“Is Standard and Poor’s Manipulating US Debt Rating to Escape Liability for the Mortgage Crisis?”

By Scarecrow and Jane Hamsher. Cross posted from FireDogLake

The Politico headline says it all: U.S. credit downgrade worries Obama, Congress more than default

It’s not the default that strikes the most fear in the White House and Congress these days. It’s the downgrade

As Robert Reich notes, Standard and Poors is the “biggest driver in the deficit battle.” Why would anyone care what the corrupt and disgraced organizations who quite nearly brought down the world economy think about anything at this point? And yet, that is where elite opinion is focused right now:

[W]hat really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.


Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction.

This rumbling has been coming from Capitol Hill for a while, which made us start asking questions about what was really going on with Standard and Poors. It felt like there’s a story-behind-the-story driving S&P’s actions in the debt ceiling debate, which appear inexplicable at face value and go way beyond what Moody’s or Fitch have done. And the more we looked at the timeline of events, the more we wondered how the intertwining dramas of a) S&P downgrade threats, b) the liability that the ratings agencies may have for their role in the 2008 financial meltdown, and c) the GOP’s attempts to insulate the ratings agencies from b) are all impacting each other.

Timeline of Events

On July 21, 2010 President Obama signs Dodd-Frank into law. Prior to Dodd-Frank, the courts found that credit ratings are expressions of opinion that were protected under the first amendment, subject to a demonstration of actual malice:

The Dodd-Frank Financial Reform Act stripped away those protections, so that CRA’s were now subject to the same expert liability as an auditor or securities analyst, and required only a “knowing” or “reckless” state of mind for liability, rather than proof of scienter. It also repealed Section 436 of the Securities Act of 1933, which granted “safe harbor” for ratings, which were part of a prospectus.

Which, for obvious reasons, made the ratings agencies extremely nervous.

In October 2010 S&P issued its first threat to downgrade US debt: “If the U.S. government maintains its current policies for the next 40 years in the face of rising health care and pension spending pressure, it is unlikely that Standard & Poor’s Ratings Services would maintain its ‘AAA’ rating on the U.S.” The report paints a target on the back of Social Security and Medicare, says nothing about the wars, the Bush tax cuts, private health care costs or the absurdity of 40 year projections.

Ratings agencies are supposed to be reactive and analyze only what they see. They are not supposed to explicitly or implicitly give ”assurance or guarantee of a particular rating prior to a rating assessment.” By prescribing not only an austerity package for the United States, but stating that “in the long term, the U.S. AAA rating relies on reforms” of Social Security and Medicare, they most assuredly broke that rule.

S&P put forth no legitimate basis for their downgrade threat. As every reputable economist keeps reminding us (James K. Galbraith, Joe Stiglitz, FT’s Martin Wolf, Peter Radford, Bruce Bartlett, Krugman), the US is not Greece and does not face its risk of default. Unlike Greece, the US has its own currency, and unlike Greece, its debt is denominated and would be paid in its own currency. It can create that currency at will. So the only way the US can be forced into default is if Congress and the President do something that would be insane, like refuse to raise the debt limit, and the President then refuse to use the Executive authority of the Constitution to prevent a default.

But S&P was clearly determined to set itself up as arbiter of the US debt ceiling debate. They said nothing in December when the Bush tax cuts were extended, which dramatically exacerbated the deficit problem they warned of in October. But on February 14 President Obama releases his budget, which cut the deficit by $1.1 trillion over 10 years. The Standard and Poors committee found Obama proposal “disappointing.”

Sign our petition to the SEC: Revoke S&P’s authority as a credit ratings agency for their use of ratings as a political weapon and their attempt to avoid responsibility for their role in the financial crisis of 2008.

The White House clearly began to worry about the political implications of what S&P might do. Emails from both Treasury and S&P were provided to the House Financial Services committee earlier this week, showing that in March S&P and Treasury officials began coordinating discussions of the administration’s budget strategy before the S&P committee met to discuss the US credit rating.

But White House officials weren’t the only ones trying to work the refs. On March 14 Congressional Republicans stage their first challenge to 2010′s Dodd-Frank financial regulation reforms — an attempt to repeal the provision exposing credit rating agencies to the legal liability they were chafing to escape from.

And on April 5 Paul Ryan announced his alternative budget plan. Ryan’s budget was claimed (it was mostly a fraud) to produce over $4 trillion in reductions, while reducing tax rates. It also did so by slashing Medicare and making hundreds of billions in unspecified cuts to unnamed domestic programs. S&P were conspicuously silent.

April 13 was a big day

President Obama gave a speech in which he vowed to cut $4 trillion in cumulative deficits within 12 years through a combination of spending cuts and tax increases. Why was he suddenly pursuing $4 trillion in cuts, up from $1.1 trillion in January? Clearly Ryan had upped the ante. But what was he competing for?

Also on April 13 , Timothy Geithner along with Deputy Secretary Wolin, OMB Director Lew and a representative of the vice president’s office met with S&P personnel, per Geithner’s June 13 letter to the House Financial Services subcommittee. ABC reported that Geithner asked S&P’s David Beers to hold off on issuing any report until after the President Obama and Congress had completed negotiating over the rest of the FY2011 budget.

But perhaps the biggest thing that happened on April 13: A bipartisan study on the financial crisis from the Coburn-Levin Senate Permanent Subcommittee on Investigations released a report saying the credit ratings agencies were a “key cause” of the financial crisis. They issued a 650 page report, which included the following recommendation (p. 16):

The SEC should use its regulatory authority to facilitate the ability of investors to hold credit ratings agencies accountable in civil lawsuits for inflated credit ratings, when a credit rating agency knowingly or recklessly fails to conduct a reasonable investigation of the rated security.

Two days later, David Beers reached out to Undersecretary Goldstein to let Treasury know that the Standard and Poors committee has changed its outlook to “negative.” On April 18: Standard and Poors issued press release downgrading the outlook for US sovereign debt from stable to negative and giving a 30% chance of a ratings downgrade from AAA to AA.

“U.S.’s fiscal profile has deteriorated steadily during the past decade and two years after the financial crisis” they say — with no mention of their own role in that crisis. And whereas the October threat had been based on concerns over Social Security and Medicare, the latest press release contained no mention of either. Now they were worried that “Republicans and Democrats are deeply divided on a plan to reduce debt” and that political squabbling will prevent the debt ceiling from being raised.

On April 19 Geithner was dispatched to do an exhaustive round of talk shows, saying he disagrees with Standard and Poors and that there is “no risk” of a credit ratings downgrade.

But Geithner isn’t the only one. On April 20 Mitt Romney begins using the S&P threat of a downgrade for political advantage. In a radio interview he says that S&P “just downgraded their view for the future of America” and called for the President to “sit down and personally meet with S&P” as he said he did as governor of Massachusetts.

SEC takes the gloves off

In the midst of all of this, the SEC was moving to implement Dodd-Frank in ways that would negatively impact all the ratings agencies, and looking into S&P’s role in the 2008 mortgage crisis:

May 18: the SEC commissioners “voted unanimously to propose new, tougher regulations for credit rating agencies,” which would “implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and enhance the SEC’s existing rules governing credit ratings.”
June 9: Bloomberg reports the SEC may recommend recommend that ratings agencies be prohibited from advising investment banks on how to earn top rankings for asset- backed securities
June 14: Reports emerge that the SEC is considering civil fraud charges against S&P and Moody’s in the run up to the financial crisis.

But Standard and Poors was not cowed by the SEC’s sudden rash of action. On July 14 they raised the threat of a downgrade to 50% within the next 90 days.

And now they were very explicit about what they were looking for in exchange for a AAA rating. They wanted a number….which just happened to be the magic $4 trillion number:

If Congress and the Administration reach an agreement of about $4 trillion, and if we to conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the ‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.

