstein and Keohane call an "arehaeology of
ideas."63 In any case, the mechanism is not monolithic. As
Katzenstein warns, norms remain contested and contingent.
In an insightful
analysis of financial auditing, Michael Power makes an argument similar to
Goldstein and Keohane's about semantic or programmatic effects.64
The subject cannot be reduced merely to the technocratic and the functional, he
argues. Auditing is "implicated in the framing of organizational
life," contributing a style of evaluation or self-monitoring that
underpins how organizations work. Like rating, auditing involves a
"certain obscurity in the professional craft," which contributes to
its monopoly privilege. Practitioners defend this obscurity against
codification, to preserve their scope for judgment.
Unlike
intellectuals, auditors—and raters, too—do not invite public dialog, debate, or
democratic deliberation. Audit reports, like ratings, are labels. By virtue of
a rhetoric of "neutrality, objectivity, dispassion, expertise,"
reports and ratings do not communicate passively but tell or as Power says,
"give off" an understanding or view premised on trust in
experts—authorities. But this understanding is not meant for public
deliberation. I.ike an auditor, a rater has emerged "not just as one who
exercises expert judgement but also as one who is in the role of judge."65
Two more
specific claims about governance and rating agencies are addressed in this
discussion: first, nonstate forms of governance increasingly matter in the contemporary
world, and second, the forms of governance rating agencies
"encourage" contribute to patterns of public and private
policymaking.
As we have seen,
bond rating agencies are unusual entities to consider politically. They are
privately owned and not directly involved in electoral politics. The analysis
is different from that for legislatures, regulatory agencies, or political
parties, even though the agencies are also subject to constraints relating to
their organizational character. No doubt, many of the conceptual tools applied
to public bureaucracies could be used to establish a better understanding of
them, too (if the same
61. Ibid., 12.
62. Peter J. Katzenstein, "Coping with
Terrorism: Norms and Internal Security in Germany and Japan," in Goldstein
and Keohane, eds., 1993, 267.
63. Ibid., 21.
64. Michael Power, The Au/Ht Society: Rituals of
Verification (Oxford: Oxford University Press, 1997). Peter Katzenstein and
Dieter Kerwer separately suggested Power's book to me.
65. Ibid., 8,74, 127,40.
Unconscious Power 67
sort of internal data was available).
However, a critical first evaluation of bond rating agencies must get at the
governance outputs they produce. What is it about the type of institution
rating agencies represent that is different from those political scientists
more usually analyze?
Governance
focuses on the processes associated with the exercise of control rather than on
administrative mechanisms considered in abstraction/'6 In the orthodox
view, transactions are understood to occur exclusively in the realm of the market,
and legal authority is a feature of governments. However, this orthodoxy is
less persuasive in the contemporary world. A more effective conception
acknowledges that nonstate forms of governance have always been important but
that financial globalization has made these institutions and networks more
central to capitalism. Their interactions with each other and with states are
essential to an understanding of contemporary governance.
Ferguson and
Mansbach contend that states are less important as a result of "historical
sea changes," which have displaced one form of political organization from
"pride of place" in our world.67 Limitation of authority
to the legally binding actions of governments is no longer persuasive. Instead,
they suggest the idea of "effective governance"is more useful today.68
Miller and Rose
endorse this concern.69 They add that "technologies of
thought," such as writing, numbering, compiling, and computing, render a
realm knovvable, calculable, and thus governable. This notion is clearly
applicable to the world of rating. "Procedures of inscription" make
objects like the economy and the firm amenable to intervention and regulation.
Such "humble and mundane mechanisms," combined with interventionary
policy goals (what Miller and Rose call "programs of government"),
have over time dissolved the distinction between state and civil society. What
has been most vital are the ways in which these indirect mechanisms of rule
have enabled "government at a distance " to be maintained. This form
of domination involves "intellectual mastery," based on the
possession of critical information, by those at the center over persons and
events distant from them.70The objective of rule at a distance is to
create a framework in which social forces are self- regulating within the norms
of the system.
Rating agencies
have an impact on the governance undertaken by other institutions. Financial
globalization has created an unprecedented degree of volatility in
66. James N. Rosenau, "Governance in the
Twenty-First Century," Global Governance 1, no. 1 (1995): 13.
67. Yale H. Ferguson and
Richard W. Mansbach, "Between Celebration and Despair: Constructive
Suggestions for Future International Theory," InternationaI Studies
Quarterly 35, no. 4 (December 1991): 371.
