The S&P Agenda
Hypocrisy abounds as credit rating agencies decide to act hard-nosed without good economic reason.
Thursday, August 11, 2011
As you might have heard – considering the entire political establishment has spent the past 72 hours debating it – Standard & Poor’s followed through on their threat to downgrade the federal government’s credit rating.
Standard & Poor’s declared in April that if $4 trillion in savings was not achieved in the debt ceiling deal, it would downgrade the government’s credit rating from AAA status. They did so on Friday, citing not only a deal that achieved “only” $2.1 trillion in savings, but also Republican intransigence against raising new revenue and the party’s hostage-taking over the debt ceiling. The agency also downgraded Fannie Mae and Freddie Mac, since they depend on the federal government for support. Moody’s also is threatening to downgrade.
It’s a deeply silly idea that U.S. Treasury bonds, which are how the government finances it debt, are no longer a safe investment because the solution to a manufactured crisis fell $1.9 trillion short of an arbitrary goal. S&P correctly identified other factors threatening long-term fiscal stability, like inflated health care costs and political opposition to new revenue, both were also well-known factors one year ago, and five years before that – but S&P said nothing.
The S&P analysis is all the more silly given the haphazard way in which they calculated the national debt, confusing two different analyses by the Congressional Budget Office and pegging the national debt $2 trillion too high. “This is like an undergrad student mistake,” Robert Pollin, a professor of economics at the University of Massachusetts and co-director of the school’s Political Economy Research Institute, told The Nation.
Nobody is laughing at the report’s collateral damage, however. Treasury bonds but could rattle stocks, because investors often “act on the basis of incomplete, or even inaccurate, information” and could “interpret the downgrade as evidence of a rising default risk.” The Fannie and Freddie downgrade could lead to higher mortgage rates for Americans, since the firms back nine out of ten mortgages and might face higher borrowing costs due to the rating change.
The Securities and Exchange Commission recently erased rating agencies from all federal rulebooks, meaning they cannot be used as a legal standard for determining safe investments. The SEC also created entirely new standards of creditworthiness that it hopes will provide a “workable alternative to credit ratings.”
The changes are a result of atrocious performance in evaluating the real safety of mortgage backed securities before they badly damaged the global economy despite AAA ratings. A Senate subcommittee just named rating agencies a “key cause” of the financial crisis. Connecticut has already sued S&P.
Pollin speculated this could be rehab for S&P’s previous transgressions – that now the ratings agencies are trying to create an image that “they’re courageous… all of a sudden, after being shill for the financial bubble, they’re going to be hard-nosed.”
Pollin floated another bit of speculation: Standard & Poor’s is catering to potential Chinese business by issuing a report that allows China to browbeat the United States. The state newspaper published a commentary, saying China has “every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.” As the largest holder of U.S. Treasury bonds, China has most to gain if investors flock the bonds and interest rates rise. “Maybe [S&P] is calculating that the real money now is Chinese,” Pollin said.
Nobody actually knows what is motivating Standard & Poor’s to act in this manner. But one thing is clear: It’s not sound economic analysis.
GEORGE ZORNICK writes for The Nation.