Incredibly, S&P’s Devan Sharma told Congress this week that that S&P had been “misquoted” regarding the $4 trillion figure and that it had been “inaccurately stated that the company was calling for that specific threshold.” I really don’t know any other way you could read it. He also accused the administration of “meddling in the ratings process,” a charge quickly trumpeted by Republicans on the committee.

Politico reported that administration officials were “shocked by the move,” suggesting that it did not seem to square with prior S&P reports (duh).

But S&P wasn’t done. On July 21: David Beers met with Congressional Republicans in a closed door meeting to brief them on a potential downgrade of US debt.

And on that same day, the House Financial Services Committee approved the bill to remove the Dodd-Frank provisions that subject credit ratings agencies to expert liability. It passed 31-19 “over the opposition of the senior Democrat on the panel,” devolving into a clear partisan effort.

Then on Tuesday of this week, the SEC unanimously approved a plan to erase references to credit ratings from certain rulebooks. They also adopted alternatives to the credit ratings — a blow to the CRA’s entire business model.


It’s becoming more and more obvious that Standard and Poor’s has a political agenda riding on the notion that the US is at risk of default on its debt based on some arbitrary limit to the debt-to-GDP ratio. There is no sound basis for that limit, or for S&P’s insistence on at least a $4 trillion down payment on debt reduction, any more than there is for the crackpot notion that a non-crazy US can be forced to default on its debt.

Whatever S&P’s agenda, it has nothing to do with avoiding default risks or putting the US on sound fiscal footing. It appears to be intertwined with their attempts to absolve themselves from responsibility for their role in the 2008 financial crisis, and they are willing to manipulate not only the 2012 election but the world economy to escape the SEC’s attempts to regulate them.

It’s time the media and Congress started asking Standard and Poors what their political agenda is and whom it serves.

Sign our petition to the SEC: Revoke S&P’s authority as a credit ratings agency for their use of ratings as a political weapon and their attempts to avoid responsibility for their role in the financial crisis of 2008.

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  1. psychohistorain

    I hearty thanks for all that put this together and are keeping this in the public eye to the extent possible. As the world is being sucked into the Shock Doctrine black hole event that is being orchestrated by the inherited rich of the world it is imperative that those that can continue to speak truth to power.

    Standard and Poor’s management should be thrown in jail until they admit their perfidy against humanity that are not the inherited rich at the top.

    It is getting to be time for pitchforks and such if our rule of law has become this much of a joke.

    1. youniquelikeme

      Yes, a few people have to stay on topic so it is nice to see you began by doing so and by being polite. Why is it so few who comment here do?

      S&P are interfering for a reason and this post may well have hit the nail on the head. Good work investigating this so thoroughly.

      Perhaps a few more Americans should open their eyes to see how manipulated the people and the economy have become, while those who crippled the economy (Big Banks, S&P,hedge Fund Investors,crroked mortgage servicers, etc. are not just scot-free, but more powerful, more rich and more dangerous than ever.

    2. Juan

      I have never laughed so hard…this is great stuff…how do you come up with it??
      Were my lungs in better shape I would bring some easy widers and help you smoke some of the Gunja but from the sound of things you must have smoked the whole bag all at once…..

      Come back to earth brother….your friends and family miss you..

      Peace & Love

      Juan Jet

  2. Cedric Regula

    The only thing I worry about is if S&P decides they will rate currency risk.

    But I intend to be 100% in Norwegian whale blubber by then.

      1. Cedric Regula

        Whale fur futures? I guess I’m not sure if whales have fur. Are these synthetic instruments? If you take delivery, do you really get whale fur or the whole whale? (Norwegian sovereign whale seigniorage – I’ve become wary of these tricks) Does Moody’s rate them? Have any economists written a book about whale fur? Would a whale CDO be better because you can pick which whale parts you want?

        1. Valissa

          Well there is a theory that global warming can cause global cooling ( http://www.livescience.com/3751-global-warming-chill-planet.html ) so that should mean that fur futures of all kinds are a good bet…. perhaps your great-grandchildren will be able to cash in if you invest now! I’ve heard a rumor they’re going to try and use ancient DNA to clone wooly mammoths… that should create some very lucrative trade!

          I’m thinking that jackalope skins will be in big demand as well, due to PETA’s objections to people wearing the hides of real animals. Also I expect dragon hides to fetch top dollar!

          1. Cedric Regula

            I think you’re right of course, but my financial advisor says at my age I need a lower risk profile. So I’m thinking Statoil, maybe. When North Sea oil runs out they are a natural to become the premire whale oil supplier in the world.

            I think whale oil for our oil lamps will be in great demand in the future so we can continue to read the teachings of MMT and stay abreast of what our money system was, is, and could be someday.

          2. Valissa

            After researching Statoil, your plan seems sound to me. The only question is whether Greenpeace can be ‘managed’ when they switch over to whale oil. Should make for some great episodes of Whale Wars anyway!

            Then I got to thinking… if the global warming lasts long enough (before cooling reaction kicks in) they’ll be able to keep on drilling. Perhaps a more reliable investment would be arctic shipping, since business is picking up there and that appeals to my Norse ancestry more.

            How the Ice Melting in the Arctic Has Effected the Shipping Industry http://www.marineinsight.com/marine/environment/how-the-ice-melting-in-the-arctic-has-affected-the-shipping-industry/

            I think the Russians will clobber everyone else in this industry. They have the coolest nuclear icebreakers!

            Top 5 Biggest Ice Breaker Ships in the World in 2011 http://www.marineinsight.com/marine/types-of-ships-marine/top-5-biggest-ice-breaker-ships-in-the-world-in-2011/
            50 Years Since Victory [English translation of name] is currently the biggest icebreaker ship in the world as of 2011. It is a Russian Arktika class nuclear powered icebreaker and boasts of exceptional maneuverability and a top speed of 21.4 knots. With a crew of 140 and a displacement of 25840 metric tons, it is 524 feet long and designed to break through ice up to 2.8 meters thick [~9.2 ft].

            Armed with a digital automated control system, the spoon-shaped bow design increases the efficiency of breaking the ice. Modern comforts on board include an exercise facility, a massage facility, a swimming, a restaurant, a library and a music salon.

            As far as oil companies go… the Russian firm Lukoil is looking good to me. Every time I drive to New Jersey to visit family I see their gas stations everywhere, and they have good prices too! Plus… my sister and her husband have 2 daughters that were adopted from Russia.

          3. Cedric Regula

            Those are some cool boats (no pun intended). Russian engineering too – they included the massage parlor! But beware of Cossacks in Swedish ports.

            I keep worrying that Putin will nationalize all Russian oil companies so he can fire the Russian mafia. That’s another level of worry I don’t need as a shareholder.

            I was 7% in Russian sovereign bonds in my favorite bond fund. It’s all in BRIC and Asian Tiger sovereign bonds. My bet was their MMT was going to work better than US, Japan and Euro MMT. That worked out good; so good I sold it a year and a half ago because it’s chart looked like a growth stock fund. As usual, I moved too soon and it is still rising and paying dividends.

          4. Valissa

            Here is a clue as to why Putin won’t nationalize the oil companies.

            Dimon, Pandit, Blankfein, Ackermann Join Kremlin Advisory Board http://www.bloomberg.com/news/2011-03-10/dimon-pandit-blankfein-ackermann-join-kremlin-advisory-board.html

            Wall Street bankers including JPMorgan Chase & Co. (JPM)’s Jamie Dimon, Citigroup Inc. (C)’s Vikram Pandit and Goldman Sachs Group Inc. (GS)’s Lloyd Blankfein are advising the Kremlin on how to turn Moscow into a global financial center.

