Monday, August 8, 2011

On S&P, Downgrades, and Idiots

This is not going to be one of those posts that laments S&P’s decision to downgrade the US, but then says that S&P was probably right about our oh-so-dysfunctional political system.

No, S&P was flat-out wrong — no caveats. They are, to put it very bluntly, idiots, and they deserve every bit of opprobrium coming their way. They were embarrassingly wrong on the basic budget numbers, as everyone knows now, so they were forced to remove that section from their report, and change their rationale for the downgrade. (Always a sign that you’re dealing with hacks.)

S&P’s rationale for the downgrade now is based entirely on their subjective political judgement — and their political judgement is wrong. The brilliant political minds over at S&P said that “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.”

That sounds like a Very Serious and Sober assessment, but it’s really not. It’s true that the debt limit debate was ridiculous, and that a large contingent of Tea Party freshmen in the House were threatening to not raise the debt ceiling. But here’s the thing: we still raised the debt ceiling, and in such a way that this Congress won’t have the opportunity to use the debt ceiling as a political bargaining chip again.

S&P’s assessment is only remotely serious if you assume that this particular Congress, with its huge contingent of crazy Tea Partiers, is going to serve in perpetuity. But this Congress isn’t going to serve in perpetuity — there are elections next year, and many of the Tea Party freshmen are likely to lose. They won in 2010 because it was a “wave election” in the middle of a very severe economic slump. But 2012 is a presidential election cycle with an incumbent Democratic president. A lot of these Tea Partiers who won in traditionally Democratic districts (and swing districts) are going to lose. In fact, it’s probably even odds that the Dems take back the House.

The simple fact is that the Tea Partiers are almost certainly at the height of their power in this Congress. And no, the debt ceiling debate doesn’t reflect some sort of secular change in US policymaking — the next time there’s a Republican president, House Republicans will be all about raising the debt ceiling, and Democrats won’t engage in the same kind of political brinksmanship. You’d have to be stunningly naïve not to believe this.

There have also been plenty of political de-escalations over the years — Republicans didn’t shut down the government every year after 1995, for instance. After Tom DeLay won the Medicare Part D vote by holding the vote open for 3 hours, everyone claimed that this would be the new normal on all controversial votes. Didn’t happen. There are plenty of one-off political confrontations. Simply assuming that every political confrontation represents a secular change in US politics and policymaking is ridiculous.

(S&P tries to side-step this obvious weakness in their so-called “argument” by claiming that by the time the 2012 elections roll around, it will be too late. Please. The idea that we have to act in the next 18 months in order to meaningfully affect our long-term solvency is patently absurd.)

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.

Naturally, before meeting with a rating agency, we would plan out our arguments — you want to make sure you’re making your strongest arguments, that everyone is on the same page about the deal’s positive attributes, etc. With S&P, it got to the point where we were constantly saying, “that’s a good point, but is S&P smart enough to understand that argument?” I kid you not, that was a hard-constraint in our game-plan. With Moody’s and Fitch, we at least were able to assume that the analysts on our deals would have a minimum level of financial competence.

I’ve seen S&P make far more basic mistakes than the one they made in miscalculating the US’s debt-to-GDP ratio. I’ve seen an S&P managing director who didn’t know the order of operations, and when we pointed it out to him, stopped taking our calls. Despite impressive-sounding titles, these guys personify “amateur hour.” (And my opinion of S&P isn’t just based on a few deals; it’s based on countless deals, meetings, and phone calls over 20 years. It’s also the opinion of practically everyone else who deals with the rating agencies on a semi-regular basis.)

Treasury has every right to be outraged. S&P mangled the economic argument so badly that they had to abandon it entirely, and then fell back on a political argument which they are in no position to make, and which isn’t even correct.

So to S&P, I say: you should be ashamed of yourselves, and I truly hope this is your downfall.


Dan Tyler said...

Thanks for the insight about S&P. After the botch all the rating agencies made with the sub-prime bundling, I'm surprised anyone trusts what they say. If they can package liar loans as AAA, they ought to be able to rate Boehner and McConnell as AAA+ without batting an eye.

Anonymous said...

Some people criticize the anonymity enabled by the internet, but posts like these show that there are advantages as well.

