Monday, August 8, 2011

No right to judge...

Standard & Poors' recent decision to downgrade the United States credit rating from AAA to a AA+ has caused not a little handwringing among the chattering classes. The move dominated the financial news over the weekend, and investors the world over are wondering just what it means for the future borrowing costs of the world's largest economy.

Which is pretty silly.

Because truth be told, in the grand scheme of things and once the dust settles, Standard & Poor's rating of United States debt will prove about as relevant to investors as an unknown blogger's review of the latest Hollywood blockbuster is to the movie industry as a whole. Which is to say: about none at all. Indeed, it's a mystery why the the rating downgrade caused any sort of flare up at all, given Standard and Poor's miserable track record issuing ratings over the past few years. As both Paul Krugman and Daniel Gross have pointed out in recent columns, Standard & Poors' poor judgment in assessing the risks of securitized mortgage debt helped enable the 2008 economic collapse. Krugman is amazed at the Chutzpah:
America’s large budget deficit is, after all, primarily the result of the economic slump that followed the 2008 financial crisis. And S.& P., along with its sister rating agencies, played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste.

Nor did the bad judgment stop there. Notoriously, S.& P. gave Lehman Brothers, whose collapse triggered a global panic, an A rating right up to the month of its demise. And how did the rating agency react after this A-rated firm went bankrupt? By issuing a report denying that it had done anything wrong.

So these people are now pronouncing on the creditworthiness of the United States of America?

And Gross reminds us that S&P's ratings of sovereign debt are both capricous and irrelevant:
S&P, which covered itself in a substance other than glory during the mortgage crisis, may have a poor record and strange methodology when it comes to sovereign ratings. France, which has a far higher debt per capita ratio than the U.S., still enjoys a AAA rating. And a downgrade, alone, doesn't mean U.S. interest rates will spike -- on Monday or at any time in the future. Japan's credit rating was downgraded several years ago, when the interest rates its government paid on bonds was already extremely low, and they've generally trended lower in the years since

My personal view is that, given the rating agencies' dysmal performance throught the 2000's, the current move by Standard is little more than an attempt to appear "serious, prudent" and "conservative" by issuing a "shocking" judgement that, on closer examination, looks to have been arrived at through the arduous, precise and scientific process of dilligently exaggerating currently fashionable cliches. Because S&P's downgrade of U.S. debt is an obvious and laughably transparent over-correction. Having given Lehman and the Subprime Mortgage market an undeserved vote of confidence just before they collapsed, Standard & Poor's seeks to repair its reputation by issuing the United States and undeserved downgrade. Yet as the driver who swerves left to avoid a ditch well knows, over-correction can just as surely leave you stranded in a ditch on the opposite side. The collapse of Lehman and the securitized mortgage market revealed a corrupt, incestuous relationship existed between the ratings agencies and the debt issuers to the point that the former were unable or unwilling to perform their job. What we see here is the little man behind the curtain, imploring us to ignore the little man behind the curtain, even as he hurriedly speaks those words into a microphone and frantically turns dials and flips switches. And if there were still some doubt that Standard and Poor's assessment of U.S. debt is a joke, the revelation that the agency crunched the debt reduction numbers wrong to begin with should settle it:
Before downgrading U.S. debt, S.& P. sent a preliminary draft of its press release to the U.S. Treasury. Officials there quickly spotted a $2 trillion error in S.& P.’s calculations. And the error was the kind of thing any budget expert should have gotten right. After discussion, S.& P. conceded that it was wrong — and downgraded America anyway, after removing some of the economic analysis from its report.

As I write this, the markets are in turmoil. That's not too surprising. In the short term the stock market reflects a casino mentality as traders attempt to gauge investor mood and market direction in hopes of making a quick killing. The long term trends should remain relatively unaffected after the inital rumblings subside. That's not to say everything's hunky dory with the nation's finances, but the long-term trends are as unaffected by Standard & Poor's rating as a freight train smacking a butterfly. Just ask Japan.

(Note: This essay also appears in Stinque)

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