Standard
& Poor’s downgrade of the U.S. confused the markets but not the
pundits. From far-left to far-right, everyone with a stake in the existing
order is shocked that a lowly rating agency would critique the
emperor’s wardrobe.
Liberal filmmaker Michael Moore, for instance, views the downgrade as
a crime:
Michael Moore to Obama: ‘Show some guts,’ arrest
S&P head
Liberal firebrand Michael Moore called on President Obama to respond to the
U.S. credit downgrade by arresting the leaders of the credit-ratings
agencies.
On his Twitter feed Monday, the Oscar-winning film director also
blamed the 2008 economic collapse on Standard & Poor’s —
apparently because it and other credit-ratings agencies did not downgrade
mortgage-based bonds, which encouraged the housing bubble and let it spread
throughout the economy.
“Pres Obama, show some guts &
arrest the CEO of Standard & Poors. These
criminals brought down the economy in 2008& now they will do it
again,” Mr. Moore wrote.
Standard & Poor’s, one of three key debt agencies, stripped
the U.S. federal government of its AAA status Friday night and reduced it to
AA+ for the first time in the nation’s history.
Mr. Moore went on to note that the “owners of S&P are old
Bush family friends,” continuing a theme he has developed through
several films about capitalism as essentially a crony system for the rich and
Wall Street, especially the Bush family.
He went on to link approvingly to an article last week in the Guardian, a
left-wing British newspaper, about a police raid in Milan against the offices
of S&P and fellow ratings agency Moody’s. Italian police were
searching for evidence on whether the rating agencies, in the words of a
local prosecutor, “respect regulations as they carry out their
work”.
“Here’s how they roll in Italy when it comes to these
bastards,” Mr. Moore cheered.
Meanwhile, Wall Street Journal columnist Holman Jenkins just thinks
S&P tarnished it brand:
S&P Introduces the Edsel
Over its head in understanding American politics, a rating agency discredits
itself.
The Standard & Poor’s downgrade is likely to pass into business
history as a failed gesture and blunder on a large scale, like “New
Coke”—only worse.
The unsustainability of the U.S. government’s fiscal trajectory
was already known. Nothing had changed in the debt-ceiling debate except in a
positive way for debt holders: In a world in which peer countries are
struggling with runaway deficits, America had begun to confront its fiscal
challenges legislatively (having already begun to confront them electorally
in the 2010 tea party elections). What’s so disheartening about that?
The angry idiocy of cable TV caters to those for whom politics is a
form of entertainment, about which they can become passionate and
self-righteous. Beneath the sound and fury, however, our system moves forward
on broad consensus—it can do no other given the design of the Founding
Fathers.
Three players—the House, Senate and White House—were
required to give their consent to a debt-ceiling hike. All three, by
definition, were holding the hike “hostage” to their concerns.
The House tea party contingent “won” not because it was more
ruthless—but because, with Venn diagram simplicity, it confined itself
to a position that overlapped with the positions of the other players, who
all agreed that, whatever else needs to be done, spending cuts must be part
of the long-term solution.
And look at the settlement that materialized: The parties agreed to
agree on spending cuts at a later date—a remarkably consensual solution
that imposed immediate pain on no one in our struggling economy. Even the
White House achieved its non-negotiable: The debt-limit issue will now remain
buried past next year’s election.
The debt-ceiling battle was the tiniest step on a long road, but it
laid down a useful milestone: We’re overspending. Not a bad day’s
work in our democracy.
Alas, committees are often wisdom-impaired, and the S&P credit
committee showed as much when it based its downgrade on the discovery of
conflict, brinksmanship and hyperbole in the debt-ceiling fight, as if these
aren’t a standard accompaniment to political progress. This was to take
the angry-idiot shouting of TV, which is epiphenomenon, and make it
phenomenon. It was the opposite of insight. It was also instantly refuted by
the markets, which understand all the reasons U.S. debt is virtually
default-proof.
