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Standard and Poor's: Just More Corrupt Wall Street Insiders Waging Class War on America

S&P's downgrade provides compelling evidence of the corruption eating away at the foundations of yet another key Wall Street institution.
 
 
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Standard and Poor's decision to downgrade our public debt tells us absolutely nothing about the probability of the federal government meeting its future obligations. The move really only offers us some compelling evidence of the corruption eating away at the foundations of yet another key Wall Street institution.

I should say that it offers us additional evidence. According to a Senate investigation concluded earlier this year — a probe that was greeted with a collective "ho-hum" by the corporate media — S&P and Moody's, another leading agency, “issued the AAA ratings that made ... mortgage backed securities ... seem like safe investments, helped build an active market for those securities, and then, beginning in July 2007, downgraded the vast majority of those AAA ratings to junk status.” And when they did, it “precipitated the collapse of the [mortgage-backed securities] markets and, perhaps more than any other single event, triggered the financial crisis. ( PDF)”

According to the Senate investigation, in the years leading up to crash, “warnings about the massive problems in the mortgage industry” — including internal warnings from their own analysts — had been ignored because of the “the inherent conflict of interest arising from the system used to pay for credit ratings” — the big “rating agencies were paid by the Wall Street firms” that were making a fortune selling that glossed-up garbage to credulous investors.

The almost surreal irony here is that it was the economic crisis that the ratings agencies facilitated which led to a massive drop in tax revenues, and it was that, more than any other single factor, which caused the large deficits the federal government has been running in recent years. In other words, the agencies themselves played a pivotal role in driving up the national debt. Yet, rather than doing the honorable thing and throwing themselves out of their high-rise windows in the wake of the crash, S&P's management had the nerve to start playing politics with that very same debt.

At the height of the debate over raising the debt ceiling, the elite ratings agency issued a remarkable warning: The firm said that it would downgrade U.S. treasuries even if the limit were raised. The only way the government could avoid such a move, the agency warned, was for Congress to rubber-stamp the ostensibly “balanced,” $4 trillion debt-reduction package — one that included largely unspecified “entitlement reforms” — that Barack Obama had offered the GOP (S&P insisted that it didn't favor any specific policy approach, but it did specify a “balanced approach” worth $4 trillion shortly after Obama floated the proposal).

Congress eventually raised the limit in exchange for a lesser figure of up to $2.7 trillion worth of deficit reduction, and late Friday, after the markets were safely closed and the world's traders had headed home for the weekend, S&P shot its hostage.

The downgrade itself is a ludicrous joke. Those Wall Street hotshots made a mathematical error that inflated our projected debt by $2 trillion — more than the amount of difference between the debt package they lusted after and the one eventually passed by Congress. “A judgment flawed by a $2 trillion error speaks for itself,” an unnamed Treasury spokeswoman told the New York Times . And can anyone seriously believe that the United States — the world's most powerful state — is less likely to meet its obligations than Hong Kong, a semiautonomous capitalist appendage of quasi-communist China?

S&P's decision to knock us down a peg wasn't based only on its economic analysis. Its primary reason for the move was our screwed up, tea party-stained political scene. And on that point, the firm's analysts are 100 percent correct. While the United States — which issues debt in its own currency and can always print more money — can't be forced to default on its debt by external circumstances, an unstable government made dysfunctional by a band of ideological zealots in control of one chamber of Congress could potentially choose voluntarily to default. We came close to seeing that scenario come to pass last week.

 
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