Saturday, August 6, 2011

Standard & Poor Excuse for a Ratings Agency

Mike predicted this years ago and finally the S&P ratings agency has "downgraded" the U.S. credit rating to "Outlook Negative".

Link to the S&P announcement here.

Others within the MMT paradigm have pointed out that perhaps S&P should downgrade the US rating due to the fact that intransigent deficit reduction fetishists operating within the government often push the US Treasury to the brink of default at the times when the US reaches the so-called "debt" ceiling; and therefore, for a lack of effective willingness to pay, the US perhaps could receive a downgrade. Here is S&P on this:
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 statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.
So you can see S&P comes close to a realization of this concept of willingness here, pointing out the reckless behavior of those in government around the "debt" ceiling issue. But close is all we get from them, S&P then goes full moron:
Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement 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.
Too bad they cannot see that with the US Treasury, "willingness to pay" is the only issue. Look for this ratings issue to be a major topic in the financial media next week.

Aside: You know, all of this when we have troops in the field in harms way getting shot at everyday. This garbage from S&P and then the previous statements from PIMCO's Gross (remember "who will buy them now?"). What would people have thought of these types of statements and actions during WW2 when the Treasury was selling "war bonds"? To me it is the same thing.


Anonymous said...

These wars are genocidal, so who cares.

Anyway, what will be effect on the bond market? I guess nil, maybe a small correction but yields will continue to be extremely low.

Matt Franko said...

I believe this is just a "slight" downgrade (so far) so probably not much effect, but it will occupy the media next week for sure.

Speculators could start to short Treasury securities. Mike has called that same trade wrt the similar Japan downgrade "The Widowmaker".

Expect much blather from CNBCs Santelli for instance...


PS I can just picture Gross and McGraw sharing a nice cell down at GITMO.

Anti said...

Why wasn't there more talk about destroying the rating agencies after the financial crisis?

There've been claims they can't survive without depending on fees from some of the institutions they rate, so why not make such conflicts of interest illegal(if fin reg didn't address it)? And why not do everything possible to break the dependency of various private investment institutions on their ratings? Why not a sustained and concerted effort to destroy the rating agencies in the eyes of the public, starting in '08-'09?

When you let bad people get away with things, this is what happens. They are brazen enough to direct their corrupt and incompetent attention toward our very government, completely unjustifiably.

We have no leaders in Washington. Leaders would have treated these agencies and the big banks and other financial institutions responsible for this crisis as what they are, which is enemies of the public.

Tom Hickey said...

Anti, some pundits are seeing this a payback from S&P for politicians putting blame for the crisis on the agencies and trying to put a leash on them. It's a warning shot that the rating agencies can take them down if they overstep.

This is hardball.

Anti said...

I should say Tom, I don't buy MMT, but you guys are good bloggers. I started reading this when it was just Mike, and it was fine, but you guys have really added a lot to it.

Tom Hickey said...

Thanks, Anti. Everyone who comes by and comments adds something we can learn from, too.

SchittReport said...

"for a lack of effective willingness".

this is hardly fact-based analysis. in fact, most of the "analysis" in their report is illustrative and interpretative.

even in their own guidelines, S&P says the basis for most decision making on upgrades / downgrades should be event-driven.

i had dinner with the head of S&P asia a couple of months ago, and apparently S&P senior brass believe that using a mckinsey-esque SCP framework will make their analysis appear more value added => increased fees.

fallacious thinking to say the least.

Tom Hickey said...

SR, how does one apply an industrial SCP framework analysis to government securities? Got me scratching my head on this one.

googleheim said...

Folks say that Obama skimmed over the Constitutional option, instead favoring a more transparent bargaining.

However, how more transparent is the Constitution ?

He should not have bargained, and then also the Republicans should have asked to bargain.

This is the 2nd ending of the Republican party.

SchittReport said...


while it was developed by mckinsey for business analysis, SCP is not limited for that purpose only. it is a framework for taking different sets of causal inputs and understanding their impact on performance, usually for the purpose of developing predictive models or conclusions / recommendations.

as such, you can apply this framework to a broad range of situations, including ratings for debt instruments.

indeed, if you look at the S&P report, they break the analysis into two main components: 1) future projections of overall debt and debt / deficit reduction capacity and 2) government policies towards 1)

to digress a bit, i think they've done a fairly shabby job in the report as they do not analyze the range of policy measures government can take to repudiate debt and/or control deficit spending (this is the "C" or "Conduct" part in SCP). their main conclusion in this part is backward looking - that government has been acting irresponsibly and has not taken enough measures to cut the debt / deficit and hence the downgrade.

this sort of conclusion is highly arbitrary in nature and can be way off the mark if you don't have the right inputs or conduct the analysis incorrectly. hence back to your original point - i don't think S&P should be using this type of framework for assessing sovereign debt - the conclusions are never uniform and rely heavily on individual judgment.

Matt Franko said...


Yes Tom, like SR says they probably "wing it" when it comes to the US Treasury.

But Ive noticed that other morons ROUTINELY mis-apply business practices to the operations of the government.

Paul "$350 Wine" Ryan comes to mind.

You can pick up on it in how he talks about the government: "savings" "made money (for the taxpayers", "borrowing", all kinds of words from the lexicon of business.

They see themselves as business persons or something. They do not realize who they are really working for (ie the govt/"Caesar").


Tom Hickey said...

Thanks for the clarification, SR and Matt. Seems to be yet another case of treating government like a business when they are actually antithetical in purpose, structure and function.

SchittReport said...

dean baker summed it up perfectly:

"It would be nice if we could just assume that the credit rating agencies make their rulings on an objective assessment of the evidence, but we can't."

googleheim said...

matt mmike tom

paul ryan's savings are taxes to us and to our grand children

Bob said...

People bitched when the rating agencies didn' do their due diligence when it came to the MBS etc. I was one of them.

Now they are doing their job and call it like it is, and people still bitch? The US is insolvement with the upkeep of the Zombie banks, and the missing 160 billion in tarp funds. What a joke our system is, the banks paid back tarp with federal tax payer money to get out from under govt watchdog on bonuses. The supreme court rolled over for the corporations, (my definition of a corporation a handfull of rich asshholes who dont give a dam about the environmet or their fellow man, all they care about is GREED). sorry to say.

Calgacus said...

Bob, the point is the ratings agencies are still not doing their jobs.

They think the deficit should be reduced, that this will help the economy, that it would improve the government's ability to pay, that the government could ever be insolvent.

This is like a doctor giving someone with a concussion a baseball bat and telling him to hit himself on the head with it three times a day. And then pulling a gun on the patient and threatening to shoot him if he doesn't comply.

The ratings agencies see this and downgrade the the patient's prognosis. They feel the doctor's behavior is just fine, but not tough & effective enough because because the patient doesn't always follow instructions. They may be right about the prognosis of a patient with this doctor, but for the wrong reason.