Why S&P Has No Business Downgrading the U.S.

Standard & Poor’s downgrade of America’s debt couldn’t come at a worse time. The result is likely to be higher borrowing costs for the government at all levels, and higher interest on your variable-rate mortgage, your auto loan, your credit card loans, and every other penny you borrow.

Why did S&P do it?

Not because America failed to pay its creditors on time. As you may have noticed, we avoided a default.

And not because we might fail to pay our bills at the end of 2012 if tea-party Republicans again hold the nation hostage when their votes will next be needed to raise the debt ceiling. This is a legitimate worry and might have been grounds for a downgrade, but it’s not S&P’s rationale.

S&P has downgraded the U.S. because it doesn’t think we’re on track to reduce the nation’s debt enough to satisfy S&P — and we’re not doing it in a way S&P prefers.

Here’s what S&P said: “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” S&P also blames what it considers to be weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions.

Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?

If we pay our bills, we’re a good credit risk. If we don’t, or aren’t likely to, we’re a bad credit risk. When, how, and by how much we bring down the long term debt — or, more accurately, the ratio of debt to GDP — is none of S&P’s business.

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.

We’d all be better off had S&P done the job it was supposed to do, then. We’ve paid a hefty price for its nonfeasance.

A pity S&P is not even doing its job now. We’ll be paying another hefty price for its malfeasance today.

This post originally appeared at Robert Reich’s Blog and is reproduced here with permission.

5 Responses to "Why S&P Has No Business Downgrading the U.S."

  1. Ed Dolan
    EdDolan   August 8, 2011 at 8:56 am

    "If we pay our bills, we’re a good credit risk. If we don’t, or aren’t likely to, we’re a bad credit risk. When, how, and by how much we bring down the long term debt — or, more accurately, the ratio of debt to GDP — is none of S&P’s business."

    No downgrade before default? By this reasoning, S&P should not have downgraded Greece, either. Greece is still "paying its bills" and will continue to do so, although the latest EU measures mean they won't be repaid on as good terms as originally promised.

    Looks to me like S&P is doing just what it should be doing by noting that the emperor is not quite as fully dressed as would be proper.

  2. shtolcers   August 8, 2011 at 9:01 am

    Should S&P previous mistakes with mortgage-securities be the reason for them to be quiet now? Strange logic.

    • BreezyOhio   August 8, 2011 at 11:40 am

      Of course in a vacuum it shouldn't. However it's clear to me that this is the kind of thing that happens when we don't enforce our own laws. Why is it that no ratings agency exec has gone to jail over the 2008 mess and rating C paper as AAA? When we let things like that go we just ask for these guys to beat us up more.

      The statutes haven't run out .. we can still pursue these guys, and we should.

  3. lastdaysofrome   August 8, 2011 at 10:29 am

    I agree with much of this – and as I've said, it's grating to be lectured on economics by the Chinese. But … broken clocks and all that. My take here: http://www.economonitor.com/moran/2011/08/08/2012

  4. drewpuli   August 8, 2011 at 1:43 pm

    For all you tea bagger economic wizards disagreeing with Prof. Reich. The interest rate on US T-bill dropped, and bond prices have gone up. That means the market totally ignored S&P and still thinks US bonds are the safest investment. S&P is just pushing a political agenda. Reality vs Teabag delusions – people with money bet on reality. The stock market drop has nothing to do with the down grade; otherwise Bond prices would have dropped along with the stocks.