People with unique qualifications, like the poster, can let the rest of us know what really goes on inside institutions with immense power over all of our lives, without the fear they'll ruin their own careers.

Nancy Irving

Anonymous said...

I want to dissent.

There's no question that the decision was political and completely misguided or that S&P has a bad track record.

However, the basic problem is that the US is unable to raise taxes. To actually raise taxes will require not just a majority in the House, but a supermajority in the Senate. That's not going to happen for a minimum of four years.

Letting the Bush tax cuts on the wealthy expire will help.But that would require that the President win re-election and start standing up to Republican blackmail. So, the odds are that the tax situation will stay bad for at least 4-6 years-- or more.

I think that S&P made a difficult call well. Let's not enter a state of denial about the state of our politics. We are in a state of Cold Civil War.


Anonymous said...

I totally agree with you and was surprised that the media did not question their change of tact more.

Anonymous said...

to anon at 8:09, I think you give FAR to much credit for any non financial news station (msnbc, cnbc, bloomberg).

All of your morning news / today show etc have NO chance of noticing something that obvious

Robert said...

What do you mean by "the order of operations"? is this some fancy aspect of finance as most people don't need to worry about it ? Surely you don't mean first you multiply then you add.

Tenney Naumer said...

Really, I'd like an answer to that question -- surely you do not mean the order of mathematical operations! sias

Anonymous said...

With anonymity, there are more arguments against than in favor of the S&P rating. I view that it's totally too early to assume that the whole financial market and it's agents will not react to the S&P's recently downgrade, although political and expected as mentioned here, given its presence for more than decades. The post seems to be a fictional story not backed by sufficient illustrations to show that S&P rating is not the one that US fiscal policy and so the policies of other governments should rely on from now. Yes, the market knows agencies biased ratings during recent crisis, but it is also surprising that there is still no any regulating authority to make them responsible and punished them for the great recession.

Anonymous said...

The downgrade creates a future upgrade day to boost consumer confidence and a political victory to the whoever is currently in office.

The downgrade gives the rich more money for doing nothing while the American people have to work harder. The rich and banks have been taking from the "working" for generations (because they have never learned self control).

Entprof said...

This is all about S&P trying to look like hard asses after, as the author of the OP points out, getting the entire decade wrong and playing the fools on Wall Street.

Anonymous said...

The rest of the world has had to watch on tenterhooks to see whether or not the US was going to default.

That's not AAA.

Anonymous said...

"I’ve seen an S&P managing director who didn’t know the order of operations..."

Could you clarify what you mean here please?

Anonymous said...

I believe that "order of operations" refers to the sequencing of events in case of a default or impairment of the credit instrument. Understanding the mechanics of a bond default allows proper estimation of "who pays" and "how much" -- which are the important things to bond buyers.

Anonymous said...

The ratings agencies have big problems because of how they get revenue. So, with regard to private debt there is some corrupting influence. When it comes to Sovereign debt, there is a lot of information out there for market to absorb without relying on ratings agencies. Also, the time to have shown concern about US debt was several years before the recession when we had all the bad trends but were at full employment. Unfortunately, most analysts are myopic, or occasionally ideological.

fourstick said...


Can't raise taxes? Maybe, but that's really irrelevant. Tax Reform (like that laid out in the Bowles-Simpson proposal from last year) could add $2T to $4T in revenue over the next decade, and that's just eliminating loopholes and lowering rates.

The current administration could and should promise to let all the Bush Tax Cuts expire at the end of 2012 if Republicans do not come to the table to bargain for tax reforms that will provide the government with more revenue. The cuts expire unless they are extended by Congress, so there's not need to have any votes whatsoever to raise rates back to where they were under Bill Clinton.

Your first paragraph is false. Whether the administration in fact WILL let those cuts expire or hold them over the head of the GOP to extract revenue generating concessions is a different animal entirely. But it does not take a majority in the House and a Super-Majority in the Senate to raise taxes. It takes one veto, that's it.

Anonymous said...

The ratings agencies lost all credibility long ago. Indeed they are idiots. If their employees were smart, they would be working on Wall Street.

But if you are going to criticize them, it should be for keeping AAA ratings on crappy securities for way too long. That includes the AAA rating for the USA.

