Don’t Mean Nothing: The S & P Downgrade

“To say that S &P’s analysts aren’t the sharpest tools in the drawer is a massive understatement.”

The Economics of Contempt

By now, you’ve probably heard about Standard & Poor’s botching the numbers on their budget “analysis.”  That’s right. The guys who, less than 5 years ago, were giving AAA ratings to the emperor’s new clothes of investments (and a single A rating to Lehman Brothers up until the day it went bottom up)  made an oopsie of a couple of trillion dollars. Not because they forgot to carry the one, but because they didn’t understand how federal budgets work.

The Gang The Couldn’t Shoot Straight may be repairing its reputation with someone, but it’s not investors . As Krugman points out this morning, if there were serious concern about the United States’s debt status, investors should be running away from U.S. debt. They’re not. “Investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns.”

But what about S & P’s analysis of American politics? If the ratings agency’s credibility weren’t already ridiculous, The Economics of Contempt points out that its political assessment depends on us having the same crazy Congress “in perpetuity.” While it is true that we will be stuck with Republicans for a long time to come, the Tea Party contigent is not likely to wield this much power ever again. Things change in politics, often before we know it. (Read this post for more on S & P’s clownish political analysis; the blog wouldn’t let me copy and paste). E of C, a former investment attorney for a large investment house, says that Moody’s and Fitch’s had minimum financial competence, but when his people went to argue for a rating, they had to consider whether their argument could be understood by S & P’s analysts. Oy.

Jacob Goldstein of Planet Money points out that S & P’s rating is largely irrelevant because,

most Treasuries are held by big, institutional investors who do their own research and don’t rely on rating agencies for this sort of thing. And, while ratings do a some role in financial regulation, regulations treat AAA and AA-plus the same way, for the most part.

If you really want to cram this morning’s decline in Treasury yields into a narrative about the downgrade, you could say that the downgrade of U.S. government debt scared investors, and what investors do when they’re scared is buy U.S. government debt.

In other words, who actually cares what S & P’s thinks? Krugman thinks the Very Serious People will. That’s their job after all: decide what is significant and explain why its significant even if it’s insignificant. I’m not finding much at the moment. There’s no search engine filter for VSP commentary, but we can expect the editors of the Globe to opine that although S & P lacks credibility that it’s time for Washington to get our financial house in order, and we should use the downgrade as a signal that it’s time for both parties to come together in the spirit of bipartisanship to raise the age for SSI and Medicare and look at carefully raising some money through taxes.

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Tue 28 Mar 6:06 AM