            President Dmitry Medvedev named 27 people to a working group for the project that also includes Bank of America Corp. (BAC)’s Brian T. Moynihan, Morgan Stanley (MS)’s John Mack, Deutsche Bank AG (DBK)’s Josef Ackermann and Blackstone Group’s Stephen Schwarzman, according to a member of the board who declined to be identified and information posted on the Kremlin’s website.

            Russia is seeking to lessen its dependence on natural resources by promoting “innovative” technologies, selling state assets and creating a “special sovereign” fund to attract foreign capital, Medvedev said in an interview on Jan 26. Creating the legal and physical infrastructure needed to lure financial flows to the Russian capital is part of that drive. Moscow ranked 68th of 75 cities in the Global Financial Centers Index commissioned by the City of London in 2009.

            “We believe it is very important to participate in the committees advising President Medvedev on how to transform Moscow into a financial center,” said Dimitri Agishev, a Deutsche Bank spokesman, in an e-mailed statement. Russia continues to be a key market with ample opportunities.”

            Clearly the Russians want “in” with the global bankster cartel, so expect them to play along with that game.

          5. Cedric Regula

            Good point. If you can’t beat ’em…bribe ’em. I’ll mark on my calendar that russia should be broke in 5 years.

            I guess soon we’ll be able to buy CDS with our Lukoil stock. Oh, never mind.

            My old bond fund also has swedish, norwegian, swiss and oz bonds in it too. Almost makes me long for a global flight to safety so I can buy back in. Maybe this is just wishful thinking, but if the US, Europe and Japan get a major hiccup again from some Black Swan event, and for some reason Ben doesn’t spoil the party with QE3, maybe we will get a dollar rally and I can afford these pretty things again. I keep my tin foil hat tuned for signs of this happening.

          6. Valissa

            To tie back in to the subject of this post… “Whatever S&P’s agenda”… IMO, their agenda is to play whatever role the bankster cartel (i.e. Federal Reserve & friends) wants them to play in order that the US raise the debt ceiling (and paper over the mortagage mess or whatever else these elite want done) so the banksters can make even more profit from the interest on the debt. Follow the money… the pro-wrestling style faux-drama will eventually give way to a new debt ceiling in dome form or other. It’s useful to assume you’re being lied to in the MSM regarding issues of money and politics, making it challenging to do analyses based on those. Having slightly paranoid assumptions are a very practical sort of tin-foil hat protector in today’s world.

  3. F. Beard

    Since the US Government need not and should not borrow in the first place then who cares what its credit rating is? Let it go to “FFF” for all we should care.

    US Government deficit spending is the equivalent of mining and spending gold under a gold standard. US Government borrowing is equivalent to a gold miner with an infinite amount of easily mined gold who borrows gold at interest from others to sell. It does not make sense.

    Talk about rentiers? The US Government spends hundreds of billions every year just to rent its own money supply that it could create for itself interest-free!

    1. No Know

      We just need Ben B. to follow through with his promise. He said, “The U.S. has this thing called a printing press” and God knows we have enough military helicopters he can borrow. Is it that Ben only knows how to print bonds?

      1. F. Beard

        All a banker can create is debt. What we need is Obama to order a “helicopter drop” ala Bush’s stimulus checks. But he should use debt-free money (seigniorage) this time.

        1. No Know

          Sorry, got my agencies mixed up and I accept that you are technically correct. How about Ben B. rounds up the helicopters, and Timmy G. fires up the presses. You’re not going to break my heart by telling me that Mr. B misled us again are you? My point is that some agency of the U.S. government can indeed print dollars (aka legal tender) and there need be no debt created whatsoever. The sticking point seems to be how we would physically move all of those dollars around. The banks are very busy with other things after all.

        2. No Know

          A further comment re debt v. money. My state (California) from time to time has been precisely where the U.S. claims to be just now. Lotsa bills and not enough to pay them. The clever folks there just resorted to printing IOUs and life went on. What I am suggesting is that it is an option (you may not like it but…) the U.S. can pay all of its bills by just printing up dollars and, unlike California, they never have to exchange those “IOUs” with dollars because they already are dollars. Maybe you think that this is too foolish to take seriously but it is an option. And unless Mr. Bernanke, Banker Extraordinare, was just fooling with us, that is precisely what he said he would do. Now I expect that someone may say that his statements were made in connection with stopping deflation. To that I would say, do you think it outlandish to consider the huge probability that a U.S.default would lead to the Mother of all Deflations? No doubt the geniuses that run the show, with the help of the wisdom shown on this blog will have a much better plan than mine.

          1. F. Beard

            Why do you think I disagree?

            The US Government SHOULD pay off its debt and finance its deficits with seigniorage – “money printing” if you like.

    2. Eureka Springs

      This is a great analogy, beauty in simplicity (KISS). Precisely what’s needed in the form of everything from pamphlets in every coffee shop and laundry mat to televised commercials. We’ve got to come up with simple repetition like this and spread it… if we can’t get this into the zeitgeist, nobody will.

    3. Elizabeth

      Well, the way I understand it works is that it’s not just a printing press. It’s printing Treasury bills, and the Federal Reserve buys them with money hot off the press on its end. So yes, some borrowing has to happen for this to work. The money is backed by U.S. government debt.

      I’m not saying that’s how it should work, but that’s how it does work.

      This idea that we can keep printing money and therefore there’s no problem is a little suspect. The authors seem to be saying it’s OK because the printing of money IS debt; the government pays it back in kind. But it still smells. Is there a limit somewhere, anywhere?

      This idea that a rating agency made up a debt crisis to light a fire under the asses of already reform-killing congressmen is strange. What are you smoking, and where do you live that a Congressional committee churns out a bill the same day it gets the idea? And since when does anyone need to threaten a sitting president already sponsored by banks with default to make him stick to the script? He’s doing what he was hired to do: Give away his wallet and then call 911 and say he was mugged.

  4. Doug Terpstra

    “The [S&P] report paints a target on the back of Social Security and Medicare, says nothing about the wars, the Bush tax cuts, private health care costs or the absurdity of 40 year projections.”

    Bingo! The real targets have been excruciatingly obvious from the start, as was single payer in the HC bailout, buried alive. But Jane really should fix one sentence: “The White House clearly began to [pretend to] worry about the political implications of what S&P might do.”

    In fact, why would Geithner do the talk show circus circuit to supposedly counter an utterly discredited agency when evidence of its malfeasance is low-hanging fruit and you have the SEC in your arsenal? When he really has their little balls in a huge vise, that makes no sense at all.
    Only collusion makes sense, barely concealed by poorly-written and badly acted Chicken Little Theater.

    As attempter noted earlier, it doesn’t make apparent short term political sense for the Machiavellian Obama himself, but then he’s not really in this “great game” for himself alone, but rather for the kleptocracy as a whole, in which he is clearly a Kool-Aid guzzler. Whether Obama is a shear pin or a lynchpin in the developing Shock Doctrine assault, in post-democratic America, short term political concerns hardly matter anymore (DC Theater has become perfunctory and cartoonish; the Roman senators mostly phone in their performances with the animated dynamism of Mitch McConnell.) If the military plutocracy wants him in office, he’ll stay there. But once the velvet glove comes all the way off the fascist fist, conventional political calculus won’t matter one whit, and that time may not be far off now.

    1. Kevin Egan

      That’s “linchpin,” but I think that “lynchpin” might be a brilliant Freudian slip…I know I sure feel the noose being tightened, around my SS and Medicare, by the economic ignoramus and tool in the White House.

      Kudos also on this very useful new dialectic: shear pin versus linchpin: which one are you??? We can all ask ourselves that.

      Knaves and fools, shear pins and linchpins: what a world we live in!

  5. John Merryman

    Is there really any overall thought process going on here? When these people have bought up the entire government and all its assets, while disenfranchising the vast majority of the population, what do they think is going to happen? Have they read any history books? Do they think the entire western world is Syria? They are disemboweling the very processes which give them power in the first place. This debt ceiling fiasco is like trying build a wall in front of a runaway train.