The problem with the debt of the United States isn't that there is a ceiling, and the Treasury came perilously close to being unable to issue more debt to make interest payments. It's that the Treasury needs to borrow more money to pay back existing investors. It's that there is a massive official budget deficit. It's that the official deficit is tiny in comparison to the structural fiscal deficit due to off-balance-sheet obligations. The United States is, like most other countries, deeply insolvent. The gap between tax receipts and payments to Social Security and Medicare will within a decade or two reach tens of trillions of dollars - many times today's "deficit".

None of this should be surprising. Lehman Brothers, AIG, Fannie Mae and Freddie Mac and others all had AAA, AA, A2 or very high investment grade ratings days before they declared bankruptcy or were rescued by the government. Mortgage-backed securities given A ratings by the agencies didn't just default - some of them were entirely wiped out.

The ratings agencies get paid to perpetuate a vast illusion. Their job is to help the financial industry pretend that the bonds in pension funds are solid investments, when in fact they are bad loans that will not be repaid.

Perhaps this downgrade will begin the unraveling of the illusion. When bond-holders start to sell, they will find there are no buyers, and the whole scheme will collapse.

But perhaps it is easier to believe that everything is OK, and mighty America is exceptional, and remain ignorant and optimistic as the world collapses.

Anonymous said...

What do we think it's going to take for S&P to give us back our AAA rating? A budget surplus, or something else?

David in NYC said...

Only the author of the post knows for sure, but based on my own experience with the folks at S&P, I would bet the mortgage (pun intended) that, yes, he really is referring to someone who doesn't know something as simple as "first you multiply, then you add".

Calling them "dim bulbs" would be a compliment.

Anonymous said...

While it's true that Democratic policies since FDR have turned the U.S. into a socialist cesspool which is unquestionably leading to U.S. economic decline, it's pretty remarkable that an organization like S&P, which apparently employs idiots exclusively, has somehow survived for 150 years.

g kaiser, johannesburg said...

I think SP has done now, what should have been done years ago.
The US is run badly, arrogantly and without any concerns for sustainability.
The US is bankrupt, face it. Buy gold!
It is the end of fiat money, nothing less.

demz.taters said...

Yeah let's drain that socialist cesspool and go back to the days before Social Security when half of all elderly women lived in poverty. That will make us lean and competitive again.

Anonymous said...

Phoenixwoman said
" To actually raise taxes will require not just a majority in the House, but a supermajority in the Senate."

Reconciliation requires 50 votes.

To actually raise taxes would require the Democrats to actually make the argument that we know from experience that voodoo economics doesn't work.

Anonymous said...

I think the downgrade is serious not for any directly economic reasons, but because it shows the political connections at work. Certain factions - which seem to be strongly represented on both sides of Congress and in the White House - want to lend weight to the "necessity" to impose economic austerity on the American people. This downgrade works to that effect.

Quid Pro Quo: one wonders if this act was in payment for prior legislative favours to the rating agencies, or an investment in future favours?

And yet again, the protected status of these agencies leads ineluctably to the type of incompetence discussed, for the same reason that congenital idiocy is no barrier to being King.

moe99 said...

How is it that the debt ceiling cannot be used again as a political football?

Didn't Geithner just agree to stay on as Treasury secretary because the administration feared that a new appointment to this post was going to be the next hostage taken by the Know Nothings in the Republican party?

Anonymous said...

This is the only rational thing I've read about the S&P debacle. And it's just my style. Bravo!

masaccio said...

I think you wildly underestimate the failures of government in the US. It isn't just the Senate, which no longer operates on a majority rules basis. It isn't just the House, with the crazy party in control. Even if the Tea Party gets wiped out, control is vested in so few people that both houses are dysfunctional. This comment explains a lot:

Every single regulatory agency is hamstrung by procedural rules and by unprincipled judicial oversight. The judiciary is full of ideologues whose leisurely pace insures that rules are in limbo for years even if they are eventually approved.

For years, republican administrations put anti-regulation people into the system, sucking the vitality out of enforcement and regulation. Look at the SEC: no prosecutions for fraud in the biggest fraud in our history.

There is no uncontested ground anywhere when one party makes it their sole political goal to screw over the President.

Our government is thoroughly broken at every level. S&P is right about that.

