Today I invested 18 minutes of my life in watching a self-serving video on Standard & Poor's "CreditMatters" multimedia web page. I was curious to see how two high-ranking executives defended their downgrade of the U.S. credit rating.
As I watched David Beers, Standard & Poor's Global Head of Sovereign Ratings, and John Chambers, Chairman of the Sovereign Ratings Committee, I got increasingly irritated at them.
They struck me as detached, rich, overly self-confident Wall Street types who enjoyed being fed canned questions by another S&P employee. I'd already read the S&P report that described the downgrade, so didn't learn much new.
In fact, Beers and Chambers ignored some key facts in their report that I blogged about previously.
Notably, that new federal revenues (a.k.a. tax increases, such as on high earners) would make S&P look more favorably on an improved U.S. fiscal situation -- they liked to say "fiscal consolidation" for some reason, and said "sovereigns" instead of "nations."
Their key points weren't exactly news from out of the blue. The U.S. government deficits are too large (duh...) and political paralysis is the order of the day in Washington, D.C. (double duh...).
So it's difficult to understand what the point of the downgrade from AAA to AA+ was. Nobel Prize winning economist Paul Krugman challenges S&P's credibility, which helps explain why an incompetent organization came out with a report that essentially restates the obvious.
To understand the furor over the decision by Standard & Poor’s, the rating agency, to downgrade U.S. government debt, you have to hold in your mind two seemingly (but not actually) contradictory ideas. The first is that America is indeed no longer the stable, reliable country it once was. The second is that S.& P. itself has even lower credibility; it’s the last place anyone should turn for judgments about our nation’s prospects.
True. But here's what really irks me about the S&P downgrade.
I've heard that Wall Street now is filled with mathematical genius types who graduated from M.I.T. or CalTech with a Ph.D. in physics and have chosen to rake in big bucks on Wall Street.
Well, you'd think that some of these guys would have let Standard & Poor's know about a basic principle in quantum physics: the observer is part of an experimental situation. There's no such thing as a totally detached perspective.
Watching the S&P executives talk, I didn't get any sense that they understood how their downgrade would affect stock and bond markets. And hence, virtually every American in some way or another.
Downgrading the national (oops, "sovereign") credit rating isn't like alerting bond investors that General Electric might have some upcoming earnings difficulties. Analyzing a corporation's financial situation is much different from what S&P did in its report on the federal budget outlook.
S&P is an integral part of the national financial system.
What it did is much more akin to a physicist deciding to perform a "two slit" experiment on light and thereby finding that photons behave like waves rather than particles, than like a biologist sitting on a mountaintop far removed from the plains below, charting migration patterns of wildebeest.
Standard & Poors surely realized that its federal credit downgrade would have a large effect on already spooked stock markets. Today American stock exchanges lost 6-7% of their value. That's more than large, it's huge for a one-day drop.
Now a double-dip recession appears a lot more likely. This will reduce federal revenues markedly, and increase federal expenditures for unemployment insurance, low-income health programs, job training, and such.
So S&P's warning that the U.S. government faces serious fiscal problems -- which already was obvious -- will help produce what the report warned about. To me, this is highly irresponsible.
Stephen Colbert likes to say, "the market has spoken." Today, it sure did. Investors flocked to U.S. Treasury bonds, driving the price up and the yield down, while selling stocks like crazy -- fearing an economic downturn.
This should cause S&P to engage in some serious self-reflection. Investors aren't buying the notion that federal debt is a risky proposition. What they're afraid of is another recession, a scary proposition given that this country was just crawling its way out of the last one.
What Standard & Poors did with its downgrade was akin to someone leaving a bunch of baseball bats lying around a biker bar, then predicting, after paying for a long night of hard drinking, "guys are going to get hit on the head."
S&P is worried that the federal government's budget deficits will continue to be unduly large. Well, as noted above it looks like S&P's report expressing this worry is going to be a self-fulfilling prophecy.
The other big concern of S&P is a lack of common ground and consensus between Republicans and Democrats. Yet the downgrade has spurred even more finger-pointing. "It's a Tea Party downgrade!" "Obama is responsible for losing our AAA rating!"
Thanks a lot, Standard & Poors. So far, for nothing.
A Daily Kos post has a theory about who benefits from the S&P downgrade: S&P. I hate to think that this could be true, that a Wall Street firm could be so willing to feather it's own nest at the expense of the national interest.
But I suppose I shouldn't be. Here's an excerpt:
S&P's history of making superficial, self-serving ratings designed to do nothing more than pad their own pockets had left their reputation in such tatters that they had only one choice. They made another superficial, self-serving rating designed to do nothing more than pad their own pockets.
The purpose of the downgrade isn't to warn against U.S. policy or generate any change. Its only point is to generate publicity for S&P and to try and restore some of the importance and respectability to the company's reputation that decades of careless, lax, regulation-free operation have eroded.
It's an ad campaign designed to fight the real downgrade, the one that S&P applied to their own value by the simply awful quality of their work. So far, it seems to be a pretty good effort. Certainly people are paying a lot more attention to S&P than they have in years and citing them as if they have biblical authority.
Would you describe the financial status of the United States of America as AAA?
Posted by: Randy | August 08, 2011 at 10:59 PM
Randy, it's not much different from the United Kingdom and France, which do have AAA ratings. But they do have much lower health care and military costs, which is a big reason our deficit is so large. Plus, those other countries have higher taxes, which is in the cards for the US also.
My gripe is that S&P based its downgrade mostly on political factors, not fiscal factors. Evidence of this is that it didn't matter when the $2 trillion error was pointed out to them on Friday. They blithely went ahead with the downgrade, which seems funny to me.
Posted by: Blogger Brian | August 09, 2011 at 12:32 AM
What's irksome (to me) about the credit downgrade is that there are people who actually think it has some significance. But it is comforting to know that those to whom it is significant are in no position to do anything more than talk about it.
Posted by: Willie R | August 10, 2011 at 04:03 PM