  6. PaulArt

    If there is a faint silver lining in this sad story unfolding in our once great Nation it is probably this:Wise and Intelligent people are watching, have been watching the modus operandi of the wealthy mob, every trick in their bag of nefarious tools is being documented so that it will never be repeated again at least in their Country. Allowing the wealthy to have more wealth is probably the worst thing that can happen to Society. Every ill that has plagued us in the last 30 years can be traced to this. If you want crooked legislation that favors only you to be written then you gotta have money to bribe. No money, no legislation. Taxation is a muzzle, bit and bridle to the greed of the rich. Taking it away is like opening Pandora’s Box.

    1. Ransome

      Lending money at interest is a profit center. Lending money at interest has no positive effect on an economy and has several notable downsides. S&P is a member of the cabal.

    2. Blunt

      [i]Allowing the wealthy to have more wealth is probably the worst thing that can happen to Society. Every ill that has plagued us in the last 30 years can be traced to this. If you want crooked legislation that favors only you to be written then you gotta have money to bribe. No money, no legislation. Taxation is a muzzle, bit and bridle to the greed of the rich. Taking it away is like opening Pandora’s Box. [/i]

      And there it’s been written. Thank you, PaulArt. Succinct and beyond denial any longer. The game has been revealed and in your words lies the key to the entire matter.

      What New Deal accomplished was to place a governor on greed so that it couldn’t run roughshod again over and through everyone and everything else in the country and world.

      That simple fact is what was lost in the 70s and destroyed by Reagan, Bushes, Clintons and Obamas as well as in the majority of the populace. We have allowed out greed to run as rampant as that of the inherited wealthy, CEOs, banksters, MssOTU, and politicos.

      S&P is simply the engine by which the above listed cabal is attempting to make an end to any pretense of legitimate governance and to move into the fascist/corporate governance they have always preferred.

      Our homegrown fascists were a major force in the 30s. Their heirs have the bit between their well-fed teeth.

  7. Middle Seaman

    For a president who has no compaction holding Bradley Manning in Lubyanca style jail, it is astonishing how timid he is with S&P. Raiding their offices, issuing subpoenas and dragging some obviously criminals to the FBI cellars is just simple justice for the unemployed, foreclosed and otherwise wronged 2008 victims. How much money did he get from S&P?

    1. rjs

      i can imagine that S&P is being used to enable the entitlement cuts agenda that obama & his tea party buddies really want…

  8. Richard


    As you know, I have long argued that the way to neuter the rating agencies for all time is disclosure of all the useful, relevant information in an appropriate, timely manner. With all market participants able to access this data, the rating agencies loose their leverage in the financial system. Suddenly, the barriers to new rating services being established drop to zero.

    By not forcing the issue on disclosure, the administration is getting what it deserves in terms of the rating services trying to use their position to protect themselves from their contribution to the ongoing credit crisis.

    1. No Know

      They say a camel is a horse designed by a committee. Well when the committee was finished, they designed the ratings system. The hallmark of those who provide opinions is, you get what you pay for. First we ask cui bono? Then we find out that it is those who pay (hint – it’s not the investors). Add to this the fact that ratings agencies have been historically exempt from liability and, voila, you have a system designed to fail. Heads they win, tails you lose. The system (business model) must be designed so that the rating individual or entity is independent, compensated by those who are dependent on the advice and responsible for its opinions. Humans by nature have trouble with these concepts but we’ve got to find a better committee to fix this system. As long as the system remains as such, we have no one to blame but ourselves.

    2. vlade

      It would need more than that, namely it would need to get the ratings out of the system (various versions of Basels etc.. ) Basically – remove any legal standing they might have.

  9. Barbara Roper

    Before you give the SEC too much credit for taking the gloves off, there are a couple of things you might want to consider.

    1) Last year, the SEC issued and then indefinitely extended a “no action” letter designed to protect the ratings agencies from the expert liability intended by Dodd-Frank. Their justification (which has some validity) is that the ratings agencies are holding them hostage, essentially threatening to shut down the ABS market without that protection from liability, and that the step is temporary while they go through the process of removing regulatory references to ratings. But, what with the SEC no action letter and courts still treating ratings as opinions protected by the First Amendment, the ratings agency liability promised by Dodd-Frank has yet to become a reality.

    2) Those tough new regulations the SEC just released definitely have their merits, but they are not as tough in some key areas as they could or should be. As just one example, the SEC doesn’t propose to set any standards for the internal controls over procedures and methodologies the ratings agencies are required by Dodd-Frank to adopt. Whatever the ratings agencies come up with is fine as long as they stick to them. What could possibly go wrong there?

    3) In most of the places the SEC has proposed to remove regulatory references to ratings they have, in fact, proposed no alternative measures of creditworthiness. That’s true for money market mutual funds and appears to be true for broker-dealer capital standards, although I haven’t reviewed those as carefully. Maybe they’d have had more luck coming up with alternatives if Congress had funded them to staff up with experts in this area and given them more time. It’s not like there have been a lot of good suggestions put forward. But the fact remains that, without good alternatives, people are still going to rely on credit ratings, whether they appear in the rules or not.

    Having watched the credit rating agencies trash the global economy with their AAA ratings on toxic MBS, it galls to see them still wielding such power (and using that power in such an apparently partisan fashion). But, truth be told, can any close observer of our political process really retain faith in the United States as a AAA nation?

  10. Clark

    Thanks for the great post. Excellent comments as well, as is expected on this site.
    I’m glad (if that’s the right word for something so revolting) to have my initial suspicions confirmed. I could not understand just how the hell a company that rated CDOs stuffed with dog turds as equal to USTs in exchange for grift from Wall Street had any credibility at all. Now it’s clear: officialdom is all in a lather, or pretends to be, because it suits their ultimate ends very well. The readers of this blog care. When will everybody else wake up and demand that the looting stop?

    1. readerOfTeaLeaves

      The timeline presented in this post makes a spooky amount of sense, and the ratings agency testimony in the House last week adds further evidence. to the timeline.

      Anyone who watched the FCIC hearings on the ratings agencies got a real eyeful of just how little these agencies understood the actual content and quality of what they were rating. It became quite clear that the ratings agencies were deeply culpable in pumping up the housing bubble, but they made millions doing it.

      (Interested commenters could google archived hearings, which included one with Warren Buffett, or simply start at the archived FCIC website: http://fcic.law.stanford.edu/)

      As commenter ‘doom’ points out below, there appears to be a dynamic whereby the more corrupt an entity is (i.e., the ratings agencies), the more political protection it needs to keep people’s asses out of jail. In that sense, the entity becomes more ‘politically useful’ to the most intransigent, politically cadaverous GOP members. (It’s interesting to note how many of these same members have sabotaged Prof Elizabeth Warren’s efforts to clean up financial contracts.)

      Ultimately, the very people demanding – and providing – political protection are further eroding the legitimacy of the government they’ve worked so very hard to manipulate. Apparently, they are too stupid to realize they are killing the golden goose upon which their livelihoods depend. In other words, stupid enough to try and squeeze blood from a turnip.

  11. doom

    S&P’s RICO-scale corruption on MBS fraud makes them perfect Republican allies: adverse information gives Republicans a carrot and stick. Play ball and attack the administration, and we’ll protect you; cross us and you’ll be the next Webster Hubble.

  12. David

    Wow. Great piece — thanks, Yves.
    If I didn’t have kids, I’d say it’s time to burn it all down. What a rotting, crumbling house we live in.
    Odd, isn’t it, that the idea of real reforms or a reform party seems impossible in our democracy? We’ve moved from regulatory capture, past state capture and into soul capture.

    1. another

      You’re content to allow the capture of the souls of your children? You’d have them live in this rotting, crumbling house?