68. Ibid., 376.
69. Peter Miller and
Nikolas Rose, "Governing Economic Life," Economy and Society 19, no.
1 (February 1990): 2, and "Political Power beyond the State: Problematics
of Government," British Journal of Sociology 43, no. 2 (June 1992):
173-205.
70. Ibid., 1990, 5, 8, 9.
68 The New Masters, of Capital
socioeconomic circumstances. One response
to this has been initiatives to separate central bank monetary policy from
legislative intervention and to establish "fiscal responsibility
acts," as in the case of New Zealand, which set out principles for
"prudent" fiscal policy.7' Another response has been a
shift in emphasis between what have come to be called "fire alarm"
and "police patrol"-type surveillance forms.72 The fire
alarm metaphor refers to a problem-focused, episodic approach to governance.
Municipal fire departments give problems like fires attention only when they
have been identified and called in by nonspecialists. A framework is
established— fires are reported by those who see them—that requires only
occasional enforcement. Inspections are infrequent (perhaps annually), and the
emphasis is on self-regulation in self-interest. In the case of police patrols,
a much more aggressive process of looking for law-breaking is characteristic.
The idea is that many problems never mature into crises because of surveillance
and early intervention.
Although fire
alarm approaches may be cheaper in cost-benefit terms, police patrol
surveillance is attractive when the immediate costs of disgovernance are very
high and losses are "lumpy"—what Hubert calls low-probability,
high-consequence risk. An example of the latter is when a major bond issuer
unexpectedly defaults and a crisis of confidence arises in financial markets as
a whole.'3
Public
institutions seem to be increasingly moving from the police patrol to the fire
alarm approach, under fiscal and competitive deregulation pressures from financial
globalization. Paradoxically, a tightening of governance is developing in the
private realm, as institutions with the capacity for governance seek to
compensate for the risks and opportunities change creates. Rating agencies are
part of this tightening.
Rating agencies
adjust the "ground rules" inside international capital markets and
thereby shape the organization and behavior of institutions seeking funds. This
anticipation effect is reflected in capital market participants' understandings
of the agencies' expectat ions. In turn, from this point of origin, business
and policy initiatives are developed. This coordination, or
government-at-a-distance effect, narrows the expectations of creditors and
debtors to a shared set of norms derived from the prevailing orthodoxy about
corporate governance and public policy structures. Thus, the agencies do not
just constrain the broad capital markets, but they actually
71. "The Great Escape?" Economist,
April 1, 1995, 60.
72. Mathew D. McCubbins and
Thomas Schwartz, "Congressional Oversight Overlooked: Police Patrols
versus Fire Alarms," in McCubbins and Sullivan, eds., Congress: Structure
and Policy (Cambridge: Cambridge University Press, 1987), 427.
73. Don Hubert,
"Popular Responses to Global Insecurity: Public Encounters with Low-
Probability High-Consequence Risk," paper presented to the annual meeting
of the International Studies Association, Chicago, February 1995; also see
Virginia Haufler, "Learning to Cope: International Risk Management in History,"
paper presented to the annual meeting of the International Studies Association,
Chicago, February 1995; Ulrich Beck, Risk Society: Towards a New Modernity,
trans. Mark Ritter (Newbury Park, Calif.: Sage, 1992); and Anthony Giddens,
Modernity and Self-Identity: Self and Society in the Late Modern Age
(Cambridge, UK: Polity, 1991).
Unconscious Power 69
exert significant pressures on market
participants, contributing to their internal constitution or identity as
market agents.
Mental Framework of Rating Orthodoxy
The purpose of a mental framework of rating
orthodoxy, presented in table 5, is to clarify the fundamental assumptions
underlying rating, set out here in ideal-typical form. Fundamental principles
central to the agencies—orthodox, synchronic principles—are contrasted with a
heterodox, diachronic set. Like the first set, the second is not exhaustive
but merely indicates the diversity of conceivable thinking.
The framework is
a codified version of the "rating myth." Myth, as Meyer and Rowan and
Power have noted, is a key to understanding why institutions are organized as
they are and operate as they do. The components of the rating myth within the
mental framework of rating orthodoxy should be seen as a set of norms for the
agencies' work.
