Posts Tagged ‘aa

05
Aug
11

downgraded

Paul Krugman: OK, so Standard and Poors has gone ahead with the threatened downgrade. It’s a strange situation.

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point – then went ahead with the downgrade.

More than that, everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation. The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs.

So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future – but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment.

In short, S&P is just making stuff up – and after the mortgage debacle, they really don’t have that right.

So this is an outrage – not because America is A-OK, but because these people are in no position to pass judgment.

****

I ignore Krugman’s political views, he’s fast becoming the left’s Bachmann (clueless and marginally bonkers), but when he concentrates on an area he actually knows something about (economics) he can, occasionally, be interesting. I’ve read him before going on about Standard and Poors so I reckoned he wouldn’t be impressed with the downgrade news. He’s, eh, not!

****

UPI: …. another government official said the White House had told S&P the company’s thinking was “based on flawed math and assumptions.” And S&P acknowledged “its numbers are wrong.”

An administration official told NBC News after the credit rating was lowered, “It’s amateur hour at S&P.”

The official said the administration showed S&P where its computation errors occurred.

Rep. Barney Frank, the ranking member on the House Financial Services Committee, said on MSNBC the decision was “just a political judgment by a group of incompetents.”

“This is the rating agency that took money from people who were selling junk bonds and told other people to buy it,” Frank said, accusing S&P of overvaluing private debt while consistently undervaluing public debt. They are as responsible for the financial crisis as anybody else. There is zero chance of (the United States) defaulting,” Frank said.




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