    2. Kraken

      Kids or no kids I think you’ve got it Dave. There is zero chance this corrupt kleptocracy can be reformed. It must crash and burn and somehow be rebuilt. It’s not going to be pretty but there’s no other way.

    1. lambert strether

      Adding, that even our stupid and/or evil elite decision makers must know S&P is corrupt; heck, they benefited from the corruption. So the ratings downgrade is a proxy for the outcome of some other elite conflict, but between who and over what?

  13. Ignim Brites

    Have to agree that S&P ratings are meaningless. Seems to be the market judgement, to the extent there really is a market in Treasuries now.


    As to whether the US can default. It is an equal corruption to anything that the S&P has done rating dodgy credit AAA for economists to say that the printing press guarantees that the US cannot default. Ron Paul is more honest. Every day of government stoked inflation is a day of default. But the fact is the market, the smart money, doesn’t care about slow motion defaults. That is for the little people to not worry about.

  14. imagnethat

    Well, for once you almost see the light, but in the end get it wrong again. This is because 1) You actually believe what the Democrat’s Nomenklatura tell you (in fact you have neurotically internalized their propaganda to the point where they do not have to tell you anything, you will manufacture the cant yourself), and 2) You Leftist propensity towards paranoia, which derives from an ability to face the failures of your loony world view. Thus you come up with some vague notion of a rating agency trying to “Influence” an election a year away from now, and against a Democrat POTUS no less. Hilarious.

    The “default” was a red herring and straw man thrown out by the Democrats to scare the electorate (amazing how they can wrap both in to one bit of agitprop). The Federal Government were never going to “default”, now matter what the “useful idiots” hereabouts may have thought. After all the Chicken :ittle caterwauling out of the Democrats, Aug. 2 will come and go without default. So will Sept. 1st.

    See here. for an S $ P interview. Here they clearly state that the primary issue is debt to GDP ratio and not either “the debt ceiling” or “default” per se. Note as well that in this context, they are tax rate neutral, they only admit concern with the ratio. They do not really link this at at all to “default” n any direct way.

    Thus is notion:

    It’s becoming more and more obvious that Standard and Poor’s has a political agenda riding on the notion that the US is at risk of default on its debt based on some arbitrary limit to the debt-to-GDP ratio.

    is wrong on the face of it. S & P’s position has little to do with the current agiprop about “default”, and, no, their GDP to debt limit is not a way to somehow “qualify” the government’s “approach to that “default”, nor is it “arbitrary” at all. To imagine that they are saying the opposite is not only not “obvious”, it is irrational

    The real question is: Will America pay down its outrageous debt or will they inflate it away by devaluing the dollar. That is what the talk of “credit risk” is about. If Obama had his way this just in what he is asking for right now, we will have borrowed in inflation adjusted dollars more than we borrowed to fight WW2, ad this does not even begin to include Obamacare. Add onto that the already huge expansion of the debt these last few years. Will the American political class have the will to pay that down or inflate it away? Here S & P has a real point. If there is not serious attempts to change that ratio in one way or the other, it is glaringly obvious that America is most certainly a credit risk and deserves to have its ratings downgraded. This should be patently obvious to all.

    This is hardly some “arbitrary” move by S & P to cynically manipulate elections. This is merely a statement of fact, and it is a fact that international investors have already known for quite some time. In reality, the markets are discounting America as if it has already lost that rating, and has done so for quite some time. To see S & P state an obvious fact, and then evade the reality of it by writing it off as some sort of grand and bizarre “independent political agenda” of S & P to “influence” 2012 is the height of loopy, Left wing paranoia and projection. Do you really image that that bunch it around the board room and plot to influence elections? Never forget, it is is the corrupt “regulation”: scheme of the Democrats that keep firms like S & P in the pink in the first place.

    Does S & P have a political agenda? Certainly, but not the vague and vainglorious one you imagine. It is three fold: 1) trying to dodge the mess it and its brother agencies made of the 2008 “crisis”, and this includes erring on the side of caution, 2) Helping their democrat co-religious keep the state money pump flowing, which, most likely, includes raise taxes, and 3) like most of the other player, scrabble to get what they can before the ponzi scheme collapses.

    In the end, globalism has hollowed out the American economy such that we cannot continue the growth of the soft-socialist government nor keep the parasitic Democrat Nomenclature so poshly and safely removed from the real world.

    On this point S & P is right, but only by coincidence. You, however, are yet again quite wrong.

    1. rps

      “In the end, globalism has hollowed out the American economy such that we cannot continue the growth of the soft-socialist government…”

      I concur if globalism is used in the context of free trade as hollowing out the economy. If the “soft-socialist” referral is in reference to the trillion $$$ bailouts of the financiers and corporations, the US military protection of waterways, airspace, and bases worldwide at the expense of american taxpayers, I heartily agree. However, if the aim is at the meager medicare & social security programs for the 62yrs+ and substandard programs of medicaid (largely rejected by the medical and dental profession) and SSI(max $674.00 per month for shelter, food and clothing) for citizens at the lowest rung of society’s ladder at subsistence levels well below the poverty level of $10,890.00 you are sadly mistaken. Compared to the European and Nordic models whose social programs of caring for their citizens should be our goal. Providing subsidized health, education, and a livable lifestyle beyond the dregs of human subsistence is neither party’s mission due to the false flag waving of capitalism.

      Society is socialism. What is society but a collective of humans who work, live, and share in the fruits of our labor, creativity, and genius? Through cooperation, provisions are made for the weakest of our communities. We promote the continuity of humanity through the encouragement of education and innovation without fear of poverty. Together we ensure our survival by sharing of resources and ensuring a decent life that in turn, buoys our future. Alone we are an extinct species. No woman or man is an island unto themselves. There is no Enlightenment without our creative energies and sharing extended to all.

      On topic, the CRA’s as a reliable source in the determination of credit risks, they’ve validated their worthlessness and ineptness the last go around. As for their wanton downgrade on the U.S., well Thoreau says it best, ” Some circumstantial evidence is very strong, as when you find a trout in the milk.”

      1. Joe Rebholz

        “Society is socialism. What is society but a collective of humans who work, live, and share in the fruits of our labor, creativity, and genius? Through cooperation, provisions are made for the weakest of our communities. We promote the continuity of humanity through the encouragement of education and innovation without fear of poverty. Together we ensure our survival by sharing of resources and ensuring a decent life that in turn, buoys our future. Alone we are an extinct species. No woman or man is an island unto themselves. There is no Enlightenment without our creative energies and sharing extended to all.” — rps.

        So true. So nicely said. Thank you! If we could get enough people to understand this, we could organize ourselves to make a much better world. I want to understand how to get enough people to see this.

    2. Ransome

      So it is only now, after 43 increases in the debt ceiling, only now that we are mired in a recession with decreased revenues, that government spending into a recession is a reason for downgrade. And it will decide based on the package of what they consider incentives and disincentives. The one advantage they have is protection from the SCOUS and decisions will be made behind closed doors.

      The Europeans must be rolling in the aisles.

    3. Yves Smith Post author

      We’ve debunked the significance attributed to the debt to GDP ratio repeatedly. Private sector debt, in particular household debt, is the baddie, since rising or high household debt to GDP is bad for growth. It is pretty much never productive.

      Government debt to GDP in a sovereign issuer isn’t the big scare that it is commonly made out to be, we’ve debunked the Reinghart/Rogoff analysis.

      And S&P has spoken specifically about wanting a $4 trillion reduction, and that meme has been picked up by the Democratic hackocracy (see Matt Yglesias among others) which mean it has also caught the attention of the officialdom. You can cherry pick S$P all you want, they’ve come up with a specific, large, and bogus bottom line on this one.

      Your throwing out “socialist” is a huge tell, you have ideological blinders on big time.