Conclusions
What is rating? In a narrow sense, rating
is simply a technical support system for the new global capital markets. In a
broader view, bond rating is much more than a technical support system. It is
the arehetype of a new form of institutional coordination developing in
conditions of financial globalization. Based in markets rather than formal
governmental structures, bond rating is at odds with the consensus that underpinned
the post-World War II political economy of embedded liberalism. That postwar
world order was built on a compromise between producer and consumer, owner and
worker, investor and employee. 'The work of bond rating agencies, as the mental
framework of rating orthodoxy suggests, implicitly attacks these compromises
and promotes the interests of investors, as interpreted and constructed by the
rating agencies. °
Rating agencies
should be understood therefore as a crucial nerve center in the world order, as
a nexus of neoliberal control.76 Like an operating system in a
personal
74. John Gerrard Ruggie,
"Embedded Liberalism and the Postwar Economic Regimes," in Ruggie,
Constructing the World Polity: Essays on International Institutionalization
(New York: Rout- ledge, 1998); also see Mark Rupert, Producing Hegemony: The
Politics of Mass Production and American Global Power (Cambridge: Cambridge
University Press, 1995); and Robert W. C.ox, Production, Power, and World
Order: Social Forces in the Making of History (New York: Columbia University
Press, 1987).
75. On the interests of investors, see Adam
Harmes, "Institutional Investors and the Reproduction of
Neoliberalism," Review of International Political Economy 5, no. 1 (Spring
1998): 92-121.
76. Kees van der Pijl, Transnational Classes and
International Relations (New York: Routledge, 1998), 5.
70 The New Masters, of Capital
Table 5. The mental framework of rating
orthodoxy
Synchronic-rationalist principles
(orthodoxy)
Diachronic-constructivist principles
(heterodoxy)
Investment • Ratings are the result of rational professional processes.
• Emphasis on short-terms returns and the specification of
liabilities. Valuation of profit-making as means of repayment. May take place
in production or financial markets.
Knowledge • Knowledge is objective, cross- cultural and
instrumental. Markets are natural and spontaneous, not social phenomena.
Technical expertise is essential to creation of knowledge. All knowledge
producers are equal and are only as good as their last output. Competition
between sources of knowledge negates any perverse social dynamic to falsely
accord eminence to knowledge producers.
Governance • Rating is not political.
Rating challenges historically- derived
norms and practices assumed to inhibit efficient resource allocation. Emphasis
on self-regulatory "police patrol"-type systems. Privatization may
result. This is seen as politically neutral.
Ratings are the result of judgments.
Emphasis on sustainable growth in
environment of collective absorption of risk. Valuation of profit-making and
taxation as means of repayment, based on investment in productive capabilities
and social infrastructure.
Social dynamics are central to the
creation, content and eminence granted to different knowledges. Markets are
social phenomena Reputation, based on experience, underpins epistemic authority
(e.g. embedded knowledge networks). All knowledge producers are not equal—the
intersubjective identity of a knowledge producer as an epistemic authority
gives authority to this knowledge producer's subsequent output(good or bad).
Rating is political. Emphasis on valid role
of multiple stakeholders and the social distribution of costs and benefits.
Influence of rating establishes potential for government-at-a- distance.
computer, rating agencies, although usually
unseen, monitor global life at the highest levels, with important social and
political effects. In conditions of financial globalization, rating agencies
serve as intelligence-gathering, data-analyzing mechanisms.
The mid-range
arguments made in chapter 1 were developed here conceptually and empirically.
The ideas presented here, as captured by the rating orthodoxy framework,
provide the analytical core for the following substantive chapters. Rating
incorporates both quantitative and qualitative variables. It is crucial to
acknowledge this, for much of the commentary in the financial media passes
over the inherent indeterminancy of bond rating. What follows from this
observation that ratings are judgments is that rating is more contestable than
it at first appears.
Unconscious Power 71
Particular solutions to problems, such as
how to fund the construction and maintenance of a bridge, can have vet }'
different answers. Some answers, such as funding from general revenue, bias the
distribution of resources toward certain groups (such as drivers) and away from
others (e.g., taxpayers). Other solutions, such as the imposition of tolls,
target all who drive over a bridge but negatively affect low-income people,
whose mobility is reduced accordingly. These distributional effects are key
political consequences of rating, but they rarely receive acknowledgment.
What are some
consequences of this new form of power? Rating agencies and the rating process
provide a means for transmitting policy and managerial orthodoxy to widely
scattered governments and corporations. In this sense, the agencies are nominally
private makers of a global public policy. They are agents of convergence who,
along with other institutions, try to enforce "best practice" or
"transparency" around the globe. The rating agencies are promoters of
an American-derived, synchronic mental framework. The most significant effect
of rating agencies is not, therefore, their view of budget deficits or some
other specific policy but their influence on how issuers assess problems in
general. This adjustment of mental schemata is the most consequential impact of
their work.
