S&P's downgrade of US debt: hypocrisy, irony, comedy, and realism
Sunday, August 7, 2011 at 7:43AM S&P, the rating agency that missed, indeed helped stoke, a major reason for the US economic crisis - the $14 trillion toxic asset pyramid spawned between 2003 and 2008 that it rated as stellar so the banks that concocted the assets could reap fees off their creation and spread them globally - choose late Friday night after months of embarrassing bi-partisan squabble - to act decisive.
From my Daily Beast piece running today: "On one main score, S&P’s downgrade rationale is right: Washington policy-making is decidedly "dysfunctional.” In fact, that’s a seismic understatement.
But that would also be a fair description of S&P’s decision-making in recent years. Remember: In the run-up to this very financial crisis, for which our debt creation machine at the Treasury Department ramped into over-drive, S&P was raking in fees for factory-stamping "AAA" approval on assets whose collateral was hemorrhaging value.
That high class rating was the criterion hurdle that allowed international cities, towns and pension funds to scoop up those assets, and then borrow against them because of their superior quality, and later suffer devastating losses and bankruptcies when the market didn’t afford them the value that the S&P AAA rating would have implied.
Perhaps, this downgrade is S&P’s way of saying, we’re on it now—we’re not going to give bad debt a pass anymore. Earlier this week, they downgraded a bunch of Spanish and Danish banks that are sitting on piles of crappy loans. Then, of course, there was Greece.
But just like Washington, the agency is missing the main reason for the recent upshot in debt. There’s a bar chart on the White House website that cites an extra $3.6 trillion of debt created during the Obama administration which is labeled for "economic and technical changes." That figure doesn’t include the $800 billion of stimulus money delineated separately, which is more deserving of that moniker.
But it’s not like the GOP, in particular its Tea Party wing, screamed once about that $3.6 trillion figure during the latest capitol cacophony. Instead, the Treasury Department made up a name for Wall Street subsidies, and Congress went along. And until this spring, when the debt cap debate geared up a notch, S&P was pretty mum about this debt and exactly why it was created.
Read the rest of my Daily Beast article here.
Reader Comments (7)
I HIGHLY recommend reading the whole article at The Daily Beast.
I agree completely and one has to wonder if this is some type of grab at credibility by the rating agency as in,"See, we are the only rating agency willing to downgrade the US." Also, if one looks at the limited countries that have a AAA rating(Great Britain and Germany being the biggest), the other countries are too small to absorb the demand for bonds. The timing of this seems like it is very much in the self-interest of S&P. If they downgrade now, there is no risk. Why? I don't think that investors are going to pull of the US or demand different rates from the US because of where the markets are internationally. There is no downside for the S&P to do this. As Nomi points out, the rating agencies acted in their in self-interest by giving bogus ratings in the past. Should we believe that this is not the case now?
This is clearly a grab at credibility and grandstanding at this point. A very well timed one with very little down side from what I see for the S&P. The US does need to get it's house in order yet let's examine the full picture. As someone not in that industry, I would be interested in knowing what are some of the other nuances going on here.
Malcolm Arnold
Great article! Agreed on the need to read the whole thing. I was wondering how the rating system fit into the scamscheme - thanks for the explanation.
We did them the favor so perhaps the banks should bail out the US.
well, JPM Chase's counter party credit rating is AA- vs the US which is now AA+, not a ton of difference in between.. the question is - will Washington spend a lot of time bemoaning the downgrade, or use this situation to examine what's really gone wrong - probably the former.
All of which begs the Question: why only a downgrade by S&P? Why not Moodys? Others? Actually, I'd give S&P a few points for - finally - doing something right. Too bad it wasn't done years ago, before the Ponzi spun out of control. Now, it really doesn't matter. The politicians will burn thru the 2.5 trillion in new debt at warp speed, Fed will do one more desperate dose of QE and then...you can kiss all this goodbye.
Perhaps the others are more tied to certain DC members, They are basically on the fence, they have the US on a downgrade 'watch' without the downgrade. I agree, because politicians are not being honest about how that debt was created, all the show about cuts or containing a budget are meaningless. We racked up debt predominantly, but not exclusively (less revenue from less taxes due both to fewer jobs, and an antiquated system where not everyone pays a comparative share was a part, as was rising defense budgets for three wars) because of the choice to subsidize Wall Street and the banking system. It's clear as day when you look at the amount of new debt created by the Treasury, sold through the banks, and sitting on the Fed's books doing nothing productive. This next round of debt will go through the same pattern, QE3 and all. Didn't have to be this way.
Yes it did: because people are what they are - self-interested and present-tensed - and do what they do. Good explanation though, and I am going to get and read your books.