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    Standard & Very, Very Poor

    By The Liberal Mob on Mon, 08/08/2011 - 9:55pm |

     

     

    Over the weekend, and into today, there has been much sound and fury about Standard and Poor's downgrade of the United States' credit rating to AA.  Unfortunately for S&P (or fortunately for the rest of us), it turns out that it is signifying nothing.  It is now left to the rest of us to wonder: what is happening here, what does it mean for us, and what does it mean for S&P?

     
    What is happening here seems to be, first off, that S&P has made some serious errors.  Earth-shattering errors, the kind that if we're lucky they might never recover from.  The downgrade was based on a number of factors, but one of the main ones was that the amount of deficit reduction was insufficient to slow what they saw as a rapid climb in debt-to-GDP ratios.  As it happens, though, their projection was based on the wrong baseline metric.  This equates to about a $2 trillion dollar discrepancy, otherwise known as "antihistamine money", since it is not to be sneezed at.

    Note how much quicker the climb is under the original, flawed estimate.

     

    But really, that's just the tip of the iceberg.  Ezra Klein does a better job than I ever could on this one, pointing out all the contradictions in S&P's report.  For example: S&P claimed that allowing the Bush tax cuts to expire would allow for an upgrade in the outlook of our credit rating.  Yet, their revised estimates, after fixing the $2t mistake, account for significantly more savings than the Bush cuts would have.  Surprising no one, though, S&P kept their downgrade in place.  At least they're committed to something (i.e. being terrible at their jobs).

     

    It gets even more damning, too, as Klein points out:

    Similarly, they have previously explained that while a $4 trillion deal could have saved our credit rating, a $2.4 trillion deal — which is what we got — was insufficient to stabilize the debt. But since their original calculations misplaced $2 trillion, the deal and the correction should have added $2.4 trillion + $2 trillion to our bottom line. That, again, is more than $4 trillion.

    That S&P - responsible in their own way for the subprime mortgage crisis anyway because of their frightening eagerness to rate crap mortgages as AAA - would make this sort of mistake is not surprising.   It is also not surprising that they would double down on it.  After all, the downgrade really isn't about the economic ability of the United States to pay its debts.  That would be ridiculous.  It is more about the political ability to do so, which might be the only thing they got right in this whole thing.  Don't believe me?  Take it from them:

     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.

    Amusingly, it might not actually matter.  Sure, stocks are dropping, but that started before the downgrade.  But demand for U.S. Treasury Bonds is as high as ever, and in fact bond prices ticked up slightly.   Interest rates, in turn, also dropped slightly.  Rather than abandon all faith in the safety of Treasury bonds, investors have reaffirmed that faith in spades.

     

    It looks like the upshot of all this is that rather than lose faith in the United States, investors are losing faith in S&P instead - an idea echoed by none other than Warren Buffett.  Standard and Poor's probably had this coming as a result of their role in the financial crisis, of course.  I'm not going to shed any tears if they lose a little prestige.  But there really is no other obvious answer to what happened here: they downgraded themselves instead of the United States.

     

    The funniest part is that their analysis of our political system isn't actually wrong.  A week ago, we were within hours of an outright default.  And it happened because a sizable portion of Congress is apparently made up of nine-year-olds, rather than those 25 and over as we all thought was required.  S&P's mistake - well, aside from the terrible math - was conflating that with everything else, and going too far in pursuit of making a political point.  And that's an error they might not ever recover from.

     

    For more commentary and analysis from Scott, Hurley, and Desmond visit our blog site at TheLiberalMob.

     

    Comments

    A week ago, we were within hours of an outright default.

    This is simply false.  Why do people keep repeating it?   Even if the debt ceiling had not been raised, the US government was not close to defaulting on the debt.


    by Dan Kervick on Mon, 08/08/2011 - 10:09pm

    Thank you, Dan. It's too bad the media would rather be dramatic than accurate.


    by MrSmith1 on Mon, 08/08/2011 - 10:16pm

    It's also not surprising. Drama sells. (That doesn't make it any less bad, of course.)


    by Verified Atheist on Tue, 08/09/2011 - 6:36am

    To be more specific, current monthly debt service is less than 1/15th of current monthly tax revenues.  So even without any additional borrowing, debt service payments can easily be met.

    And they would have been met:

    http://www.npr.org/blogs/money/2011/07/29/138806068/why-interest-payment...