Anonymous said...

I think its a big guess in thinking 'tea party' freshman will loose in 2012. Don't bet on it.

Anonymous said...

Economic crisis of the magnitude we are facing today does not develop in a vacuum, but due to collusion of interests to game the system. The question remains whether the rating agencies pattern of behavior over the last several decades was to willfully aid and abet these collusive interests, or whether they were simply just that incompetent. This accusation of collusion was made during the Carter's administration. At the time I thought it absurd that certain Americans would damage their own economy for political gain. Seeing the recent developments, and reflecting on the missteps of the earlier decades through the lens of accumulated experience, I am reaching different conclusion.

Anonymous said...

That is how you measure intelligence? That you couldnt sucker someone into accepting a structured finance deal like you could the other two agencies? Do you even remember when you sold out?

Anonymous said...

"But this is the United States of America. No matter what some agency may say, we've always been and always will be a triple-A country."

... regardless of how much money we borrow or print.

There, finished that for you.

S&P is many years too late.

Anonymous said...

If the Tea Party does not lose, but gains members of Congress in 2012 will you admit you were wrong?
If the economy totally collapses in the next 18 months, will you admit you were wrong?
I will agree with one thing you said, that Republicans like to spend with a Republican president, but Democrats will never apply brinkmanship (because they always like spending.)

Anonymous said...

Several people have made this point already...

However, a super-majority is not required to raise taxes in the Senate. 50 Senators (and the VP) will suffice.

Tax hikes are subject to Reconsiliation and debate stops after 20 hours.

Obama could have repealed the "Bush tax cuts", in whole or in part, at any time. He didn't.

That makes them the "Obama tax cuts" and he has stated many times that he wants to keep almost all of them.

Anonymous said...

"No, S&P was flat-out wrong"

Actually you are flat-out wrong.

On what planet will discretionary spending only match GDP growth over the next 10 years?

On what planet will a budget deal that cuts virtually nothing in 2012 but supposedly cuts a lot in 2021, actually reduce spending?

When people say they will pay you on Thursday for a hamburger on Monday, you are supposed to know that it's a joke.

A budget deal that promises lots of cheese in 2021 and near zero cheese in 2012, mean near zero cheese.

Here is the number you really need to pay attention to. The 2011 estimated budget deficit is 10.8% of GDP. That's unheard of in the peacetime history of the United States and close to unheard of in modern economic history.

We have been running gigantic deficits since Obama took office and no serious projection shows them declining any time soon (unless you believe a growth miracle is imminent).

The S&P downgrade was fully justified.

Anonymous said...

I googled "order of operations finance" and "order of operations debt" and got nothing but mathematical order of operations, or the best way to increase your FICO score. Nothing about the seniority of debt for repayment in bankruptcy or anything like that.

So I guess it is multiply then add. That is...sad. S&P must be absolutely terrible at hiring and keeping employees. I guess the only answer is that they're purely a sweat shop with relatively low wages and they make money because they get paid for ratings pretty much regardless of quality.

Anonymous said...

as someone who also has dealt with not only S&P but many other of the rating agencies I will also agree that they are complete and utterly useless idiots.

There is no way they can grasp PEMDAS FOIL or anything along those lines, let o lone anything financial related.

Often times yes, they were duped by people selling their useless toxic shit, but that just makes them bigger idiots because they knew they were being sold on BS.

Even IF the US deserved to be downgraded doing it well after everyone says it so just makes you a sheep. They downgraded Bear hours before they were bought by JPM, LEH days before they were bankrupt. Anyone who thinks they are "doing the right thing" and not covering their asses is also equally stupid.

Ratings are supposed to measure one thing, and one thing only. A CREDITS ABILITY TO REPAY ITS DEBT.

Thats it

nothing else

nothing more

nothing less


Anonymous said...

This reeks of (corrupt) politics. I would like to see the phone list of all the senior management over the last 6 years (yes, including the bush/chaney years).

Charles said...


I urge you to examine the following table and chart.

Simpson-Bowles has some useful ideas, but on the whole it is completely oblivious to many actual problems. The US is the most likely taxed nation in the developed world. It spends the most on the military by far; . Deficits and military overspending have burdened it with enormous interest payments. It has weak demand, leading to low capacity utilization, because incomes at the bottom 2/3ds of the income spectrum have been stagnant or falling for a generation. The income situation is why there is such enormous debt.

