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Home Publications Blogs Beat the Press Credit Rating Agencies That Rated Subprime Junk as Investment Grade Warn U.S. Over Downgrade

Credit Rating Agencies That Rated Subprime Junk as Investment Grade Warn U.S. Over Downgrade

Thursday, 13 January 2011 08:00

This would have been an appropriate headline for an article about warnings from S&P and Moody's that they might downgrade U.S. debt. These credit agencies rated hundreds of billions of dollars worth of mortgage backed securities that were backed largely by subprime and Alt-A loans as investment grade. Of course they were paid large amounts of money by investment banks for these ratings.

It would be appropriate to provide readers with background information so that they can better assess these sorts of warnings. It also is worth noting that Japan's debt was downgraded by S&P back in 2001 and in 1998 by Moody's. The interest rate on Japan's 10-year Treasury bonds is currently a bit over 1.0 percent. Clearly the downgrading by these credit rating agencies have not had much effect on Japan's ability to borrow.

Comments (9)Add Comment
Robo-Signed Spending Surge Credited for Economic Recovery
written by izzatzo, January 13, 2011 7:38
Just when credit rating agencies were on the verge of issuing a junk bond rating to the USA for its crippling debt, an unexpected surge of investment and consumer spending reversed the deep jobless recession, sending the economy back to full employment and a balanced budget, accompanied by triple AAA+++ ratings.

When asked for an explanation, the agencies explained that under recent court rulings, since ordinary people now had the same access to jobs, income and wealth through Robo-Validation as the ultra-rich, free markets interpreted the flood of higher qualifications as justification for redistribution of income, which in turn sent the Marginal Propensity to Consume and Invest to new high levels with explosive multipliers.
written by JohnT, January 13, 2011 7:47
This isn't the first time credit agencies have threatened the government. In 2008, maybe 2009, a congressman started asking angry questions about the credit rating agencies's role in the collapse. He asked for an investigation. Sorry, I don't remember his name. Moody's CEO thereupon threatened to downgrade US rating. Congressional pursuit of this issue collapsed.
We ALWAYS have the ability to service our debt.
written by Benedict@Large, January 13, 2011 10:27
If such an assessment is based on "ability to pay", then any downgrade would be tatamount to S&P and Moody's saying they are idiots. The US always has the ability to pay, as it has a fully sovereign fiat currency, and can issue additional currency at will and as necessary.

If the assessment is that politians will willfully default when there is no economic necessity, that is another matter. Bit if this is the basis for a downgrade, it should be stated as the basis so as not to cloud what the exact nature of the issue is.
In Fairness to the WSJ (I know that sounds ridiculous)
written by paul, January 13, 2011 11:15
The article did note that markets completely ignored the rating agencies' prior warnings and seem to be ignoring them now. OTOH, the WSJ accepted Moody's seriously misleading stats:

"The most recent official figures show the ratio of federal debt to revenue averaging 397% of gross domestic product in the period to 2020, while the ratio of interest to revenue will rise to 17.6% by 2020, from 8.6% in the last fiscal year. "These figures are "quite high for an Aaa-rated country," Moody's said."

The true measure of creditworthiness, apart from credit history - when did the U.S. last default - is debt service to income ratio, i.e., the interest cost for the federal debt divided by the GDP, which is currently less than 3%. No wonder the market prices the risk of a U.S. default less than the risk of a German default.
written by Matt, January 13, 2011 12:35
Apparently the rating agencies are ITCHING to get charged under RICO - they've stepped it up from conspiracy to defraud investors to "that's a nice country you've got there - would be a shame if something were to HAPPEN to it..." Mafioso tactics.
written by Calgacus, January 13, 2011 2:45
Somebody should tell Moody's that "the validity of the public debt of the United States, authorized by law ... shall not be questioned".

Paul, the Constitution's 5th & 14th Amendments and case law makes US debt uniquely safe and resistant to political tampering. That we issue fiat currency at will means that unless the entire government loses its mind or an asteroid hits the US, the risk of default is zero, unlike Germany, which insanely, like the rest of Europe, gave up its right to create money at will when it joined the Euro.
written by diesel, January 13, 2011 4:56
Sure they gave up their sovereignty, but methought they were tired of speculators jacking their currencies around all over the place and making long term planning and trading well nigh impossible. Help me out here someone. Doesn't that echo in anyone's brain? I'm no expert (in fact, I'm no economist) but I seem to remember the Germans in particular complaining about American hedge funds and investment banks et al playing devious tricks with European currencies back in the pre-Euro days (which is not to say that adopting the Euro didn't mean jumping from the frying pan into the fire).
Could Congress Lose its Mind?
written by paul, January 13, 2011 4:59
We are about to find out, aren't we. So far, the signs are not all that good and just ask Newt about that debt ceiling thingy. BTW, Newt could possibly be Pres in 2012.

Now you see the need for insurance against default?
written by Calgacus, January 13, 2011 8:11
My point is that it is questionable that the Congress has the legal power to make the government default on its obligations, which the Congress itself created. These obligations are then constitutionally protected, and thus the responsibility of all 3 branches of government to ensure payment of.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.