Wednesday, May 12, 2010

What if one could look up the credit score of every company -- just like they are able to look up the credit scores of customers?

All of us are walking around with a credit score hanging over our heads.  If you go to make any major purchase on credit -- a car or house -- even renting an apartment or applying for a credit card -- the lender will want to know your credit score.  A credit score is a measure of character -- it gives a numerical value for how trustworthy you are based solely on your past history.  It gives the lender a reasonable understanding of his/her/its risk and the likelihood that you will repay the loan.

Which I guess is fine as far as that goes.

But when I'm looking to buy a mutual fund, where is the credit score that tells me how trustworthy the financial services company is?  When I go to buy a car, where's the credit score that tells me how likely it is that company will follow through on its warranty?  When I buy a house, where is the credit score that tells me how trustworthy the builder is?  

See, the odd thing about our market economy is that it is completely asymmetrical.  Consumers, regular human beings, are all walking around with a number over our heads (instantly available online) that tells lenders exactly how much we're good for.  But there is no objective measure that tells us whether the company on the other side of the deal is trustworthy or not. In short, labor and consumers are graded, but in our capitalist system, capital itself never gets graded (which is how they are able to steal your 401(k), the U.S. Treasury, and the wealth of the entire planet...). 

That's really the problem with Wall Street right now.  There is no objective measure that tells us the credit score of Goldman Sachs, Bank of America, Morgan Stanley etc.  That's why Retail Investors are Fleeing the Stock Market and YTD Domestic Flows Into Stocks Are Negative. Indeed if these companies were given a credit score based on their past history -- no one would ever do business with them again because they are not creditworthy.  That's the crazy thing about the present political moment -- the U.S. and the E.U. are throwing trillions of dollars at companies that, if they were a person, would not qualify for even the most basic entry-level credit card. 

In some ways then, Yelp and Zagat's Guide and Consumer Reports and Edmunds Car Buyers Guides and even customer reviews on are an attempt by people to create a credit score for companies and products.  But it still seems to me that there is an ENORMOUS UNMET DEMAND for a single trustworthy measure of the creditworthiness of major corporations themselves (not a particular product that the company sells -- but the company itself).  And really, if we could build a system to score the trustworthiness of each corporation, it could become the basis for reregulation the economy --  requiring every company to live up to the highest standards of creditworthiness or lose their license to operate in our economy.

Update #1Branding is an attempt, by corporations, to finesse the issue of creditworthiness -- to create the impression and emotional sensation of trust, without any bona fide data to back it up.  In fact, branding is the opposite of creditworthiness in a way -- in human terms it's the equivalent of a person applying for a credit card saying, 'don't bother researching my credit history -- look at how pretty I am!'  Branding intentionally lights up the emotional parts of the brain associated with desire so that we will turn off the rational parts of the brain used to assess risk -- in order to sell products at a higher profit margin.  So at the core then of the capitalist system there is this disconnect (between the brand image and the actual product itself), this built in incentive to lie in order to generate ever higher profits.  Thus one of the key functions of the public sector is to reign in this impulse to lie that always appears in the marketplace.  That's the point of regulation, to correct for the defects that are an inherent part of a market economy.

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