A small measure of blame must also fall to the White House, with its
strategy of deliberately confusing a partial government shutdown with a
“default.” Think about it: Congress can’t take the heat
from the national parks being shut down for three days. The idea that the
debt-ceiling stalemate might go on and on until the only remaining
possibility would be to stop payment on the national debt was absurdly
misleading.
S&P could not penetrate even this little bit of political
posturing by the White House. This tells you what S&P’s political
judgments are worth.
The consequences of its downgrade, however, will take longer to come
into view. French insurance companies this week have been dumping U.S. Treasurys simply because of the downgrade. Ripples were
felt in the markets for Fannie and Freddie securities. Is France a Triple
A—or is the whole ratings structure now destabilized? S&P may have
played a role in this week’s market turmoil, but it wasn’t
because S&P brought any new and useful information to light.
The problem here is our system of mandatory ratings, in which certain
regulated funds and depositories are required by law to sell securities when
ratings are cut. This gives ratings downgrades a certain self-fulfilling
potential. It puts the rating agencies in a difficult, and adult, position.
It imposes on them a duty to be more than just kibitzers—to think about
the consequences of their judgments and to avoid flippancy.
This is where S&P failed, and in failing has debased its own bread
and butter, the Triple A rating. One hopes the parent company, McGraw-Hill,
is paying attention. As Bloomberg News aptly noted on Thursday, “Credit
ratings are becoming irrelevant in a bond market where investors still
perceive AAA companies from Johnson & Johnson to Microsoft Corp. to be a
higher risk than recently downgraded U.S. Treasuries.”
S&P and its fellow raters did not acquit themselves well in the
mortgage mess. Their errors then were errors of venality, opportunism and,
finally, panic.
S&P’s latest error is of a different magnitude, a colossal
failure of judgment, at once adolescent in its grandstanding and childish in
its irresponsibility. It may have been unwise even to give rating agencies their
power. Since we have, they are honor-bound to use that power wisely, not destabilizingly. There’s a reason we don’t
want our presidents wearing bow ties—and why similarly foppish gestures
from S&P are not welcome on matters as grave as the U.S. cred
Some thoughts:
It’s no surprise that Michael Moore is angry, since his standard
response to pretty much everything financial is to demand that Wall Street
and its minions be jailed. In general, he’s right. Locking up the top
100 or so investment bankers and their pet politicians would be instructive
for those that remain free, and fun for the rest of us.
But the Wall Street Journal’s take is inexplicable. In an
opinion piece reminiscent of the sadly-missed Thomas Frank, Holman Jenkins bundles a
series of economically questionable assertions into a conclusion that’s
even less than the sum of its parts. The misconception from which all else
flows is this:
“Nothing had changed in the debt-ceiling debate except in a
positive way for debt holders: In a world in which peer countries are
struggling with runaway deficits, America had begun to confront its fiscal
challenges legislatively (having already begun to confront them electorally
in the 2010 tea party elections). What’s so disheartening about
that?”
What’s so disheartening is that we did not begin to confront our fiscal
challenges. We agreed to miniscule “cuts” and created a
commission to impose a few more at a later date. If the US made ten times the
proposed cuts it would still be bankrupt.
The rating agencies, despite all the heat generated by the downgrade,
are irrelevant. They rated mortgage backed bonds AAA and the bonds still went
to zero. They liked Greek
bonds until very recently. Whether they rate the US, France, and Japan AAA or
CCC, it doesn’t change the reality that our debts exceed our income by
an unmanageable amount. The US has downgraded itself by its actions.
So S&P isn’t brave, it’s not making a political point,
it doesn’t possess more insight than the ten thousand or so other bond
analysts around the world, and it can’t make the markets do anything
they wouldn’t eventually do on their own. A solid credit will survive
no matter what it’s rated, and an insolvent borrower will behave like
junk even if rated investment grade. In the end, fundamentals always trump
opinion.
Since Developed World fundamentals are horrendous and getting worse,
future historians will have a different take on the rating agencies. Instead
of asking why they chose this moment to downgrade the US, the question will
be why they waited so long.
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