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Home Publications Blogs Beat the Press Credit Rating Agency that Rated Subprime MBS Investment Grade, Downgrades U.S.

Credit Rating Agency that Rated Subprime MBS Investment Grade, Downgrades U.S.

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Saturday, 06 August 2011 07:58

This would have been an appropriate heading for this article on S&P's decision to downgrade U.S. government debt. S&P gave investment grade rating to hundreds of billions of dollars of mortgage backed securities. They received tens of millions of dollars from the investment banks for these ratings.

It would have also been worth asking what S&P thinks it means by this downgrade. U.S. government debt is payable in dollars. The U.S. government issues dollars. What does it mean that S&P thinks that at some point the government will not have the dollars needed to pay interest and principle and its outstanding debt. Does S&P think the U.S. government will forget how to print dollars?

If that is not what the downgrade means then it would be helpful to explain what it does mean. Readers of this article would likely be confused since there is no obvious meaning that could be attached to this downgrade.

Comments (10)Add Comment
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written by foosion, August 06, 2011 10:44
S&P downgraded because of the danger that the political system would willfully decide to default, as the GOP recently threatened.

Reading the S&P press release, there is no meaningful economic reason to be concerned. It's purely a political judgment.
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written by skeptonomist, August 06, 2011 11:06
Dean seems to think that someone has the authority to print up dollars and distribute them for payment of interest and principal on U.S. debt; I don't know where this idea comes from. Some people do claim that the President (or someone) can or must do this on account of a statement in the 14th amendment, but this is subject to interpretation and the President has declined to take the responsibility for this kind of creation of money. Without such authority, Congress has the ability to effectively stop payment and cause default and the threat of this was apparently taken seriously by many people besides the rating agencies, although I would agree that there was probably little danger that Congress would deliberately cause default.

The Fed does have the ability to buy up government bonds, thus effectively retiring some of the debt, so in the long run the debt can be controlled through being devalued at the cost of massive inflation. Maybe this is what Dean has in mind. Bond buyers are not too crazy about this idea either, so maybe if S&P's action, if not entirely political, is a kind of warning about inflation, though I think their real job is to evaluate the risk of default.

The liklihood of default for non-political reasons may be slight, but this has little to do with the fact that the U.S. issues its own money. As I have said before, governments have defaulted before even though they have their own money.
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written by Jay, August 06, 2011 12:07
The CEO of McGraw HIll supports republicans including Romney for President. McGraw Hill owns S&P. S&P downgrades US under Democratic President Obama for the first time in history right before an election year. And Republicans use the downgrade to attack President Obama's handling of the recession. Ignoring that Congress controls government spending and domestic policy. That's basic political science. We learn that in elementary school. Obama has poor economic policy but at the end of the day Congress has to do something as well.
Boycott McGraw-Hill textbooks!
written by Tom Volscho, August 06, 2011 12:31
Well...McGraw-Hills textbook that I was planning on using to teach statistics...guess I will post widely on Facebook. Some of my colleagues will likely follow suit and boycott their textbooks.
S&P -- Still Not Ready for Prime Time
written by Ron Alley, August 06, 2011 2:01
Just as S&P failed to adequately analyze the financial bubble and its housing component, it fails to analyze the economy and the federal government's proper role in regulating the economy.

The text of the S&P downgrade is classic "he said ... she said" stenographic work that masquerades as journalism in mainstream media outlets. It gives a summary of the President's position that includes, "The President’s proposals envision reducing the deficit via both spending cuts and revenue increases." It then discusses the Ryan plan and includes the statement, "The plan also includes significantly reducing the scope of Medicare and Medicaid, while bringing top individual and corporate tax rates lower than those under the 2001 and 2003 tax cuts."

S&P's view is stated succintly, "Standard & Poor’s takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate."

The S&P conclusion is that political agreement is sufficient to insure that investors in US debt instruments are well protected. The sad truth is that the political controversy over the federal budgeting crisis is immaterial. It simply doesn't matter whether the Democrats and Republicans reach an agreement on deficit reduction. What matters is how soon the economy improves and how soon employment will increase. Resolution of the political controversy protects investors only if that resolution stimulates growth both in the economy and in employment.

