How to Think About Standard and Poor's Downgrade - Dean Baker/HuffPo

[WillyT]

How to Think About Standard and Poor's Downgrade
Dean Baker - HuffPo
Posted: 8/6/11 12:27 PM ET

<snip>

Standard and Poor's downgrade of U.S. government debt captured headlines across the country and around the world. It is a newsworthy event, but primarily as another colossal failure by a major credit rating agency.

First, it is worth mentioning the important background here. S&P, along with the other credit rating agencies, rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade. They were paid tens of millions of dollar by the investment banks for these ratings. We know that concerns were raised by their own people about the quality of many of these issues. This was at the least astoundingly incompetent. It was quite possibly criminal.

This raises the question of whether S&P fears an investigation and possible prosecution. In such circumstances the desire to curry favor with powerful politicians could certainly influence their credit rating decisions. There are also rules affecting the credit rating agencies in the Dodd-Frank financial reform bill. The desire to have these rules written in a favorable way could affect the credit rating agencies' decisions. It would be nice if we could just assume that the credit rating agencies make their rulings on an objective assessment of the evidence, but we can't.

Let's look at the evidence. S&P made a big point of citing the fact that the debt deal did almost nothing to slow the growth of Medicare and other entitlements, obviously alluding to Social Security. S&P surely knows that Medicare's cost growth is driven by projections of explosive growth in private sector health care costs. The projections it relies upon from the Congressional Budget Office show that the cost of providing health care to an average 65 year-old in the private sector will be almost $20,000 (in 2011 dollars) a year by 2030. Of course, this will make Medicare unaffordable if it proves true, but this projected explosion in health care costs will be devastating for the U.S. economy even if we eliminated Medicare and other public sector health care programs altogether.

If S&P were being honest, it would have written about the need to fix the U.S. health care system. Instead it talked about the need to cut Medicare. Of course, if U.S. health care costs were comparable to those in any other country in the world, then we would be looking at massive surpluses in the long-term, not deficits. The reference to Social Security also cannot be supported...

<snip>

More: http://www.huffingtonpost.com/dean-baker/how-to-think-about-standa_b_920148.html

:kick:

[RUMMYisFROSTED]

1. It got hard for me after "How to Think."

Condescending.

[WillyT]

6. I Don't Know If Baker Writes His Own Headlines For His Own Articles...

I know that at most newspapers, the Editors write the headlines. You can go on Google, and find the same article with many different headlines.

And yeah... "How To Think..." is sort of condescending, but the article is well worth a read.

:shrug:

[Rex]

2. Well what do people expect from a company owned by Rupert Murdoch!?

We are FUCKED...

[indurancevile]

7. s&p is not owned by rupert murdoch. it's owned by mcgraw-hill.

[Rex]

9. Oops thank you I am thinking of the Dow Jones Index.

Sorry my mistake.

[polichick]

3. "We can only speculate about the true motive." k&r

[physioex]

5. If they are soo smart....

Where were they when the banks gave away all those subprime loans?

[Vincardog]

10. The problem was never the sub prime loans. The problem was that they manufactured 100s of times

more Exotic derivatives from those sub prime loans than cold ever be paid off even if every one of the loans paid off 100% on time. It was FRAUD.

[dkf]

4. Too bad the Chinese are taking this more seriously than we are.

Their credit rating agency already downgraded us to A.

http://news.xinhuanet.com/english2010/indepth/2011-08/06/c_131032986.htm

Though the U.S. Treasury promptly challenged the unprecedented downgrade, many outside the United States believe the credit rating cut is an overdue bill that America has to pay for its own debt addition and the short-sighted political wrangling in Washington.

Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.

China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.

To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.

http://edition.cnn.com/2011/BUSINESS/08/02/china.us.rating/index.html

Beijing (CNN) -- Although the United States narrowly avoided an unprecedented default following congressional approval of a last-minute compromise plan to raise the debt ceiling, China's leading credit rating agency Wednesday downgraded U.S. sovereign debt after putting it on negative watch last month.

The Dagong Global Credit Rating Company, which lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening its monetary policy, announced a further downgrade to A, indicating heightened doubts over Washington's long-term ability to repay its debts.

It said the gloomy assessment -- much lower than the AAA ratings given by the so-called "big three" Western agencies Moody's, Fitch, and Standard and Poor's -- was inevitable given the level of market concern generated by the stalemate between Democrats and Republicans over the debt ceiling.
"The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States' declining ability to repay its debts," Dagong Chairman Guan Jianzhong told CNN.

[WillyT]

8. Yeah... I'll Be Watching The Asian Markets Sunday Night/Monday Morning...

Could get REAL interesting.

:shrug:

:hi:

[dkf]

11. Europe is the biggie there.

From Bad To Far,Far Worse-Germany - Italy's Too Big For EFSF To Save,Refuses To Carry Bailout Burden

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=439&topic_id=1678316&mesg_id=1678316

[Jim Lane]

12. Baker has it exactly wrong in one respect.

He speculates that S&P wants to curry favor with powerful politicians. I suggest that it's the opposite -- S&P wants to antagonize them.

Consider Baker's point: "This raises the question of whether S&P fears an investigation and possible prosecution." Well, what would happen if the Department of Justice announced such a prosecution now? Can't you just hear the right-wing noise machine howling about how the Obama administration was retaliating against poor little S&P, just because the company dared to tell the truth about the failure of socialist policies?

It's not impossible that S&P, having more information than Baker, knew that an indictment was a strong possibility, and hoped to deter it.

[Gin]

13. they did what they did to help cause the financial collapse....and

there were NO consequences....now...this downgrade may be huffing and puffing but...they did it and who knows what will happen...

they seem to have power to make or break the economy....

should have paid the price for the fraud they sold initially (IMO).