Sunday, August 7, 2011

The S&P Makes Me Moody

So the US has been downgraded in our bond rating by the S&P, and I suspect that a move by Moody’s is not far behind. I understand the importance of this move, and five years ago I would be a lot more upset about it. But here is my problem with it now: S&P and Moody’s, the two biggest credit rating agencies, are a joke.

These are the exact same groups that rated tranches full of sub-prime mortgages as AAA investments. Why did they do this? Several reasons. One is that they didn’t understand the bonds they were rating. Second is that they weren’t paying any attention. And third, and maybe most important, is that they didn’t want to upset the Wall Street firms who were creating these devices and paying them to rate them. And so they rated terrible investments as AAA.

Now after the crash when the bottom literally fell out of these investments, what was their response? “Oh, the ratings are just are opinion, they shouldn’t actually be used to say that these are good investments.” And since it was only their "opinion” they therefore were not culpable for all of the losses that people sustained based on what they thought were their approval that these were good investments. I know that I certainly did not think that their ratings were merely an opinion, and I am sure that almost every other person thought the same thing. We thought the ratings actually meant something, that they were not things that could be bought. But it turns out we were wrong.

So, with that history, here is my question: Why does anyone care what S&P or Moody’s actually think anymore? They have proven themselves as ultimately unreliable. Here’s my opinion, which might be just as good as their opinion, our bonds are just fine.

I do have to say though that the entire debt ceiling episode continues to show all the things that are wrong with Washington. It’s solely about winning, not about what is right for the country, and not just winning immediately but also doing things so that they can win in the longer term. If the country is in bad shape at the next election then Republicans think they can win the White House again, and so they have every incentive to make sure the country is doing badly rather than actually doing what is right.

Now I think Republicans are misreading the electorate and definitely misreading the last election. It had nothing to do with Republican versus Democrat, and everything to do with those in power. People want to see something different, and since the Democrats weren’t getting it done they went the other way. But the Republicans are certainly not getting anything done either, and the polls seem to indicate that people are even more fed up now and want to vote all the bums out. So, unless something changes, I don’t think they will fare all that well in the next election.

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