      1. cswjr

        Please link to where you’ve debunked Reinhart and Rogoff. I’m dubious, but I’ll maintain an open mind.

  15. imagnethat

    PaulArt: The nation has certainly started to see the truth about some of this but it has nothing to do with your strange notion of decent Americans seeing “the Wealthy Mob”, as if there were any reality behind such an idiotic and self-serving fantasy. No, what they are finally clearly starting to see is the “Establishment Left Mob” and the “Government funded parasites Mob”, and those mobs’ inability to act like reasonable and sober adults for even ten minutes. This is supported by Obama’s polling in particulate and polling about the issues in general. The American people know that spending has to be cut and that taxes must not be raised, even if you do not. The American people detest government parasites even if you valorize them. YOU COULD NOT BE MORE WRONG.

    These bits of agitprop about “The Rich”, that the GOP is the “Party if the Rich” or that the Tea Party folks are somehow useful idiots of “The Rich” are, being exposed for the great lies they are. The Democrats are the party of the limo liberal trusties, the Nomenklatura and the democrat created and maintained lumpen proletariat against the productive, the decent, the same and the adult, which is to say against the embattled middle class.

    It is takers against makers. The immoral against the moral.
    The the merely political against the productive wealth cretors. The Middle Class (and not the bogus democrat redefinition of that class) knows this because they must bear the brunt of productive work and wealth creation, government abuse and taxation.

    What the Democrats are after when they say “Tax the Rich” is really “Tax the middle class”. and it is they who will pay. The Democrats thoroughly looted “The Rich” in the New Deal years, now all that is left to really pillage is the Middle Class. This is made abundantly clear by the brackets that will be hit with taxation: those above $200k-$250k up to about 700k. These cannot not by any possible measure be call “The Rich” or the “Wealthy Mob” and these are many of the people who oppose Obama’s foolhardiness and arrogance. But beyond this group, all decent and loyal Americans oppose this if only for the simple desire to prosper by their own hard work under a capitalistic system. For you to call these people “The Rich” or a “Mob” is intellectually dishonest in the extreme. Shame on you.

    “The Wealthy Mob” indeed. Nothing could be further from the truth.

    Yet again, this site shows that it is little more than a Marxist echo chamber constantly substitutng propaganda, cant and wishful thinking for critical thought, common sense and the truth.

    1. Work is Freedom

      You had everyone at Marxism. Tell us now, who’s really being taxed and by whom?

    2. F. Beard

      Your comment ignores the biggest parasite of all – the government backed and enforced usury and counterfeiting cartel, commonly known as the banking system.

      Imagine that!

    3. Joe Rebholz

      “It is takers against makers. The immoral against the moral.
      The the merely political against the productive wealth cretors. The Middle Class (and not the bogus democrat redefinition of that class) knows this because they must bear the brunt of productive work and wealth creation, government abuse and taxation.”

      Ah, poor baby! Do you only make between $200,000 and $ 700,000 per year and worry about your taxes going up? I guess you see yourself as a “maker”, not a “taker”. The question is who are the makers and who are the takers. We see the rich, or maybe just the superrich, or those useless people who just make money by manipulating money, as the takers and the makers are people who work for a living, or the unemployed who would work if they could, but our broken system has no jobs for them. But for you I guess the “takers” are those who work for a living, or who would work for a living, or the old who live on social security and medicare, etc. Me, me, me. How selfish. I’m a maker. My success is all due to me only, to my hard work. Nobody else had anything to do with it. The system we operate in had nothing to do with it. And I want every penny I ever saw. Poor greedy baby.

      1. F. Beard

        I guess you see yourself as a “maker”, not a “taker”. Joe Rebholz

        Be fair now. The government backed usury and counterfeiting cartel are “makers”. They “make” the money the rest of US have to earn.

        Nice work which explains why there are banks on near every corner.

  16. 4D

    He certainly is getting pay back for wimping out from dealing with the banksters and their cohorts when he had the chance.(I have just watched Inside Story so my need to see retribution is running really high).

    Having said that Yves, while technically you are correct that there is no need for default, your surely recognise the printing press option is just a default of another kind?

    It is in this respect where I have a major problem with MMT. As the printer of the global reserve currency the problem is transferred all over the world. Just look at AUD, ZAR and BRL to see who is bearing some of the costs.

    Futhermore, in reality “not needing to default in your own currency” is an option open to just a handful of countries in the world. The rest would be shunned by global investors and face a South American/Zimbabwean style hyperinflationary spiral if they attempted to print their way out of a mess like the US is in.

    1. Joe Firestone (LetsGetitDone)

      Whether “the printing press” creates debasement of the currency or not is an empirical matter; it doesn’t necessarily follow that creating more money will lead to inflation. To assume that it does is to accept the Quantity Theory of Money; a theory discredited since the 1930s. two recent pieces relevant to this issue are: http://blogs.forbes.com/johntharvey/2011/05/14/money-growth-does-not-cause-inflation



      There’s also my piece here:


      1. 4D

        Yes, I opened myself up for that lecture with some loose comments.

        I note, however, that once again MMTer’s ignore my assertion that in practice the theory of not needing to default in your own sovereign currency is a privilege only open to a handful of countries.

  17. LeeAnne

    Yves, thanks for the update on the regulatory status of the big three rating agencies without whose corruption the biggest heist in the history of the world could not have occurred.

    And many thanks to Barbara Roper for her comments above for bringing us up to date on same.

    But I am afraid that all arguments for the status quo, including the SEC fear of ‘shutting down the entire ABS’ market are specious. It is exactly the ‘status quo’ that must go; that must be left to collapse under the weight of its own corruption.

    Think of the armies of recent graduates available for new businesses; also of the retired, underemployed and fired competent finance people available to do the job of replacing these agencies. The old agency personnel, as restitution for their crimes, could be made to answer to new employees for a minimum wage; helping them with implementation of the new finance order.

    Are we to sacrifice the millions of unemployed, but rescue corrupt rating agencies, support securitization of single family residential real estate at the expense of rule of law, the integrity of state AGs, and governance in general?

    Support for the status quo implies that everyone but the victims must be rescued while banking interests continue to benefit from the crimes they’re fighting to cover up. The longer law enforcement against them is postponed, the more captive and aligned they are with their own cronies against law enforcement, the closer we as a nation are to bigger wars; domestic as well as foreign.

    The War Against the People of United States is in full force now, as ordinary travelers at airports are virtually placed under arrest as a condition for boarding a plane.

    It really is them or us.

    Notice that, in this day of brutal unemployment, a new generation of graduates is unemployed who have incorporated computer skills into their everyday lives and are exactly the American resource that is ready, willing and necessary to replace these crooks and their organizations.

    There are more than competent unemployed to revitalize a rating system along the lines of a new old paradigm; integrity with checks and balances.

  18. rps

    “You can always count on Americans to do the right thing – after they’ve tried everything else.” Winston Churchill

    The question is how much longer before the ship is righted

  19. Paul Tioxon

    S&P is providing a variable of chaos generating conflict, at the intersection of high finance and state power. What would be a mutually beneficial alliance, the precise structural, reinforcing virtuous spiral of expanding profits and expanding territories within which to profitably invest the surplus profits, is turning into an internal battle at the commanding heights of capitalism. The rule over society by the driving mission to make profits, tax profits and recycle the profits back into corporations large and small via government funded infrastructure, public services such as education, health care etc. his come to an end. The crisis of this ruling system is breaking down a previous century worth of placid, prosperity producing and middle class forming patterns of economic growth.

    S&P as a critical player in the capital markets, has been exposed, along with it counterparts, as little more than wish fulfillment for sale, so investors will buy and bankers will profit accordingly. Like corrupt or cowering real estate appraisers who produced the right value so the mortgage could be lent at the skyrocketing prices that were bursting the limits of credulity during the sub prime bubble, S&P sells what its big time clients want to hear. But with a twist.

