Both Sides Shoot The Messenger
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:
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.
Wall Street Journal columnist Holman Jenkins just thinks S&P tarnished it brand:
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
It's no surprise that Michael Moore is mad, 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 lamented 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.