The Simpson-Bowles approach is designed by upper income people who apparently have no idea that 40,000 Americans die every year because they lack medical insurance, that a million or so are homeless, that the entire rising generation is being ravaged by social ills, poor education, untreated mental illness, and increasingly poor health. There are no cuts to give in the large entitlement programs. The US already has the worst so-called "safety net" of any industrialized nation. Many developing nations have better "safety net" programs.

We deal with these issues in depth on my blog. I can offer you these leads to try to understand the situation, but can't take the time to do a full debate here.

@Anonymous said... "Reconciliation [to raise taxes] requires 50 votes. To actually raise taxes would require the Democrats to actually make the argument that we know from experience that voodoo economics doesn't work."

Actually, it would require the Democrats to change the Senate rules, which they are free to do, and have decided not to do. But then it would also take a cooperative House and President.


The Value Major said...

Wow. This is now officially the post I wish I'd posted on my my blog. S&P currently looks really stupid. They won't however admit to being wrong-- because that would mean confirming that what looks stupid really is.

Greg Cooper said...

If you have experience working at an investment bank, I'd like to ask you a fairly basic question on financial math: What kind of credit rating would you assign to a U.S. citizen with $50,000 annual income and $350,000 debt?

I ask because the U.S. pulls in roughly $2 Trillion each year and is $14 Trillion in debt, approximately the same debt to income ratio.

The math seems pretty simple, and I don't really think that you can expect to screw the "rich" out of a cool Trillion each year to pay that down.

So, why should an entity that is clearly unable and unwilling to live within its means maintain a top-tier credit rating?

Anonymous said...

@Greg Cooper: the difference is that your hypothetical individual can't demand that people start giving him more money just because he needs to pay off his debt. Governments, on the other hand, can tax.

Anonymous said...


That is also so far shortsighted that there is no way to answer that question...

What assets does that person have?

Do they have buildings full of gold (such as fort knox and the NY FED).

Do they have companies that they could own and sell to the private sector (post office, medicare etc, not saying they could but I bet companies would happily buy a gov't agency).

Etc, etc.

breaking something down to "revenue and debt" is something silly that a rating agency would do... or if you still believe in them then at least you can agree its losing the forest for the trees

Unknown said...

I'm neither banker nor economist, just a private investor who on early Friday afternoon bought back two of my favorite stocks that I sold a week earlier at a nice profit. Needless to say, had S&P given me the courtesy of a "heads-up," I could have held my buy order for an even more favorable price. Who knows how long it will take for me to recover this week's losses.

Even if the ratings folks are incompetent "dim bulbs," as I recall in int'l finance class the numbers are important, but the political picture is critical when investing. And sometimes the rot of corruption is just too pervasive for a thinking person to place a bet.

Sorry, we lose.

ploeg said...

Regarding de-escalation in politics, there typically has to be a reason to de-escalate. De-escalation isn't going to happen just because the Democrats can be counted upon to be adults and refrain from retaliating. Gingrich didn't shut down the government every year because it was politically unpopular the first time and he wanted to keep his fancy office. They haven't had any long votes like they had for Bush's Medicare vote because a Republican hasn't had to shove so big of a turd down the collective gullet of Congress. (You can bet on it happening again, should the need arise. If it works and you don't pay a price for it, it will happen again.)

Which brings me to the default debate and the effective Republican veto in the Senate. If the Republicans don't pay a political price for their gamesmanship, then we're going to see these sorts of stunts again. (And we will, perhaps, even if the Republicans pay a political price. As has been noted, the Tea Party is at the height of its influence currently, they are looking to make a big splash, and they are not particularly bright.) That being said, there is some hope that the Democrats will take action at the next opportunity to remove some of the roadblocks that the Tea Party has used (such as removing the debt limit entirely and eliminating the filibuster). As it is, S&P's case is at the very least not proven.

Anonymous said...

You can bash the ratings agencies all you like, but it won't matter.

The bashing suggests that the US didn't deserve to be downgraded.

If you have 14T in debt and your economy isn't growing, has no real plan to grow, and cannot create jobs, then you have no credibility.

