Standard & Poor’s announced on Friday, August 5th, that it had lowered the long-term debt rating of the United States of America from AAA to AA+.
While the move had been threatened by the S&P for weeks, the fact that it went ahead and lowered its debt rating for the U.S. government was somewhat surprising to some observers, and unsurprising to others.
However, there are many financial journalists and experts that are pointing out just how political the decision is on the part of the S&P. It isn’t difficult to see this, just in the wording of the press release alone.
Standard and Poor’s Offers Political Opinions to Congress
Instead of focusing on primarily financial reasons or analysis, the majority of the press release mentions comments about the S&P’s “opinions” about the recent fiscal consolidation plan in Congress, and the S&P’s opinion about the “effectiveness, stability, and predictability of American policymaking and political institutions”.
It’s like commentary taken straight off of a late-night Fox News talk show.
Even more surprising is the not-so-veiled threat issued by the S&P that seeks to influence how Congress goes about structuring its economics and financial policy-making. Since when does Wall-Street get to determine the decisions that Congress makes regarding where and how public money – tax-payer money – should be spent?
The threat in the S&P press release read as follows:
“We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”
In other words, not only is the rating lowered to AA+, the S&P decision-makers have now issued a threat that if Congress doesn’t align more with their spending reduction demands, then the rating will be reduced yet again.
The Danger of a Private Corporation Driving Public Policy
Obviously, spending cuts are critical at a time when a running under an annual deficit simply isn’t acceptable anymore. However, the phrase “less reduction in spending than agreed to” is especially troubling, considering that the S&P should not have that level of control over Congress.
Blogger Aaron Bady made an excellent post about the danger of a private corporation having such power over public policy. Standard & Poor’s is owned by McGraw-Hill. And the following diagram of ownership surrounding McGraw-Hill should open your eyes regarding the politics involved in this recent debt rating downgrade.
Aaron goes on to describe how the move by Standard and Poor’s was done more for its own self-interests. Aaron writes:
“The finance market is certainly real and powerful, but the only important question is whether we think the self interest of these kinds of entities is the same as that of the American people, how we will regulate their ability to make decisions, and whether we will continue to cede them the power that they presently have and are using to impose their will on the US’s political economy.”
Is S&P Trying to Shift Blame Away From Itself for Economic Crisis?
Further clues behind the latest move by Standard and Poor’s current decision to impose its “downgrade” upon US credit may very well be the entire history surrounding the housing bubble and subsequent crash. Senate investigations following the crash determined that Standard & Poor was one of those rating agencies that provided a “safe” rating for most of the financial institutions that were offering subprime and high-risk loans to consumers.
In the Senate report on the matter, Tom Coburn and Carl Levin wrote:
“Between 2004 and 2007, taking in increasing revenue from Wall Street firms, Moody’s and S&P issued investment grade credit ratings for the vast majority of the RMBS and CDO securities issued in the United States, deeming them safe investments even though many relied on subprime and other high risk home loans. In late 2006, high risk mortgages began to go delinquent at an alarming rate. Despite signs of a deteriorating mortgage market, Moody’s and S&P continued for six months to issue investment grade ratings for numerous subprime RMBS and CDO securities.”
Many would say that the actions of the S&P and Moody’s during that crisis proves that the motives of the firms ratings may have more to do with the self-interested internal policies and politics of the company owners than actual financial reality.
Further proof of this comes from the fact that after issuing the downgrade of the United States debt rating, the U.S. Treasury discovered a math error in the S&P’s calculations by the tune of $2 trillion. Yes, trillion.
According to the Wall Street Journal:
“After two hours of analysis, Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.”
It took the Treasury only 2 hours of analysis to discover the mistake. Which begs the question – was the S&P evaluation really based on solid facts and mathematical evidence, or a quest to push the politics of right-wing lobbyists and financial industry corporate interests?Originally published on TopSecretWriters.com