Who Is Paying For It?
CNN says that S&P downgrades U.S. credit rating. They are saying that instead of being AAA, the US debt is now AA+.
[Update: Serious People should just ignore the inconsequential, minor, not-even-worth-mentioning $2 trillion error in the S&P analysis used for the downgrade. Hey, math is hard, OK?]
S&P [Standard and Poors], it should be remembered, popped up in the middle of the debt limit hostage crisis to say that the US had to slash $4 trillion in order to retain its AAA rating.
For those just joining the discussion, here is what Professor William Black thinks: Downgrade S&P! Rating Agencies “Harm The World” and Should Not Exist, Says Prof. Black [There is an auto-run video at the link].
Ratings agencies have failed the public before. Moody’s, S&P and Fitch all labeled many of the sub-prime mortgage-backed securities as AAA, when in reality these MBS were junk. And, who can forget that all three have failed to accurately assess the debt of many European countries until after it was already considered a crisis.
With a less than stellar track record over the last five years, William Black, professor of economics at the University of Missouri has a very strong opinion on whether we should care what the top three rating agencies say.
“[They] are one of the best indicators of the real situation,” he says. “You take the opposite of whatever they say, and then you are very likely to have the truth.”
For those of you who are unfamiliar with Bill Black, his area of expertise is white-collar crime, specifically fraud among financial institutions. His best selling book was The Best Way to Rob a Bank is to Own One: How Corporate Executives and Politicians Looted the S&L Industry.
Given the way the ratings agencies operate, the relevant question is who paid S&P to get involved and downgrade the US? The ratings agencies sold the AAA ratings to the people hawking the MBS junk bonds, so someone paid for this.
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Krugman stated (on Countdown) that the major players that have lot’s of US Gov bonds are winners out of this deal, and are the only winners. Values of the stocks are up, and interest rates are down.
Krugman also said that all the numbers coming from economic and other sector reports (such as the ISM Manufacturing, and non-manufacturing, surveys) are all bad. He also said that major investors are nervous about Europe, and especially Italy right now. He said that They believe that Italy is *too big to save*.
The pundits here are running around saying “We’re OK! Don’t worry. China is our major partner, not the USA…” Yeah, right.
Oh! One other comment Krugman made, which I curiously didn’t find amusing, though I should have… was that he sometimes thinks that the USA and Italy are in a race to see who can become the World’s most dysfunctional Government. He said he believed that Italy was just slightly ahead in that race. I think it’s a pretty close race (I lived in Italy for over a year, so I got to know how things work there also). 😉 🙂
As for Australia, you are in good shape as long as no one starts talking about austerity. You aren’t in need of any great surge of stimulus, but the danger would be the ‘paradox of thrift’, where everyone attempts to save money at the same time, and the money stops moving. That’s a major problem in the US – there’s plenty of money out there in the hands of corporations and the wealthy, but it isn’t circulating. People are paying down debt or leaving it in banks. If it doesn’t circulate, there is no demand, so no one adds jobs.
The biggest problem at the moment for Italy is the cost of borrowing. They can’t afford 6%. It is the same old stupidity – if you have problems, they raise the interest rate and make the problems worse. Banks want to maximize interest because that is their cut, and don’t worry about the principal because that belongs to ‘investors’.
Italy has always had interesting governments, and their scandals were much more entertaining than anything that has happened in the US recently. I have serious doubts that Congress will be able to pass a budget this year, or that the ‘Super Congress’ will solve anything. Fortunately we get a new Congress every two years, so nothing this Congress does will be valid in another 17 months, no matter what the current group may think.
About 60 of 435 Congresscritters are total whackoes, and they tie up everything else. If Boehner wants to get anything done, he had better be ready to deal with Nancy Pelosi, because he certainly can’t deal with the Tea Party.
Interest rates on U.S. Treasuries are set by the market, not by S&P, and I don’t see any better alternative to Treasuries if you want a reasonably safe place to park your money. Yeah, the current Congress threatened default, but like you said, they’re gone in 16 months, and if you’re planning for retirement 10+ years from now and want a place to park your money for the next 10 years… (shrug). Where else? Can’t plop it in pork bellies, because the Chicago exchange discontinued their pork belly trading floor for lack of volume ;).