    Following suit with the extortionate Republican gambit to vote no to raising the debt limit for the Federal government, then voting yes with political earmarks near and dear to every insane Libertarian Tea Party knucklehead, then and only then, when these demands added to the bill, will the debt limit ceiling be raised.

    S&P sees that extortion works, and will hold the world capital markets hostage with untold billions in additional borrowing costs unless it is left alone. Of course, this will be seen by the right wing as Obama’s trying to start a New World Government with the Bilderberg Group, and on the left, Marshall Auerback will have to search out new personalities to compare the moral depravity of Obama with. Suggestion; Pol Pot, I don’t think Marshall has mined the killing fields analogy for a hysterical essay yet. But please, feel free to borrow.

    1. Whole Frauds, Organics

      Why the relentless defense of Obummer? Klanton-Rubin were right wing Republicans – Does that help?
      Obama is a disgraceful cheerleader, he has done nothing to address the jobs, foreclosure crisis – largely ignoring both of them. He’s refused, his administration has refused, DC has refused to ‘put the law-and-order crowbar to the corporate criminals, defrauders and reckless speculators.’ The politicians are just another impediment, Americans are going to need to free themselves from a predatory nightmare, people are being consumed by a machine that seems to celebrate this brutal reality. Read it in the press that they own, and use to brainwash the public.

      1. Paul Tioxon

        Woozers Woozies!!! The unspeakable has finally spoken. Sign me up for the next best alternative.

  20. Jim

    Doug Tempstra in his 4:25 A.M. comment makes an important point when he argues that what is actually going on between the White House and S&P is “pretend” worry–with the reality being collusion without democratic accountability.

    In our post-democratic system of governance Standard and Poors plays multiple roles. They “compete” in the private market to sell credit rating services while simultaneously becoming the unaccountable public arbiter of the debt ceiling debate. The result is a fusion of state and private power independent of democratic control.

    For those of us who are interested in taking on such illegitimate and corrupt forms of governance it is important that this architecture of power be completely exposed.

    That is why I sometimes worry about the appropriatness of such general terms as kleptocracy to describe this system of governance.

    It is not simply “Government Sachs” or “looting by the rich.” On a more blood and guts detail level, today it is also S&P, tomorrow it could be the Government Accounting Standards Board or the Financial Accounting Standards Board or the corrupt contracting rules that originated in the Clinton administration.

    It is also sophisticated social networks of prominent academics. nonprofit organizations and private think-tanks which create and modify domestic legislation and determine the direction of American foreign policy.

    All of these organizations and networks have disdain for the public good yet they often present themselves as representatives of the public good–and they are increasingly ruling our lives and determining our future.

  21. Government ATMs

    Modest reforms from Dodd-Frank are being papered over, evicted, and left to wander in ruin. Millions are out of work, out of hope and the entire exercise is to gut basic survival programs. The instructions the “free” market utopians (a stunning lie and propoganda victory in itself) give to regular working stiffs is that they should approach their non-existant jobs like entrepreneurs, add night school, start a business. Consume, be viable!

    “Sie denken an Knechtschaft und Krieg
    Derweil unsre Äcker reifen,
    Du Fahne der Freiheit, flieg!”

  22. Rodger Malcolm Mitchell

    “[W]hat really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.
    Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs . . .”


    1. Our federal government is Monetarily Sovereign. ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ) It does not need to borrow.

    2. Our federal government is Monetarily Sovereign. ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ) It can pay any level of interest at any time, with no difficulty.

    3. Our federal government is Monetarily Sovereign. ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ) Its spending does not cost American taxpayers one dime.

    4. Our federal government is Monetarily Sovereign. ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ) Its interest payments simulate the economy.

    Those who do not understand Monetary Sovereignty do not understand economics.

    Rodger Malcolm Mitchell

  23. RebelEconomist

    It’s no good blaming the messenger. Of course the US should be downgraded. Japan is also monetarily sovereign, and they got downgraded, and, not for the first time (I experienced similar brinkmanship as an investor in US treasuries in 1995), the US is playing chicken on the edge of a precipice of default in its own currency in a way that Japan never has.

    1. Yves Smith Post author

      I suggest you deal with facts before scaremongering. Being downgraded to A has not affected Japan’s bond yields adversely. And that is because….drumroll…it is monetarily sovereign and at no realistic risk of inflation. Note this is also taking place in a country with terrible demographics.

      1. F. Beard

        And that is because….drumroll…it is monetarily sovereign and at no realistic risk of inflation. Yves Smith

        Makes sense. Then what could be the motive of the ratings agencies? To protect bond holders at all costs by:

        1) Forcing austerity and crushing deflation on countries?
        2) Forcing up interest rates at which existing bonds are rolled over?

        The whole system seems to be for the benefit of bond holders which makes sense when one considers the royal roots of our money system. Royalty is accustomed to risk-free returns.

      2. Philip Pilkington

        Not to mention the fact that investors cannot get enough of Treasury bills right now. Bob Pollin did an interview on this the other day and he seemed shocked that yields were so low. He should understand that this is how the monetary system operates, but at least he’s not putting his head in the ground on this one:


        This is a good summary, even though the data is a bit old (although it hasn’t changed significantly):


        It seems to me that to be a mainstream economist — rebel or otherwise — requires, first and foremost, the ability to tolerate absurd amounts of cognitive dissonance. Secondly, it requires an unabashed confidence in your own opinion that literally steamrolls over the facts in order to make them fit your preconceived notions. I’ve been saying it for years: economists are fairly weird people, in any other discipline they’d be chalked up as incompetents and sneered at.

        1. F. Beard

          I’ve been saying it for years: economists are fairly weird people, in any other discipline they’d be chalked up as incompetents and sneered at. Philip Pilkington

          It’s the money system that is insane; it is no wonder that it drives people crazy.

          But hey, just a few more hundred years and we’ll work the kinks out of it, eh Philip?

      3. RebelEconomist

        I suggest you read the comment Yves – only four lines is not much to ask – before you respond. Did I say anything about yield? Is yield in the title of the post? No; it’s about “manipulating the rating”.

        A credit rating is a measure of the probability of default loss. If you had the job of rating a country’s own currency debt, and you had downgraded a monetarily sovereign country like Japan, what would you do when rating another monetarily sovereign country that is crippled by a bunch of nutters who are threatening to force a default, and has a political system that simply refuses to raise taxes despite them being around a historic low relative to GDP?

        1. Foppe

          You seem to be under the assumption that the ratings these agencies give out of countries/states are something other than primarily political; whereas one could fairly easily argue they aren’t. From what I remember from an earlier post, their methodology when it comes to national debt is at best a joke. So while the US (or any other country) might deserve (whatever that means) it, it is a basically meaningless assertion, as unrigorous (or unscientific) as deciding on a downgrade by coin flip.

    2. No Know

      I’m with you Reb. I’m starting to wonder though if enough of the people who seem to be trying to create a crisis believe, as I do, that Obama completely wasted the Banking Crisis. I think that there is a growing number of people who have given up on our legislative process and believe as I do that (1) Obama did waste the crisis and actually made things worse; (2) We cannot fix the situation without another one; and (3) Our only hope is that someone, not necessarily on the radar today, will lead an effort to seriously reform our system so that it again functions for ALL. We all think we know where we want to be. I’m just very pessimistic that the current system can come even close to getting there. So arguing about which crook or nutcase will either hatch or collaborate on the plan is interesting(?) but a waste of time. Sad to say, but these things happen.

      1. RebelEconomist

        I agree; the US missed an opportunity during the crisis. The banks should have been nationalised as they failed with the shareholders written down to zero, and the bondholders haircut a bit, as in the case of GM. But “nationalisation” was anathema to US politicians, and, because of the importance of individual ownership of equities in the US, they did not dare to insist on the shareholders bearing their contractual responsibility. Like the Europeans, the US chose to kick the can down the road in their own way.