    Nevertheless, both parties, for somewhat different reasons, have allowed public misperceptions and ignorance of the nature of our revenue and debt situation to fester and proliferate, even now to the extent where an eggregiously incompetent or corrupt judgment by a ratings agency can trigger a massive fall in the stock market, and destroy more investor wealth.

    Obama could and should end this nonesense right away with a clear statement such as the following:

    Whatever the outcome of the upcoming Congressional negotiations on the means of meeting the deficit-reduction targets passed into law next week, the United States will pay its debts.  It can make these debt payments easily, agreement or no agreement, and there is not even a shadow of a doubt about the fact that these payments will be made.  My administration will continue to prioritize debt payments above all other payments.  Indeed, the 14th amendment mandate that the federal debt "shall not be questioned" requires our government, and the Treasury Department, to prioritize debt service payments over all other payments.  So even if my administration had a mind to prioritize some other payments, we are constitutionally bound to prioritize debt payments.

    The United States does not welsh on its debts.  Period.  End of story.  Investing in US treasury bonds remains the safest possible investment that can be made anywhere in the world.

    Standard & Poor's knows all this, which means their decision to downgrade US debt is based either on staggering incompetence, or corrupt political motivations.

    Unfortunately, the muddy statement he made today only contributes to further confusion, and suggests to people that the integrity of US government debt somehow depends on what is happening in Congress.


    by Dan Kervick on Mon, 08/08/2011 - 10:39pm

    It's all a head game with both the Republicans and the President.

    FEAR

    You must vote for Obama out of fear;  if the other side wins they'll be worse?

    Screw the peoples 401K's it's all about reelections, besides if your 401K' go any lower you CANT  retire early, you'll have to work longer.

    Will working longer save the Social Security Trust Fund money? Will it help Medicare?

    You wage slaves will have to keep working and paying for your ENTITLEMENTS  

    They don't need death panels, they'll keep you working till you die.

    First they took the roof from over your heads, now they've taken your other assets.


    by Anonymous (not verified) on Tue, 08/09/2011 - 12:17am

    To me, the United States government being unable to meet all its obligations is a default.  I don't see that as an unreasonable position, even if debt service payments would have been able to continue in full.

    The point, of course, is that we had a completely unnecessary and self-generated crisis.


    by The Liberal Mob on Tue, 08/09/2011 - 1:22am

    It’s hard not to feel a certain contempt for Standard & Poor’s in the wake of its downgrade of American debt. Its sole job as a credit-rating agency is to gauge the creditworthiness of bonds, yet like its competitors, Moody’s and Fitch, it has consistently fallen short. It downgraded Enron days before the company went bankrupt. Its willingness to slap a AAA rating on securitized subprime junk was the foundation upon which the entire financial crisis was built. And now, to show that it’s got some spine, S.& P. decided to downgrade the United States? From a purely economic standpoint, the likelihood of a U.S. default is nil. As my friend Daniel Alpert, a founding managing partner of Westwood Capital, put it: “The size of the U.S. economy, the wealth of its inhabitants and the assets of the sovereign entity itself are unquestionably more than adequate to repay, with interest, all of the $14 trillion or so of the nation’s debt.” He added, “Anyone with a rudimentary understanding of finance and economics can figure that out.” On Monday, with the market collapsing, where did investors rush to put their money? In the one security they still considered safe: U.S. Treasuries

     

    http://www.nytimes.com/2011/08/09/opinion/nocera-while-the-markets-swoon.html?_r=1&hp

    S&P are part and parcel of a corrupt system to begin with. S&P could not find its own ass with two hands.

    S&P have now demonstrated that they are nothing but traitors and part of the international corporate oligarchy that has no allegiance to this country; that perpetrates felonies including extortion and bribery; and that should be erased from our American consciousness.

    the end

     


    by Richard Day on Tue, 08/09/2011 - 3:57am

    Right on. S&P's revenue comes from clients in the financial industry. The financial industry sees Obama and Dodd-Frank as the enemy. S&P, nor anyone else, has a computer model that can predict our deficits; if they did, it would still come down to assumptions(guesses) about full employment and productivity--to name two out of many. Having no math to prove anything, S&P entered the political arena to an extent never before seen from a ratings agency. There is no way this downgrade does not hurt Obama. The markets will recover, bond yields may creep up a few basis points. But the economy itself and attendant employment have taken a hit. The hit is on confidence--business confidence, consumer confidence, and eventually our own when we question what we bought in this President.  


    by Oxy Mora on Tue, 08/09/2011 - 11:27am