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.

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.

S&P noted that it no longer believed the “Bush tax cuts” — the single largest contributor to the public debt going forward — are not going to expire on schedule. “We have changed our assumption on this,” the agency wrote, “because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing” the deal.

Looking forward, it's also clear that the GOP will continue to take the American economy hostage if its ideological demands aren't met — party leaders have promised as much — and the Democrats haven't proven themselves to be very good at mounting rescue operations. So, while a Wall Street firm that specializes in analyzing the risk inherent in various securities may not have any business offering us its political analysis, if it had left it there, nobody could have argued with its conclusions. The United States government's actions have certainly become harder to predict.

But it didn't leave it there. It added some Fox News-quality economic nonsense to its decision, noting that the debt deal “fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently.”

Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that, for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Most honest independent observers who know what they're talking about agree that Social Security hasn't added a penny to the national debt, is fully funded for the next 25 years — which is pretty “long-term” by most people's standards — and can pay out benefits higher than what retirees are getting today for the next 75 years, even without any adjustments to the program.

Messing around with the other “entitlements” will do nothing for our economic outlook because Medicare and Medicaid's problems are driven by one thing and one thing alone: the rapid increase in the cost of private sector healthcare — costs that burden American businesses as well as the government. Shifting more of the responsibility onto individuals might help the government's fiscal outlook, but it would only make the underlying problem worse. Why? Because healthcare costs are rising more slowly in our public health programs than they are in the private sector.

And even with healthcare costs rising, the Medicare “gap” — projected to hit 13 years from now — is equal to just one-fifthof the increase in defense spending since 9/11. It's worth noting, therefore, that there was no talk of downgrading our debt when we launched a couple of “wars of choice” that are projected to cost us at least $3 trillion when all is said and done.

These are all simple facts, and ignoring them should be the definition of “unserious” analysis. Or, as Paul Krugman put it, “Everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the U.S. fiscal situation.”

The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet U.S. solvency depends hardly at all on what happens in the near or even medium term: An extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term.

The downgrade may be silly, but it could hurt nonetheless. The agency may start downgrading other institutions that rely on public funds for their economic well-being; investors could start demanding more interest to entice them to buy U.S. treasuries. And even a small increase in interest rates could cost the government many billions in higher debt payments.

We'll see how the markets react this week. A more likely scenario is captured by a joke that made the rounds over the weekend: Now that U.S. treasuries have been downgraded, spooked investors will run from the risk into ... U.S. treasuries. Our bonds are still rated AAA, after all — the other big ratings agencies, Fitch and Moody's, still consider our debt to be a risk-free investment. In all likelihood, investors will shrug and continue to pour money into U.S. treasuries, because, regardless of what S&P may think, they remain the safest investments in the world. As the Wall Street Journal points out, “There is little alternative to U.S. treasuries for investors who need deep liquid markets in which to park their holdings. The most obvious place, the euro, faces even deeper structural problems.”

That's essentially what happened when Japan's public debt was downgraded. As the Journal noted, after that move, “yields on Japanese government bonds had a muted reaction and 10-year government bonds remain around 1 percent today.” Unlike the yen, however, the dollar remains the reserve currency of the world — the federal government issues around 60 percent of all AAA-rated sovereign debt — and nobody is going to be eager to pull their cash out of treasuries now, in the middle of a global downturn.

A collective shrug from investors would be the best possible result of S&P's downgrade. Most people believe that the ratings agencies base their analyses on some set of cold, objective criteria, but that's not the case. A group of Wall Street analysts — none of whom are going to have to worry too much about the state of Medicare when they retire — get together and discuss various factors, including, in this case, the political scene, and come to a consensus. So it's possible that this downgrade will expose their ratings as subjective and ideologically informed — as just another product of rich, corrupt Wall Street insiders campaigning against “entitlements” as they are now the key front in their decades-long class war from above.

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