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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

August 8, 2011 at 9:36 AM

Dysfunctional government, dysfunctional credit agencies

Note to readers: I will be blogging less during August. Come September, I’ll return to blogging every business day.

It would have been helpful if Standard & Poor’s had been so vigilant in the mid-2000s, when it and the other credit-rating agencies were assigning top grades to sub-prime securities and other financial weapons of mass destruction (in exchange for tidy fees from the banksters). Were that so, we might have avoided the worst financial panic since the Great Depression and one of the key drivers of the deficit S&P now so abhors.

S&P’s $2.1 trillion error right out of the box Friday further calls into question its standing to make a statement about the safety of U.S. debt. The New York finance lawyer who writes The Economics of Contempt blog goes further:

Look, I know these S&P guys. Not these particular guys — I don’t know John Chambers or David Beers personally. But I know the rating agencies intimately. Back when I was an in-house lawyer for an investment bank, I had extensive interactions with all three rating agencies. We needed to get a lot of deals rated, and I was almost always involved in that process in the deals I worked on. To say that S&P analysts aren’t the sharpest tools in the drawer is a massive understatement.

It’s telling that Treasuries are rallying today as a safe haven. Only S&P of the three major rating agencies issued a downgrade. The United States is not going to default or fail to pay interests to its creditors. We’re not “broke.” We’re the richest nation in history. Once again: We don’t have an immediate or even mid-term debt crisis — this was a ginned-up political event — it has a jobs and growth crisis.

S&P has no more standing than anyone to make political judgments. As the blogger and others (including me) have noted, elections can change the extremist Republican House that made us appear dangerously unserious about the debt ceiling. And if a GOP president is elected in 2012, the issue will go away and the debt ceiling will be raised automatically. Still, here is what S&P wrote: “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned…”

That part is true. Our leaders and institutions have failed us, failed to even tell the truth, much less take appropriate steps to fix a badly wounded economy (for this, the must-read is Drew Westin’s “What Happened to Obama” from Sunday’s New York Times. Among those institutions were the corrupted credit agencies. No wonder they spent $1.76 million this year on lobbying.

Join me at noon today for a live chat on the economy. You can file questions in advance.

Today’s Econ Haiku:

It’s standard indeed

That the middle class be poor

When banksters go free

Comments | More in Debt ceiling debate, Deficit


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