(note: Mike really should be doing this post, but for a number of reasons he can't touch this one. So I'm giving it a whack because it needs to be said, even though I'm sure my performance will be sub-optimal.)

Let's pretend I collect stamps. And that I'm a multi-millionaire. And that I've just found what appears to be the find of a lifetime at an unbelievable price: a four-block of Inverted Jennies (approximate value: $2.5-$3 million) for about a million bucks. Now, a million dollars is peanuts compared to the actual value, but a million dollars is still a lot of money. Furthermore, the low price is cause for extra caution and skepticism on my part. What should I do?

Well since I'm not an idiot, I'm going to hire a well-known appraiser to assure me that these are genuine, that I'm not about to drop a million bucks on something Xeroxed on chemically-aged paper. Sure, the appraiser will hit me up for ten grand, but it doesn't take a genius to see that it's a necessary expense. The appraiser does his work, tells me the product is the real deal, and I make a lot of money.

Now let's try another scenario.

Let's say that Johnny the Stamp Salesman hires the appraiser. Even worse, the industry is set up such that it's nearly impossible for any buyer to hire and independent appraiser of his or her own. The appraiser seems pretty reputable – he's certainly well-known, doing work for all the big stamp dealers – and other than my own judgment (which is far from expert) I don't have much else to go on. I take the plunge, learn much later that the stamps are fake, and I learn a million-dollar lesson. All I get from the appraiser is a lame apology and a promise to try harder next time. From the industry I get a stern lecture about putting too much faith in the experts they pay to tell me that their products are solid investments.

I think we can drop the metaphor at this point.

The greatest, least-reported story of the economic trainwreck in which we are all passengers is the failure of the ratings agencies. Investing is impossible without information, and over the last 20 years the "democratization" of the stock/bond/mutual market (read: the rapid induction of millions upon millions of uneducated investors into the market) we have seen objective, third-party information simultaneously become A) more vital than ever and B) almost impossible to find.

Moody's, S&P, and the rest of the big rating agencies are supposed to provide a vital service to the market, passing judgment on the soundness of, and risk involved in, a particular asset. These ratings are especially important for the hordes of middle class investors who have been herded into the market without knowing their asshole from their elbow. Ratings become a crucial heuristic for people who are thrown onto the field without knowing anything about playing the game.

In theory, the ratings agencies protect investors from risky instruments – say, from securities which are backed by thousands of worthless mortgages given to people with 450 credit scores. But for two reasons they failed. One, their commissions come from the same banks, mortgage clearinghouses, and other financial interests that create the securities in question. How reliable is Moody's opinion about the new GE corporate bonds when GE has paid Moody's (handsomely) to tell you it's great? Second, there is plain old bad judgment involved as well. Having long since gone native on Wall Street, the ratings agencies may honestly have believed that all those "AAA" mortgage-backed securities were sound investments with almost no downside. Think of it as a market-driven Stockholm syndrome.

The biggest problem here is the total lack of restraint in their poor judgment. They could have started out at BBB+ or Aa ("Let's see if this can be profitable for a couple of years before we declare these great long-term investments") and enforced some sanity on the market, but…that's not what their clients wanted. The difference between AAA and Aa is vast in terms of the cost of borrowing money, prices on the open market, and so on. So mountains of this crap was pushed onto the market with AAA ratings – and remember, AAA is supposed to mean "same as cash." No risk. None. Treasury bond-safe.

Accordingly, tens of thousands of well-intentioned but amateurish investors did what responsible people are encouraged to do: they invested their money conservatively, investing in securities that offered a nice return with no risk. How's the 401(k) looking now?

Thomas Friedman wrote something incredible about this phenomenon in 1995 – and yes, I'm perfectly willing to go back 15 years to hold him accountable. It's the typical Friedman leg-humping about the glory of the free market, about how Moody's was going to do for all of us what no political system had the balls (or smarts) to do. It would serve as the worldwide arbiter of the soundness of government-issued debt, wielding immense influence over not only the bond market but the financial success of governments all around the world. Get on the "globalization"/World Bank/Borders Are So 20th Century bandwagon and be rewarded with an AAA rating; persist in those silly second-wave institutions like regulatory agencies and Moody's will body-slam you down to C. That'll learn 'em.

In the typical style of economic conservatives, Friedman's fairy tale proceeds from the assumption that Moody's is reliable. That Moody's is honest and unbiased. That Moody's isn't subject to pressure by the people who pay its bills. That Moody's fundamentally has some idea what in the fuck it's talking about. Let any of these "ifs" creep into the picture and suddenly the tale of Moody's: World Police seems about as convincing as the average Friedman fantasy.

The failure of government regulation and the (alleged) vast responsibility of individual borrowers has been covered extensively. The failure of complete, transparent information – and in fact the widespread dissemenation of dangerously inaccurate information about the level of risk inherent in these financial instruments – completes the What Went Wrong trilogy. Thus far it has been the Godfather III in the recession box set and, for all the Obama administration is doing and proposing to do about the crisis, we have heard precious little about what may in fact be the biggest problem. If people can't do right by following what is officially sanctioned as a sound investment strategy, then the stock/bond markets become indistinguishable from roulette and three-card Monte.