Reich Sounds Off on S&P

Who: Robert Reich
What: "Why S&P Has No Business Downgrading the U.S."
When: August 5, 2011

Former Secretary of Labor Robert Reich reiterates his inquiry of Standard & Poor's:

S&P's intrusion into American politics is also ironic because, as I pointed out recently, much of our current debt is directly or indirectly due to S&P's failures (along with the failures of the two other major credit-rating agencies — Fitch and Moody's) to do their jobs before the financial meltdown. Until the eve of the collapse S&P gave triple-A ratings to some of the Street's riskiest packages of mortgage-backed securities and collateralized debt obligations.

Had S&P done its job and warned investors how much risk Wall Street was taking on, the housing and debt bubbles wouldn't have become so large – and their bursts wouldn't have brought down much of the economy. You and I and other taxpayers wouldn't have had to bail out Wall Street; millions of Americans would now be working now instead of collecting unemployment insurance; the government wouldn't have had to inject the economy with a massive stimulus to save millions of other jobs; and far more tax revenue would now be pouring into the Treasury from individuals and businesses doing better than they are now.

In other words, had Standard & Poor's done its job over the last decade, today's budget deficit would be far smaller and the nation's future debt wouldn't look so menacing.

The problem, of course, being that while many would suggest Reich is simply pressing sour grapes, the question of political implications does seem valid.

Notes on the Debt Ceiling Debate

Notes on the debt ceiling debate:

Some market observers speculate that a downgrade would be a non-event: Japan, for example, went from a rating of AAA to AA without much drama. Others suggest that a downgrade would increase Treasury’s borrowing costs by $100 billion a year or more, making our already unsustainable deficit trajectory even worse.

There are no rules to define what is systemic and what isn’t — or to accurately predict the consequences of an economic shock. Each crisis is unique. How exactly it will affect financial markets, companies and our economy is impossible to know. Nonetheless, recent examples offer guidance.

In 2008, a number of once-cherished beliefs were turned upside down: (1) that home prices in America would never fall; (2) that AAA-rated subprime securities are money-good; (3) that a major investment bank would never fail. Consumers, investors and companies allocated capital according to these truths. When the beliefs were revealed to be false, massive shocks were inflicted on the economy as financial markets rapidly adjusted to account for these new risks.

Neel Kashkari's analysis of potential impacts for The Washington Post is worth a read. And as long as we're pausing to think about credit ratings, former Secretary of Labor Robert Reich offers up his own opinion thereof:

... Standard & Poor's has gone a step further: It says even if the debt ceiling is raised next week, it might still lower the nation's credit rating -- unless the deal also contains a credible, bipartisan plan to reduce the long-term budget deficit by $4 trillion. This is something neither Senate Majority Leader Harry Reid's nor House Speaker John Boehner's plans would accomplish.

Now I don't mean to be impertinent, but as long as America pays its debts on time, who is Standard & Poor's to tell America how much debt it has to shed and by when?

Until the eve of Wall Street's collapse in late 2007, S&P gave triple-A ratings to what turned out to be some of the Street's riskiest packages of mortgage-backed securities.

Had S&P done its job, we wouldn't have had the debt and housing bubbles to begin with. That means taxpayers wouldn't have had to bail out Wall Street. We probably wouldn't have had a Great Recession. Millions of Americans wouldn't be jobless and collecting unemployment benefits. There'd be no need for the stimulus that saved 3 million other jobs. And far more tax revenue would have been pouring into the Treasury.

In other words, had S&P done its job, the federal budget deficit would likely be far smaller than it is today -- and S&P wouldn't be threatening the United States with a downgrade if we didn't come up with a plan for shrinking it.

And why has S&P decided to get into public policy now anyway? Where was it when President George W. Bush turned a $5 trillion budget surplus bequeathed to him by Bill Clinton into a gaping deficit?

Of course, this is what happens when we play by marketplace rules intended not for the benefit of the marketplace, but, rather, those who wish to control it.