The more I read about the S&P downgrade, the more screwy it seems. Paul Krugman:
Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point â€” then went ahead with the downgrade.
More than that, everything Iâ€™ve heard about S&Pâ€™s demands suggests that itâ€™s talking nonsense about the US fiscal situation. The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs.
S&P prepared an analysis to justify a specific conclusion. The analysis was off by $2 trillion. Treasury explained to S&P that the analysis wasnâ€™t even close to being accurate, which led the ratings agency to concede theyâ€™d made a mistake.
And a few hours later, S&P decided to reach the same conclusion anyway. The agency wanted to proceed with a downgrade; whether its numbers added up was irrelevant.
That certainly inspires confidence in the integrity of Standard & Poorâ€™s decision making, doesnâ€™t it?
The press release issued by S&P reeks of some attempt at manipulation. For example —
The outlook on the long-term rating is negative. We could lower the long-term rating to â€˜AAâ€™ 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.
Ezra says the downgrade is defensible, citing a statement from S&P about our political dysfunction —
â€œThe downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,â€ they explained in the statement accompanying Fridayâ€™s decision. After Republicans in Congress spent three months weighing whether or not to default on our debt and Senate Minority Leader Mitch McConnell said that paying our bills would never again be a foregone conclusion, can anyone really argue with that?
I can’t argue with that, and if S&P had given that as its primary reason for the downgrade I would be much less suspicious. But it goes on and on about other things, including “entitlements” and “discretionary spending,” that make it sound as if they are more interested in imposing more austerity. They do mention revenue increases also as a desirable thing, but more or less in passing. It almost reads as if they threw in a couple of mentions of revenue to make it seem less like dictation from the Tea Party.
Not long ago S&P, along with the other major credit agencies, gave their approval to what they must have known were worthless mortgage-backed securities, thus playing a role in the financial meltdown of 2008. In that case, S&P was being paid by the firms issuing the securities, which makes it clear that their primary focus is on pleasing their customers. So who is the customer now?