Libertarian Hawk


Investors Downgrade S&P to Junk Bond Status

August 10, 2011 By: Scott Spiegel Category: Economy


Image by Scott Spiegel via Flickr

The new meme on the left, helpfully demarcated on social media sites like Twitter via such catchphrases as #TeaPartyDowngrade, #HeckuvaJobTeaParty, and the trending #TeabaggersArePoopyheads, is that Standard & Poors’ downgrade of the U.S. long-term credit rating is due to the Tea Party’s push for spending cuts in the debt ceiling battle.

Never mind that S&P, Moody’s, and Fitch are the same agencies that thought Democrats’ Community Reinvestment Act and government-mandated subprime housing loans were a peachy idea; maintained top ratings for most securities backed by subprime mortgages; and thus contributed to the meltdown.

Never mind that S&P, headed by English lit major John Chambers, made a $2 trillion error calculating the U.S.’s debt-to-GDP ratio over time, then rewrote its justification for the downgrade to fit its already formulated decision.

Never mind that in the past five years, betting against S&P’s recommendations would have given you a better return on your investment than betting for them.

To the extent that one trusts S&P, its report gives a decidedly different impression of their reasons for the downgrade than those claimed by the left.

The report cites “difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about… a broader fiscal consolidation plan that stabilizes the government’s debt dynamics…”  S&P is obviously trying to be nonpartisan and spread the blame around.  It would help if they displayed less vagueness about where responsibility lies for the U.S.’s financial problems.  But I read that last bit as clearly highlighting Congress’s refusal to cut spending on items that make a real dent in our budget, which is largely the fault of Democrats, at least this time around.

S&P notes: “We could lower the long-term rating to ‘AA’ within the next two years if we see less reduction in spending than agreed to, higher interest rates, or new fiscal pressures…”  There is nothing in there about future debt ceiling inflexibility, extremist conservative posturing, or the intransigence of jihadist Tea Partiers.

The report continues: “[W]e believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed.”

Any liberals looking at this stopped reading that last paragraph after they got to “prolonged controversy over raising the statutory debt ceiling.”  The Tea Party held America hostage—S&P said so!

In fact, the agency stated that the prolonged debt ceiling debate was of concern, because the gap between the parties foretells difficulty in reining in entitlement spending.

Let’s see: which party favors reducing entitlement spending, and which is reflexively, dogmatically opposed to it?  If the two parties face gridlock on the entitlement cuts S&P is eager to see, which party is therefore more at fault for Congress’s failure to cut entitlement spending?  Why, I believe that would be the Democrats!

As for the claim that S&P was upset because Congress didn’t raise taxes, the agency explicitly took no position on what combination of spending cuts and/or tax increases, if any, should be adopted.

One very specific request S&P did indicate, however, is that an ideal deficit reduction deal should cut about $4 trillion over the next decade.  The plan Congress agreed to cuts $2.4 trillion.

So Tea Partiers were pushing for bigger cuts than Democrats and even House Republican leaders were willing to consider, and S&P wanted cuts twice as big as those Congress agreed on.  How is it again that pushing for cuts was the Tea Party’s mortal sin?

The only other crime for which the Tea Party might be to blame in S&P’s eyes is “brinkmanship” in using the debt ceiling as a negotiating tool to bring down spending.  But if a good chunk of the reason for S&P’s downgrade was the U.S.’s refusal to rein in entitlement spending, and Democrats are congenitally opposed to all entitlement cuts, then what other bargaining chip did Republicans have to work with besides the debt ceiling?

Anyway, it is logically impossible for S&P to have downgraded the U.S. out of fear that the debt ceiling standoff would result in our creditors not being paid.  The U.S. spends less than 10% of its revenue servicing our debt.  We failed to raise our debt ceiling in time on nine occasions in the past, and our debtors always got their interest payments.  How could there have been even a remote chance we would have defaulted?

If S&P really thought the U.S. was at risk of default, then they owe the American people an explanation of how exactly this might have happened.  An S&P downgrade, if any, should have taken place entirely because of our enormous debt, not our debt ceiling.  The fact that S&P refuses to make it clear which one is the cause for their downgrade shreds any credibility they have.

S&P’s downgrade is either entirely the fault of Democrats who refuse to cut entitlement spending or pass a budget, or S&P’s willful obfuscation of the difference between raising our debt ceiling and servicing our debt.  Either way, the Tea Party is utterly blameless.

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Moody’s: “Don’t Call Our Bluff!”

July 20, 2011 By: Scott Spiegel Category: Economy


Image by Scott Spiegel via Flickr

Last week Moody’s Investors Service threatened to downgrade the U.S.’s Aaa credit rating if the nation fails to raise its $14.3 trillion debt ceiling before August 2.  On Monday the agency counseled the U.S. to scrap its debt ceiling altogether.

Standard & Poors (S&P) and Fitch, the other two major credit rating agencies, recently echoed Moody’s warning.

Democrats pounced on Moody’s pronouncement as ammunition in Congressional budget talks, citing Moody’s as an unimpeachable source on what to do with our debt ceiling.

Why is anyone listening to what Moody’s has to say about the economy?

Moody’s, S&P, and Fitch are the same credit rating agencies that helped precipitate the subprime lending crisis of 2008.  These bureaus continued to give large financial institutions their highest ratings until the last minute, despite the flimsy cores of these firms’ collateralized debt obligations and mortgage-backed securities.  Moody’s and company thought the Democrats’ Community Reinvestment Act was a splendid idea, with the result that millions of investors lost billions of dollars and the international market collapsed.

Credit rating agencies work to offer valid, objective, neutral assessments of companies and sovereign states’ creditworthiness by systematically reducing outside influence and making their ratings as independently as possible.  However, if they hold invalid ideas about how governmental policy and economic principles interact, their predictions will be as shoddy as Paul Krugman’s.

Ratings agencies are subject to the same biases that businessmen, Wall Street investors, banks, and homeowners are.  Moody’s eight-member Board of Directors, for example, includes the following advisors: one director of the Federal Reserve Bank of Dallas, one member of The Federal Reserve Bank of New York Financial Advisory Roundtable, one director of Freddie Mac, and one director of the Dutch National Bank.  So 50% of Moody’s Board of Directors includes members who are heavily involved in central banking.

As one disillusioned former Moody’s VP lamented at Congressional hearings on the subprime lending crisis, “I had this somewhat naive idea when I joined Moody’s that it was a particular quality Moody’s was offering, and that was something that the company was going to seek to defend over time.”  Not quite.

In contrast to Moody’s and spend-happy Democrats, Republicans have been insisting that the nation has more than enough revenue to cover interest on our debt, military pay, Social Security, and other high-priority items for months without raising our debt ceiling.  There is literally no risk of the U.S. Treasury defaulting on our debt, unless petulant Democrats sabotage the process.

Because Moody’s admits it will downgrade the U.S. only if a default happens, not if we fail to raise our debt ceiling, there should be no need for a downgrade.  The U.S. failed to raise its debt ceiling on nine occasions in the past, from 1973 to 2007, with no concomitant default or credit rating downgrade.

There hasn’t been a looming catastrophe this overblown since Y2K.

The debt ceiling scenario is analogous to a hypothetical credit card holder who gets to arbitrarily raise his credit limit as often as he wants.  On August 2, the cardholder runs out of money to borrow.  He has more than enough income to pay the interest on his card and meet his basic living expenses.  Republicans are arguing that because he’s raised his limit so many times and is spiraling into a sinkhole of debt, he should cut up his card, rework his budget, and pay the card off.  Democrats are arguing that he should raise his credit limit again and charge the interest payments to his card, in case the credit card company is worried that he’ll fail to make them—as he always has before—and blow the money on a trip to Bermuda.

Can someone explain to me how the Democrats’ plan is more financially responsible and reassuring to bondholders?

Moody’s also argues that because the U.S. is one of the few nations that self-imposes a debt ceiling, yet has continually voted to raise it, this creates periodic uncertainty regarding whether the U.S. can service its debt; hence, the ceiling should be eliminated.

A debt ceiling is certainly not an essential aspect of governing a sovereign state.  But in this era of trillion-dollar deficits, doesn’t it serve the purpose of holding our politicians in check and sending the populace periodic wake-up alarms?  Shouldn’t a debt ceiling, however imperfectly administered, be recognized as a good-faith attempt to control a nation’s debt?

True, the debt limit has been raised many times in the past.  But in a limited government whose constitution is suffused with checks and balances and limits on rule, is it so foolish to have one at all?

If debt limits are such a poor idea, why do credit card companies impose them on cardholders?

The problem isn’t that debt limits are bad, as Moody’s implies, but that the U.S. government has been borrowing so much for so long that it thinks it has none.

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