America's Credit Downgrade Lacks Real Substance

Late last week Standard & Poor’s carried out their threat to downgrade the United States credit rating from AAA to AA+. The decision to lower the rating has been met with a roller coaster market and vehement opposition. 

The downgrade itself should be taken with a grain of salt, as S&P has shown itself on numerous occasions to be imprudent with its rating system. It is more a politically-charged decision than a judgment of the U.S. Treasury debt. Their decision is an obvious power ploy by an organization looking to stand up to the world’s largest borrower. The credit rating system that often drives markets is an imperfect science that is flawed and ill informed, as credit raters often provide a subjective outsiders perspective. The downgrade has immediately made S&P the villain as many have responded skeptically to the choice to downgrade an economy that will not, I repeat, not default on its loans.

S&P’s rating measures their opinion of the ability and willingness of a lender to meet its financial obligations, and yes, our economy is on shaky ground, but our country will never default on our loans. We will raise the debt ceiling if and when necessary, and I truly believe that our elected officials will come up with a significant debt deal in the future. The fact that investors are flocking to U.S. Treasury bonds, instead of running away as if they were on fire, signifies a slimming chance of default.

The decision by S&P to downgrade the United States was a pure political move, done not because of our decaying economy but rather our eroding political system. The report stated, "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed." The inability to compromise and incessant use of debt default, as a bargaining chip by the Republican Party, was a main reason given for the downgrade.

S&P is an economic entity, not a political one, so to base an economic decision that will knowingly sour the markets and investor confidence on political strife is unethical and downright irresponsible on their part.

The system is so inherently bad that the Security and Exchange Commission recently unanimously decided to remove references of credit agencies like S&P and Moody’s from certain rulebooks. The commission will look to come up with alternative ways to evaluate credit ratings.  

The initial analysis of our debt by S&P should have been a warning signal to the lackadaisical nature of the ratings system. When calculating the debt, S&P’s numbers were off by a hefty $2 trillion, due in large part to their calculation that domestic discretionary spending would grow at the rate of GDP rather than inflation, which is specified in the Budget Control Act. The analysis was unsound and downright sloppy.

S&P itself has a shaky history when it comes to its rating system. They were giving out AAA ratings to many of the toxic subprime mortgage packages that ravaged the markets in 2008. They continued to label these loan packages as top quality in order to persevere their business with large banks as well as keeping the cash flow moving.

Rachel Maddow put it best this weekend on Meet The Press, “… honestly, we should talk about the fact that during the financial crisis, S&P was handing out AAA ratings to any pile of junk tall enough to reach the doorbell and ask.”

Last week’s decision was an attempt to improve the stature of the rating agency following the debacle that was 2008. As economics professor Robert Polin speculated that they are trying to create an image that “they’re hard nosed, they’re courageous; this is their best objective analysis.” Too bad for them, their chance to look responsible and credible fell by the wayside when they continued to willfully give their stamp of approval to junk bonds that put us in this mess to begin with.

Photo Credit: wakrimasen82