    3. rps

      I never understand commentators that ignore the yawning chasm of United States economy, population, military, landmass, resources as comparable to Japan. Much less asserting that the USA’s fate will be that of Japan, Greece, or Ireland. Whether the world likes it or not, they hold enormous amounts of the world reserve currency. I’d say the gig has been mainly one-way free trade agreements that have destroyed the american workers. USA ports are clogged with imported waste of resources junk and in exchange, foreign nations buy our treasuries, hold vaults of green chits, allow US military bases and umbrellaed protection generously paid by american taxpayers. Downside; industry and jobs disappeared, diminished taxable income, and the dismantling of the USA economic stability; the middle class. The bad news, people need jobs to consume. The middle class was the goose that laid the golden egg that created prosperity. If the USA goes down, the rest of the world will follow.

      “It is said that Napoleon lost the battle of Waterloo because he forgot his infantry–he staked too much upon the more spectacular but less substantial cavalry. The present administration in Washington provides a close parallel. It has either forgotten or it does not want to remember the infantry of our economic army.

      These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power, for plans like those of 1917 that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.” FDR, The Forgotten Man

      Where are the jobs, Mr. President?

      1. F. Beard

        The bad news, people need jobs to consume. rps

        Actually, people just need income to (steadily) consume. I notice the rich don’t need jobs to consume.

        1. rps

          “Actually, people just need income to (steadily) consume.”
          That was Greenspan’s premise as he nurtured 0% credit cards for everyone and his masterpiece of alphabet soup concoctions of bubbleicious. The housing ATM bubbleology was an IED awaiting detonation. So here we are in the aftermath awaiting our turn after the profiteers were first in line for triage with the false-promise to replenish.

          The “rich”, I prefer profiteers/parasites, need laborers to work, create, and produce earned incomes to invest in pensions, IRA’s, Roths, and 401k’s, n’est-ce pas?! Even the southern plantation model depended on laborers to tend the fields and service the master. How else could the masters live the genteel life, someone’s gotta do the labor.

        2. attempter

          The bad news, people need jobs to consume. rps

          Actually, people just need income to (steadily) consume. I notice the rich don’t need jobs to consume.

          All people need to do in order to consume is work and not let the produce be stolen from them.

          We don’t need “income” or “jobs”, which are artificial inventions of a theft-based system. And we certainly don’t need for the rich to exist at all.

    4. Psychoanalystus

      Japan’s debt is also owed to Japanese people, as far as I know. Not the same situation as here.

  24. Mike C

    Sorry Yves. I’m not with you on this one. There’s every chance we’ve already earned a downgrade and they’ve been bending over backwards not to do it because of the ramifications. I also think that after their pathetic showing with regards to MBS ratings they are looking to regain credibility.

    Either way…to suggest that we truly do deserve a AAA rating considering our debt to GDP, unfunded liabilities and ton of other structural issues is silly.

  25. Psychoanalystus

    From a bankster’s point of view it makes perfect sense to downgrade the US and thus milk higher interest rates out of everybody including the US government. So guess what the S&P is going to do…

  26. John Monro

    Another posting on this blog talks about “trust” as the basis of commerce. I think what all these labyrinthine financial escapades show is that this trust is gone. I can’t comment on the details of all the information provided here, I don’t actually understand them. But what I do understand is that we have allowed such a degree of complexity in our economic systems, that rogues and criminals have been able to get away with the equivalent of economic murder, or should that be “assisted suicide”. Yet our institutions, rather than understanding this, have facilitated this aberrant behaviour, and have swallowed the monetarist/neoliberal dogma hook, line and sinker. Our political institutions have been the worst offenders in surrendering sovereignty; at best this was naive, at worst, complicit, and has been the major factor in undermining meaningful democracy in many of the world’s nations. The USA’s present political stalemate is a predictable result of such political incompetence and blinkered thinking.

    1. Psychoanalystus

      >>> The USA’s present political stalemate is a predictable result of such political incompetence and blinkered thinking. <<<

      What stalemate? It's all part of the "circuses", my friend. It's just the latest "Wag the Dog" episode…

  27. parisblues

    Dean Baker had this to say in March 2010. He was talking about Moody’s, but the same holds true for S&P:

    “All banks, including giants like Citigroup and Goldman Sachs, hold huge amounts of U.S. government debt. There are also reliant on the U.S. government for all sorts of reasons, including potential bailouts. If the U.S. government were to default on its debts, then it would almost certainly wipe out every major bank in the country. There is no plausible scenario in which the U.S. government defaults on its debts and the banks will still be able to make good on their debt payments.

    This means that if Moody’s were to downgrade the government’s debt, to be consistent it must also downgrade the debt of Citigroup, Goldman Sachs and the other big banks.”

    In other words, S&P, is funded by the very banks it rates, is not going to do anything to make the banks’ Treasury holdings lose their value. Obama and the SEC need to call S&P’s bluff.

    1. decora

      what if those same banks also hold massive credit default swaps against US debt? a downgrade could possibly give certain traders within those banks massive profits?

  28. Allen C

    A default is completely avoidable when you control the currency underlying the debt. What is the rating definition in this case?

    The salient issue is stability of purchasing power. Return of principal at a fraction of the original purchasing power is essentially a default. The US maintained a AAA rating throughout the 1970s while the purchasing power of the USD declined by half. Anyone purchasing and holding a 30 year T bond in 1970 essentially experienced a soft default.

  29. scraping_by

    In the “It’s an ill wind” category, there are obvious winners a rating downgrade.

    The TBTF banks only clear money these days by borrowing free Fed money and buying t-bills. A ratings downgrade would make borrowing more expensive, i.e., the rate paid would go up. Therefore, a ratings downgrade would raise the riskless return for the banks only profitable business.

    Increase return, increase bonuses, somebody’s going to be happy.

  30. Mitchell Langbert

    Your article has some good detail about the debt crisis but is uninformed. Your claim that certain economists who happen to agree with you are “respectable” is silly. The current crew of economists thought that by tripling the monetary base all of the dumb investments that had been made because of their earlier prescriptions would be washed away. They were wrong because they are not respectable–they are quacks. The US now has as much debt as a percentage of gdp as it did at the end of World War II, but the economy has not been stimulated. This is one more of a long train of evidence that contradicts the quack Keynesian and monetarist prescriptions of your “respectable” astrologers, er, economists. The economy did well after World War II because our competitors had bombed each other to smithereens (with our help) and we were intact. Keynesian economists failed in the 1930s, it failed in the 1970s, and it failed in 2009. But your respectable astrologers continue to advocate it.

    Since the United States is under the guidance of quacks in the economics departments of the major universities even the corrupt rating agencies see the handwriting on the wall. The tremendous bias against a downgrade isn’t sufficient to inhibit them from downgrading because the junk Keynesian and monetarist economics taught in American universities and advocated by Wall Street’s mouthpieces at The New York Times and Wall Street Journal has failed to work and anyone with a lick of common sense can see that.

  31. J. B Cobbs

    S&P finally grew a pair and downgraded the terrible fiscal policies of the federal government. D.C. prevaricates when it calls a decrease in the increase a “CUT”. How many of us can continue to spend more year after year in our households without paying the piper at some point? Who would lend us more money on our own personal account if we were not reducing the principal of the outstanding debt we had already accumulated rather than merely paying interest on the current debt we owed? Fortunately, we, the individual citizens, can not print money like the Federal Reserve can. What will this historic, unprecedented downgrade of U.S. bonds mean to our economy and to our future as a great nation?

  32. Johnny

    The Tea Party caused it. Period. France has a higher debt ratio to GDP and they keep the AAA. The tea party held the debt ceiling hostage for the first time and this is what we got.

    If we keep electing these right wing nut jobs, they will destroy us.

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