That is not debatable. Sorry, but blaming S&P or the Tea Party is a Red Herring. Blaming "revenue" is a red herring as well.

There are many examples out there giving ways to balance the budget. John Stossel balanced the budget on his TV show.

Obviously, no one should aggravate interest rates or the markets if possible. But the fact that US spending went from 3T to 4.6T under Obama, while revenue went from 2.5T down to 2.2T doesn't suggest that taxes are the problem.

Lack of tax reform is A problem. But, spending is, was, and still remains THE problem. Baseline budgeting with the Boomer retirment is the kiss of death. Don't forget about Fannie & Freddie either.

Anonymous said...

@ anon @ 12:32 PM

what does ANY of that have to do with their rating.

Creditworthiness is supposed to measure your ability to repay. THAT IS ALL.

Everyone needs to stop making stupid comments that suggest otherwise. That is why rating agencies are morons.

Yes the US does indeed have all of those problems, that is 100% fact.

Our probability on defaulting on our debt has not changed one bit despite all of those facts.

Anonymous said...

To the poster at 12:32 Pm...

"But the fact that US spending went from 3T to 4.6T under Obama,"

Yeah, because the Obama adminstration stopped hiding the costs of the two wars and put them on the books. So let's stop that nonsense right now.

"doesn't suggest that taxes are the problem"

They very much are the problem. Taxes are at their lowest levels in 60 years. It's the uber-wealthy and multinational corporations failing to pay their share that is driving the deficit crisis.

Oh, John Stossel is no one you want to refer to.

Oberon said...

...i invite you to join globalove think tank.

Anonymous said...

What I find hilarious in your above blog is that you readily admit to being in on the "MORTGAGE SCAM" with your investemnt bank employer(probably the biggest contributors to the 2008 Financial Crisis)...So i read all these comments about the Rating agencies being scammers and responsible for the crisis yet no one has figured out that you were even more responsible and are actually criticizing the Rating agencies for being too dumb to realize you and "your team" were scamming and making millions of dollars on poor and middle class families. My guess is that's why you are anonymous. wise move.

"Naturally, before meeting with a rating agency, we would plan out our arguments — you want to make sure you’re making your strongest arguments, that everyone is on the same page about the deal’s positive attributes, etc."

positive attributes???"

Anonymous said...

A famous geologist had published a detailed paper on the rock formation of the island he frequented during the summers. While strolling the hillside one evening he found a boulder whose mineral content simply could not be explained by his theory. Instead of changing it, he hired the locals to roll the boulder down into the sea.
As it sank out of sight, he exclaimed, "There, I was right after all."
So was S&P.

Teaching High School said...

I wish we could tax our way out of this mess, but we can't. You could take every dollar earned from every millionaire and it wouldn't solve our debt problem.

We need to cut spending.

S&P is not the only ratings agency that threatens or has delivered a ratings downgrade.

RCI said...

Thanks for your thoughts, there would seem a lot bigger problems than S&P 's Downgrade. If the US wanted to, it could sell assets and pay off all it's debt, it just elects not to, so it is not the problem. Much like the Politic-ing that went on in relation to the Debt Ceiling, if you wanted your ratings agency noticed be the only one that makes such a significant and unique statement / change.

Dan said...

Congratulations on making the blogs of note; otherwise, I wouldn't have found your blog. It's refreshing to hear someone once on the inside willing to speak . I've saved your blog as one of my favorites.

inspector35 said...
This comment has been removed by the author.
inspector35 said...

You are correct in saying that they had the wrong numbers. You are not correct when you suggest they were wrong to lower our rating. The debt "solution" raises our current debt by ONE TRILLION DOLLARS!!! Do you understand how much money that is? How many tax dollars?
Last year, my wife and I paid 13 percent of our income to the federal government in taxes. That does not include medicaid and SS payments. 13%! You enjoy saying that the rich must pay their fair share. My wife and I aren't rich, but if the rich amoung us are paying more and I'm sure they are, why are they still working? You can tax those making an honest living 100% for one year. It will only be for one year because then we will stop working also. You still won't balance the budget. What will you do then?
S&P was right and the Tea Party is right. We can not keep going the way we are headed.

The Happy Misanthrope said...

