The root of the problem

1.  How did the rating agencies Standard and Poor’s and Moody’s contribute to the financial crisis of 2008?

The largest rating agencies involved in the 2008 financial crisis were Standard and Poor’s and Moody’s, which were responsible for rating the riskiness of securities, such as mortgages.  Starting in around 2004, many credit rating companies were giving the highest possible ratings to products that were incredibly risky and should have been ranked accordingly.  At the time, many wall street companies were peddling collateralized debt obligations (CDO’s) that were given incredibly high ratings.

The root of the problem lies within the system of rating products.  The rating agencies that are hired by many firms are selected by the companies whose products they rate.  As a result, the rating agencies would be slightly biased and give the products higher ratings in order to be hired.  This was incredibly misleading, because people thought that they were getting the best possible deal and it turned out they were very misinformed.  The Dodd-Frank act in response to the act does grant the SEC more authority over agencies, but it did not eradicate the underlying issue that raters are still hired by the companies whose products they are supposed to rate.

2.  Why, in W.C. Wright Mills opinion, is it important that individuals realize their own biography within their time in history?

Mills stresses that the link between an individual and their position in history is the key to understanding sociological imagination.  It is important that people are able to deal with their own dilemmas in the scheme of what is happening during a specific time period.  Mills uses the example of unemployment, by explaining that a person may feel depressed if they are fired, but if many people are being laid off then the issue is not personal but public.  Issues such as these are rooted in economic and political issues, and therefore should be treated in this manner.

Mills further explains this phenomenon by distinguishing the key differences between a personal trouble and an issue.  Troubles are considered to be individual; they are due to the experiences of a person and not considered to be a public matter.  However, an issue is something that a population is facing, and therefore the person feeling the “troubles” should not think of himself as alone, but instead a part of a whole that is experiencing similar predicaments.  Once society is able to look beyond the personal milieu and able to embrace changes, then everyone can be interconnected and not feel isolated within a larger issue.

3.   Are there any similar examples of countries that have experienced similar financial crisis such as the US financial crisis in 2008?

Around the time the United States realized they were knee deep in a financial crisis, Spain’s similar growing expansion rapidly came to an end, as their own property bubble burst and the their public debt skyrocketed to whole new levels.  Their crisis definitely mirrors our own, in that they are now facing huge unemployment, high interest rates, and massive amounts of debt.  Spain had previously had been enjoying their new boom after joining the Eurozone, which granted them the highest ratings in housing.  Now, since the property market has collapsed, Spain can no longer afford to pay its debt and it has become one the biggest worries in the European Union.

Ever since 2010 when it was clear that Spain was problematic within the Eurozone, the country has been enacting many austerity measures to lessen their debt.  However, these measures were not significant enough, and Spain sunk further into their recession.  In September, the European Central Bank had pledged to buy bonds to lower the interest rates that had skyrocketed, but Spain refused due to the strings that would be attached if they accepted such a deal.  This situation is paralleled to the situation in the US, when the Federal Reserve injected capital into the United States to help regulate the inflation rates.

In October, the country reached a new low, when unemployment rates reached an astounding rate of 25%.  This, and their further increasing debt, led to the European Commission approving a payment of 37 billion euros to Spain with many conditions attached.   Ever since, The European Central Bank has continued to grant payments, in addition to lowering interest rates and providing cheap loans to increase the flow of money in Spain.  However, their current Prime Minister Rajoy, is skeptical about receiving any support from Europe, and many economists worry that the ongoing delay will make the situation increasingly worse.


2 thoughts on “The root of the problem

  1. 1) So, is the answer to ratings agencies problems in the realm of ethics or laws?

    2) Good analysis of Mills’ writing. I think he is more interested in how people as individuals can find ways to look beyond their own atomized mileux than in “society” being able to do so. I am not sure he imagines society having any agency. Have you had many sociology classes? Just curious.

    3) Good summary of Spain. One difference of course is that world investors still want to to buy US debt which is why our interest rates are low. SO, no matter how much some “wise people’ worry about our debt, the plain economic fact is that there are buyers of our debt.

    I worry that the Eurozone obsession with austerity is very misguided. When you face massive unemployment, you need to stimulate an economy, not shackle it. Maybe Germany is irked about bloated budgets for public works, but this is not the time to sort that out.

  2. In combining all three of your questions, I wonder that if the leaders of Spain would use their SI, they would be able to better stabilize their economy and find a way to leave their current troubles behind. Rather, from what I have seen in the news over the past few years, it seems as though many different parts of Spain are experiencing corruption and mistrust due to actions of public officials which only stand to further limit their recovery.


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