New Deficit Strategy: Flaming the Messenger


To follow up on Peter Suderman's great post from yesterday about the predictive unreliability of interest rates (and the bubble mentality inflated by those who cling to low interest rates as proof that there's no real borrowing problem), here's a selection of commentators who reacted to this week's Standard & Poor's downgrade by flaming the messenger:

William Greider, The Nation:

Standard & Poor's, the self-righteous credit-rating agency, has a damn lot of nerve. It provoked scary headlines by solemnly threatening to "short" America. That is, downgrade the credit-worthiness of US Treasury bonds unless Congress and the president oblige creditors by punishing the citizenry with severe budget cuts. What a load of crap.

The headline I would like to see is this: "S&P Execs Face Major Fraud Investigation, Take the Fifth Before Federal Grand Jury." […]

What's required is a serious law that either changes the status of the rating agencies or shuts them down. Otherwise, the temptations for more deception and false assurances will be too strong to resist.

The deficit panic is itself bogus–poor-mouthing America to avoid raising taxes on the folks who got the money.

Yves Smith, Naked Capitalism, in the New York Times:

The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.

The Standard & Poor's rating firm should be embarrassed. If there is any political judgment at work here, it is S.&P. falling for politically motivated scare mongering. But given its track record with mortgage securities and collateralized debt obligations, why should we be surprised to see a rating agency relying on conventional wisdom rather than analysis?

R.J. Eskow, Huffington Post:

Conveniently, [the] announcement put enormous pressure on reluctant politicians to accept a deal—any deal—that would reduce the deficit. And that's exactly what the anti-New Deal crowd's been pushing. […]

S&P was wrong about Enron. It was wrong about AIG. It was wrong about all those securities it rated AAA, and which were later downgraded to junk bond status. But then, when your corporate bottom line depends on being wrong, you're probably going to be wrong a lot.

The right question isn't "why did S&P downgrade the US government?" It's "why does anybody still listen to S&P?"

Stephen Reader, WNYC.org:

Because [ratings agencies] aren't a part of the government, it's harder for government to hold them accountable. "It's like freedom of the press," says [New York University Economist] Dr. [Richard] Sylla. "[They say] they're only offering an opinion, not a guarantee—so they don't guarantee that they're always right, but they have the right of free speech to express their opinion."

The excuse is unsatisfactory, but as long as the federal government relies on these private companies to do regulatory legwork instead of conducting its own ratings, perhaps our frustration could be better directed at Washington.

L. Randall Wray, University of Missouri-Kansas City economics professor, in the New York Times:

Yes, the raters who blessed virtually every toxic waste subprime security they saw with AAA ratings now see problems with sovereign government debt.

The best thing to do is to ignore the raters

James Fallows, The Atlantic:

What I'd really like to know is who S&P likes in the Hornets-Lakers series, or this season of American Idol. Their views would carry just as much weight. Also I'd like to know why the news ecology treated this as such a big deal.

Now, there are plenty of perfectly good reasons to question and mock S&P, including some at the links above (and this one, too). Context is a very good thing. But as these responses also make clear, there is a not-insignificant mindset out there that there is no problem, certainly not anything that couldn't be fixed by jacking up taxes (even though that wouldn't come close to making our red eyes black).

It may be true that the see-no-evil types are, broadly speaking, now on the sidelines of the current debate. But there is a reason why President Barack Obama is going around California talking up Pell Grants, clean energy, "investments in basic research," transportation, and protecting the safety net: He thinks that that kind of "balanced approach" (i.e., one that is fundamentally unconcerned about the growth in government spending) is what will get his voters back to the polls next year. Which might be the best defense of S&P's conclusions you'll read all week.