– Badtux the Realist Penguin
We have problems because out export sector is in trouble. We were big exporters, without that, we are screwed. The news the other night showed a large Qld w/sale Butcher who has 200 tones of top prime AAA grade aged grain-fed beef (like porterhouse, wagu and Angus) at AU$200 per 10-14kg box. Normally, it would sell here for AU$60-AU$80/kg (depending on what it is), and is normally exported Japan and the EU, but they aren’t buying! He has a fleet of refrigerated semi’s driving between NSW to Vic to sell them. We plan to buy a couple boxes when he get’s here! It may be a great deal for us personally, but it’s bad for the general economy. And that’s only one example, mining exports are down (BHP and Fortesque, 2 of the biggest and supposedly safest companies here), took a big hit on the markets!
Super Butcher container sale
So, the USA may not be a *direct* problem for us, but indirectly because of the trouble the USA is causing globally, they sure as hell are a problem for us!
Mr. Duff, S&P is the author, not the messenger, and I only want them imprisoned for 20 to life for their part in the global financial meltdown, not shot.
The other ratings firms don’t seem inclined to follow suit, Badtux, so they obviously didn’t get checks. Yeah, these clowns downgraded Japan years ago, but it made no difference. Ratings may be a factor if you are running a con, but not in the real world.
There are going to be short-term effects, Kryten, and they will affect some markets, but your economy is in much better shape than the rest of the world. and your governments at all levels are actually investing in infrastructure, so you can have hope. That isn’t the case in the US.
Which reminds me of why the rating agencies do not work: the financial incentives are all wrong if we wished to have accuracy. If *buyers* pay for the ratings, the financial incentive is to give accurate ratings, because if you give inaccurate ratings, then buyers will use other ratings agencies instead. If *sellers* pay for the ratings, on the other hand, your incentive is to fluff the ratings, because otherwise the seller might use another ratings agency for their next bond issue.
So why is it that sellers, not buyers, pay ratings agencies for bond ratings? Uhm, err… well, there’s a slight problem with buyers doing so. That problem is that there’s thousands of buyers, but only one seller. How are thousands of buyers going to get together to pool their money to hire an agency to rate a bond issue? Oh, I suppose they could get together and create some sort of fund to do this, that they paid into via, say, a percentage of their money that they were using to buy bonds. Hmm…. what could we call this sort of fund and the organization that would run it? And that percentage of money used to fund it? Oh dear, way too much trouble, just let the sellers pay for the ratings, what could go wrong? 😈
– Badtux the Snarky Penguin
Unless you were a big buyer who was risking a billion dollars on a short of US bonds, say someone who made billions by shorting other bonds. Interesting transaction, no?
Here’s a video on our ABC News with ABC Business Editor Peter Ryan talks to ABC News 24 about Standard and Poors’ decision to cut to the US credit rating. Interesting:
Breaking down the US credit rating cut
One thing he said was that one impact of the rating downgrade is that it will add about US$100 bln to the annual interest payments.
Actually, it is unlikely to add anything, because everyone is in trouble, and the US is still a better bet than anywhere else. Japan was down-graded to A years ago, and their cost of borrowing is still near 0%.
US Treasuries are still safer than anything from a bank. And banks owe a lot of their ‘trustworthiness’ to government guarantees.
Neither Fitch nor Moody has followed suit, and S&P could be embroiled in an insider trading investigation over last week’s stock sell-off. It looks like they leaked their decision to select hedge funds, and those funds went short. It could get very nasty.
Peter Ryan is a tool. As I pointed out above and on my own blog, interest rates are set by the market, not by S&P — and specifically, by the number of people wanting to park their money in the safest financial instruments they can find. What’s safer than U.S. sovereign debt? The stock market? ROFL! As for corporate bonds, there are no good plays there. The only corporations that are going to be around in 10 years to pay off on 10-year bonds don’t *issue* 10 year bonds because their problem is finding places to park all the filthy lucre they’re bringing in, and with the current economy any corporation that *doesn’t* have 10s of billions in cash reserves isn’t going to be around in 10 years so you might as well be flushing your money down the crapper to buy their 10 year bonds. Mortgage-backed securities? ROFL! The U.S. housing crash is still in progress, despite happy happy happy talk. “AAA”-grade MBS are a way to lose your money, not make money. No, the money currently in Treasuries is *staying* in Treasuries, because there just isn’t any better place to put it right now.
In the end, S&P’s downgrade is more important politically than financially, in that it highlights that even *thinking* of default is very, very bad.
It is really beginning to reek of hedge funds. The ‘reasons’ S&P is putting forth, sound more like excuses, but then, they won’t tell anyone how they reach their ratings decisions as they are ‘proprietary information’ and ‘trade secrets’. So I guess we will never get to see their dart board.