S&P Threates to downgrade US Debt

So, Ezra argues that S&P is right to suggest that the US may lose its AAA bond status:

I’ve seen some observers react to the S&P’s decision by saying that the rating agency blew the subprime crisis and thus there’s no reason we need to listen to it now. But that seems shortsighted. S&P’s concerns are perfectly reasonable. The company believes “there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013. If you don’t agree with that, you’re not paying enough attention. At this point, the rating agency only puts the chances of a downgrade at one in three — which strikes me as, if anything, a little low.

What’s important to understand here is that the rating agency isn’t saying that America’s debt has grown beyond what our economy can absorb. They’re saying that Democrats and Republicans don’t agree on what to do about it, that the gap is widening rather than narrowing, and that that polarization, when added to the political system’s increasing dysfunction, could conceivably delay or prevent a deal. Our deficit problems are not, in other words, problems of economics so much as problems of politics.

On that, they’re almost certainly right.

All true, but yet… at this point I trust Standard & Poors about as far as I can throw them.  For anybody that actually understands what happened in our economic collapse, S&P has basically zero credibility.   (Short version: you want to create a fund out of mortgages where you sold half million dollar houses to janitors?  Sure, we’ll rate that AAA).  I don’t know how alone I am in this, but it seems to me that S&P has lost the right to make meaningful pronouncements.  Nice take from Yglesias, too (short version: ignore S&P– trust investors).

About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

One Response to S&P Threates to downgrade US Debt

  1. itchy says:

    One question is, does S&P make money from downgrading US debt? Because they certainly did by giving AAA ratings to junk.

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