My opinion on this is pretty strong. Ratings agencies should not rate the credit worthiness of governments. Governments are more like non-profits. They serve a social purpose. They should not be treated like businesses. The logic of the downgrade has little to do with finance and more to do with Congress. From the S&P press release:
"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011. Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon."
The S&P should not have any power over the government finances of the United States, the hand that feeds it, the nation that allows it to exist, that provides the environment under which it thrives. This is a prime example of the corporatist model gone awry.
This is aside from the fact that the ratings agencies have had terrible track record. Didn't they give AAA ratings to toxic bonds?
I am just cynical enough to believe this is political gamesmanship.
Monday, August 08, 2011
Downgrade
Posted by USWest at 9:36 AM
Subscribe to:
Post Comments (Atom)
5 comments:
I agree that this downgrade--with their message--is a clear sign that S&P is just trying to play politics. The correct response should be for the markets to devalue S&P's ratings altogether.
So does anybody assign a reliability score to S&P? Who shall rate the raters?
Yes, who rates the rating agencies? After over valuing the privately held real estate securities in 2007-2008, Standard and Poors now wants us to believe that a true default on US debt is significantly more likely today than it was a week ago. That's absurd. If they really wanted to send a signal, they should have downgraded the US credit rating in June and put back again in August.
If I were in charge of some big investment fund (like say the California state employee pension fund or something), I'd publicly announce my declining confidence in S&P's objectivity.
But to keep this in perspective, the US is still rated at the highest left by the other two ratings agencies. And the US is still rated at the second highest possible rating by S&P. Also, it's worth pointing out that China's rating is also still significantly lower than that of the US.
BTW, this event was exactly what the Democrats and President Obama were trying to avoid by giving so much away in their compromise with the Republicans. If you had told President Obama two weeks ago that even in the event of a compromise a major ratings agency would down grade the US credit rating anyway, I doubt he would have been so accommodating to Speaker Boehner's need for political cover with the Tea Party. It sure smells like S&P was in cahoots with the Republicans.
It will be interesting to see if the other agencies follow. It was politically motivated, I think, in that they wanted to send a waring shot over the bow of congress.
It has nothing to do with campaign contributions. McGraw-Hill companies only gave $18,400 to candidates in 2010. Most of those were in Indiana. Check this out at http://www.followthemoney.org/
It has more to do with gridlock and partisan warfare that prevents real problems from being addressed. It's retaliation for Congress' manufacturing of the crisis.
The ratings agencies serve a single economic function - to collect and display in an easy to use form information about the creditworthiness of institutions that otherwise would take much more effort for individual investors to research. They make readily available, in short, the information already present in the market but available to relatively fewer actors. So much of our modern market is designed to give market information cheaply to the widest number of investors, and bans on insider trading are the flip side of the coin.
But there's no need to rate the creditworthiness of governments because that's a political judgment best left to political analysts. Asking S&P whether the US is likely to default is like asking the White House economic staff whether Lehman Brothers is likely to go belly up. They don't know much more than you do, and their judgment is suspect. In short, political analysis is not in S&P's wheelhouse, nor should anyone expect it is. Consequently, the markets have soundly ignored S&P's move, acting as if there were an upgrade rather than a downgrade of the risk in T-bills by buying them and driving DOWN the risk premium.
Kudos to Moody's for staying out of this for now.
Post a Comment