Will U.S. Debt Lose Its AAA Rating? Downgrade Moody’s
from Dean Baker
The media have been bombarding the public with scare stories about the country’s “record” budget deficits. Newspapers and news shows that never bothered to mention the growth of the $8 trillion housing bubble that eventually crashed the economy are giving us an endless barrage of stories claiming that current and projected future deficits will bankrupt our grandchildren. The implication of most of these stories is that we have to cut back Social Security and Medicare for all those high-living seniors as a matter of generational equity.
Most of these deficit stories feature a potpourri of wrong or misleading information. One item that is especially effective at raising fear levels in the public is the warnings from Moody’s, the huge bond-rating agency, that it may downgrade its rating of U.S. government debt. U.S. government debt has always held Moody’s highest AAA rating. If Moody’s were to lower the rating on government debt it would be a huge embarrassment to the country; essentially an indictment of the government’s poor financial practices. It would also have the practical effect of raising the government’s interest burden as a downgrade could lead to higher interest rates on U.S. government debt.
Before we rush to cut our parents’ Social Security and Medicare it would be worth asking a couple of questions. First, people should know a bit more about Moody’s and the other major bond-rating agencies. It would be nice to think that we had bond-rating agencies that could be trusted to examine the books of governments and businesses and tell us the truth about their financial merits. However, that is not the country in which we live.
Moody’s and the other bond-rating agencies have featured prominently in the build-up to the financial crisis. These agencies gave investment grade ratings to complex financial instruments filled with subprime mortgages and other bad assets. These ratings allowed Goldman Sachs and other investment banks to sell this trash around the country and the world, ensuring that the effects of the collapse of the housing bubble would reverberate throughout the financial system.
It was not just incompetence that caused Moody’s to misunderstand the quality of the issues it was rating; it was corruption. Moody’s and the other bond-rating agencies were getting paid by the banks whose assets that they were rating. The bond-rating agencies knew that these companies wanted investment grade ratings for their issues. As one examiner for Standard & Poor’s said in an e-mail, they would give investment grade ratings to products “structured by cows.”
This record must be kept in mind when considering the possibility of a Moody’s downgrade of U.S. government debt. It is no secret that many on Wall Street would love to see Social Security and Medicare cut back or even privatized. Investment banker Peter Peterson has even committed $1 billion toward promoting this agenda. When Moody’s threatens to downgrade U.S. government debt, or if it actually does so, it may reflect its actual assessment of the creditworthiness of the U.S. government or it could be a reflection of the Wall Street agenda to cut back these key public programs.
There is one way in which the public can better recognize Moody’s motivations. All banks, including giants such as 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. If Moody’s downgrades the government’s debt, without downgrading the debt of the big banks – or even threatens to downgrade the government’s debt without also threatening to downgrade the debt of the big banks – then it is more likely acting in pursuit of Wall Street’s political agenda than presenting its best assessment of the creditworthiness of the U.S. government.
It is unfortunate that we have to suspect a major credit-rating agency of such dishonesty, but given its track record, serious people have no choice. To paraphrase an old Winston Churchill joke, we already know about the character of the bond-rating agencies, we are only asking if they are prostituting themselves now.
–This article was originally published on March 23, 2010 by the Guardian Unlimited.
“It is unfortunate that we have to suspect a major credit-rating agency of such dishonesty”
Dude. These guys are so crooked they make Richard Nixon look like a Boy Scout. Their false, dishonest, and fraudulent ratings of bogus mortgage securities made up of liar loans and sub-prime junk as el-primo investment grade securities caused hundreds of billions of dollars of losses to pension funds, 401(k)’s, etc. all around the country. In a just world every single employee of Moodies above the rank of mailroom girl would be in prison right now serving 5 to 10 for FRAUD.
Will them downgrading U.S. federal debt do anything to interest rates on Treasuries? NONSENSE. Nobody is idiotic enough to think the U.S. is ever going to default on its debt, and who is going to believe a bond rating agency that rated a bundle of liar loans as “investment-grade” anyhow? There is a risk that the U.S. might at some point in the future maybe stage a massive inflationary event in order to pay it off, but just outright default on it? What, these people live in a world where the PRINTING PRESS was never invented or something? It just doesn’t pass the laugh and giggle test, which is why I think the joke will be on Moody’s if it dares to do something so patently absurd — all it will do is turn them into even more of a laughingstock than they already are and cause their customers to drop them like a hot iron. Because who, in the end, wants to be associated with a credit rating agency that is a world-wide joke, even if they *do* give you the ratings you want, when you want them?!
Total agreement with Badtux… must add that while the Peterson Foundation does certainly make its contribution to the argument against excessive govt debt – and thus inflation, social programs are not exclusively in its bulls eye. Moreover, the points it makes of govt spending beyond means to responsibly budget repayment are not wrong-headed. It is irresponsible for the US govt to authorize and fund budgets it can not support through income – taxes and otherwise. When inflation roars to life it will not be the multimillionaires who are unable to afford to eat and keep a roof over their heads. Inflation plays havoc with an economy – and as always its the little guys that get hurt the worst.