Kid Dynamite: “In case you’ve been living under a rock: Standard and Poors downgraded the credit rating for the United States of America last night, from AAA to AA+.”
It seems that at this point S&P is generally viewed as incompetent, and the decision to downgrade the US may not be as consequential as many initially predicted. But who really knows? We’ll get a hint tomorrow morning. In the meantime, I found the following posts and articles to be thoughtful and/or interesting:
Still, I think the whole thing is preposterous. S&P downgrading the United States is like Consumer Reports downgrading Coca-Cola. Consumer Reports is a great institution. For example, if you want to know how reliable a 2007 Ford Explorer is going to be, they have done more research than anyone to figure out the reliability history of every single vehicle. Those ratings are a real public service, since they add information to the world. But when it comes to Coke and Pepsi, everyone has an opinion already, and no one cares which one, according to Consumer Reports, “really” tastes better. When S&P rated some tranche of a CDO AAA back in 2006, it meant that some poor analyst had run some model fed to her by an investment bank and made sure that the rows and columns added up correctly, and the default probability percentage at the end was below some threshold. It might have been crappy information, but it was new information. When S&P rates long-term Treasuries AA+, it means . . . nothing. And if any serious buy-side investor were tempted to take S&P’s rating into account, she would be deterred by the fact that the analysis that produced the rating included a $2 trillion arithmetic error.
Ezra Klein, with two conflicting theories on the timing of it all:
S&P is downgrading their estimation of our political system, not our actual ability to pay our debts. Indeed, the past 36 hours offered a stunning demonstration of the market’s faith in our ability to pay our debts. The panic sent investors rushing to buy Treasuries, sending yields on 10-year Treasuries to 2.4 percent — that’s almost nothing — and demonstrating that American debt is still considered the safest bet in the world. That vote of confidence under real world conditions is far more important than anything S&P says.
This is very odd timing from S&P. The markets are very fragile right now. But you can take that both ways: It suggests that S&P either wanted to make a huge splash with their downgrade, or, because they’re doing it at a time when investors have precisely zero other options they like and are thus likely to continue to hold Treasuries … that they don’t want to make too much of a splash.
So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment.
In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.
…the US does not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default.
But putting aside the politics of it all, these charts from the Globe and Mail, via James Fallows, say quite a bit about where we’re at, where we probably need to go, and how we probably need to get there:
