Poor Standards

I don't think anyone was really surprised that the political train-wreck of the debt-ceiling negotiations led to a downgrade of the United States' credit rating. We'll start to see the effects of this move several hours from now when Asian financial markets open. Here in the US, most of the reaction has consisted of people from one political party blaming people in the other. A notable exception is former Clinton administration Secretary of Labor Robert Reich.

In an article published on the website UK Progressive, Reich makes a case that, based on their past actions, S&P had no business making any judgments about how creditworthy we are. Reich notes that if we as a country pay our bills and are likely to do so in the future, then we're a good credit risk and other metrics, such as debt to GDP, are none of their business. He goes on to point out that the irony of their actions when their relative inaction prior to the 2008 financial sector meltdown is a large contributing factor to our current level of debt.

Reich noted "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."

While the current administration has been critical of S&P's methodology, no one has called them out in the way Reich has. To what extent that's a function of politics or simply not wanting to antagonize the other rating agencies is hard to say. Either way, I'm left wishing that common sense like Reich's was in greater supply.