If I were an investor seeking guidance from a ratings service, I would want a ratings agency with the sufficient insight to identify the relevant data, conduct a thorough analysis and draw well-reasoned conclusions. The S&P rating, as reflected in the text of its statement, is so superficial as to be worthless.
AIG AAA?
written by bill, August 06, 2011 3:24
When did AIG lose its AAA rating? :-)
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written by MB, August 06, 2011 4:00
I am wondering how the downgrade compares with the recent attack on Italy by 'bond vigilantes'. The reason I ask is because I watched a news report on MHz where the reporter in Rome noted that the attack was happening while officials were on vacation (and therefore not able to respond to the challenge) and despite actual good strengths in Italy's economy, such as strong manufacturing and very little consumer debt among its citizens.

So considering the problems with credibility among the ratings agencies---and the high stakes gamesmanship going on throughout the world's economies, can this downgrade be considered a form of vigilantism, a type of attack on the US economy? Can it be comparable to the exploitative actions of the hedge fund Magnetar? Or even the actions of George Soros against the pound sterling?

Also, this issue of China and the games they play with exchange rates, can that be comparable to the dynamic Richard Wolff described in his article, A Tale of Two Lootings?

"Business and the rich happily financed a political system that converted their tax obligations into secure, well-rewarded loans to the government instead." http://www.rdwolff.com/content/tale-two-lootings

This from your other post made me think of it:

"China's decision to prop up the dollar against the yuan is the main cause of the trade deficit that makes the U.S. a net borrower. In other words, it is China's own actions that lead to the U.S. borrowing that it is complaining about."

I'm also thinking of it as similar to the actions of credit card companies that use their own obstacles or small weaknesses among consumers as excuses to jack up interest rates to the point of creating an overwhelming debt spiral. I think the word I'm thinking of is 'awfulizing', meaning there is smoke but there was no need for it to become a forest fire.
What is this: Beat the Onion?
written by Union Member, August 06, 2011 11:43

You're all joking, right?

Foosion: "Political system"/ "political judgement"... You give this slimy crap a dignity it doesn't deserve. Wall Street is playing all of Washington like a Flea Circus - on drugs from Big Pharma.

Jay: Obama isn't bargaining as a good-faith little clown either The President has taxpayers, voters, consumers - you know "folks" -right where he wants 'em - powerless, with not options. Mcgraw -Hill doesn't count for much in Washington. The most well-funded, best organized, most powerful political faction (party even) in town is the Pentagon. (They get 700 Billion Dollars every 12 months) And wouldn't you know Obama's new Defense Secretary said, this week, at his first press conference, that budget cuts should come t Social Security over defense or it would perilously weaken National Security. He's well armed.

skeptonomist: i don't know what to say? you question whether or not the Government can just print money. And you wonder about the technical legal aspects. Maybe you should look just at it like Robo-signing? That's the Bank of America way. (Obama's a Constitutional Scholar, he'll figure it out.)

You all are so seriously looking for solutions to problems we never, ever, should've had in the first place. Since all of this stuff is self-created, why can't we just print some money, bury it in the ground, and pay people to dig it up? I know lots of unemployed people who would jump at the chance to help their country, serve their country. Not like Wall Street, which just wants to take.

(I think the New York Times is trying to cut in on The Onion's circulation.)
Worst. Blog Entry Post. Ever.
written by Kevin, August 07, 2011 4:35
"Does S&P think the U.S. government will forget how to print dollars?"

By that logic, why doesn't every country that issues debt in their own currency have a AAA rating? That statement implies that being paid back in inflated dollars would be a good investment, worthy of a AAA rating. Stop this foolishness.
Mr.
written by John Kollar, August 08, 2011 2:04
S&P have been attempting to curry favor with the Euronation for rating business.
What is a S$P rating worth? We know they will sell their integrity for $10's of Million to give Triple AAA rating for hundreds of Billions of dollar of JUNK Mortgage Backed Securities.

Why hasn't AIG sued S&P and their parent Magraw-Hill.

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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.

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