The fact that the downgrade was completely avoidable is what I find so infuriating.

I haven't seen anyone comment on Obama's recent statement that the US will always be a AAA nation. While I understand that President's sentiment and understand why he needed to say that to reassure the nation, it troubles that his statement sounds like a denial of the importance of this downgrade; he's insistence that we are a AAA nation regardless of what S&P says seems to play right into the Tea-Partiers' hands when they assert that the default wouldn't happen or matter if it did. The fact is that decisions matter, politics matter, and this divisive bickering that lead to this downgrade mattered. I would much rather have seen President Obama gone out there and essentially said, "I told you so" and laid the downgrade right on the Tea-Partiers' lap.

Anonymous said...

Politics that disregard reality aren't politics. They are just there to serve the self.

Anonymous said...

HAHAHAH @ Just the Inspector... idiot

I don't think you (much like the tea party) get how percentages work.... you are being taxed at 13% and getting by, any raise will increase your discretionary spending or money that you didn't have. Your fixed expenses (food, house, healthcare) don't change. So those who make more can afford more.

That being said, I am paying 28% on fed taxes and it hurts but by no means am I struggling (thankfully).

What DOES need to be fixed is the brackets themselves, they max out WAY too early. 250,000 is a lot of money but they should not pay the same taxes as someone making 500K, 1mm, or 5mm.


One WILL SOMEONE ANYONE PLEASE tell me how the US is more likely to default.

All people are stating is how our politics are for shit, our debt is ballooning but no one will state how we are more so in jeopardy to default.

Does anyone the difference in default probability of AA+ vs. AAA its like 1 basis point (if that) aka a non-factor (granted rating agencies will downgrade someone like 5 notches just before default to cover their asses but still)

(J B)arley said...

Personally, as much as I believe that the folks at S&P are probably hacks who know nothing about economics, that doesn't mean that US debt shouldn't be downgraded. We have amassed massive amounts of debt (I will forgo commenting on the destructive nature of debt and inflation here), and some day in the probably not so far off future our dollar won't be linked to oil. When that happens, a big reason we are the worlds reserve currency is gone. Given our over-consumption, underproduction, and generally incompetent and exceptionally over-reaching government, I would not say our future looks that bright...

ploeg said...

A question to those who still believe that the US deserved a downgrade: If the US does not merit a AAA rating, then who does? Certainly no business, public or private, would merit a AAA rating. Very few sovereign governments would merit a AAA rating either.

King of New York Hacks said...

Couldn't agree more about the agencies...If people got to see up close the degenerates mismanaging there money, we would have the much needed know whats cool though is my word verification is "taxis"..ironic eh ?

Anonymous said...

There is no idiots! S&P stimulate panic for simple and pragmatic thing. Then many people sold his actives for low price... some one recive it fast, cheep and with no extra charges.

Anonymous said...


Josh Smith said...
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Josh Smith said...

Botch? Hacks? Then why do you think that the FED came out yesterday and affirmed S&P's decision? Sure, S&P missed the subprime disaster. Who didn't? Don't forget, Moody's and Fitch both missed subprime as well, but nobody has questioned them. Let's look at the "faulty" math for a seccond. $2 trillion mistake. Out of $14 trillion that isn't that much. They were only off by 7%. If S&P was a student that would be the differnce between a 100% and a 93%. That's still an A grade.

Sukhesh said...

politics or not, its a fact that US economy is dwindling. can't deny that fact. no use complaining about S&P

Olavo Marques said...

This blog I will show, was considered the best blog in the world:

Anonymous said...


"If the US does not merit a AAA rating, then who does?"

The US's problem isn't that it can't afford to pay its debt's - it quite easily can - but that a substantial section of the us simply isn't willing to pay and seemingly relishes the idea of default.

The world has had to watch on tenterhooks to see if you can be bothered to pay your bills. Absolute joke in the light of that for the US to be considered AAA.

tomasgiron said...

We all better wake up and smell the coffee!
S&P was not at fault, it was the tea party repub's who can't see past their own ideology. They hurt all of us - could you imagine not paying our troops in the heat of battle - how about the troops such as I recovering from viet nam. Be honest with yourself, it was the tea party and bachmann who wanted to drive us off the cliff. The result is 400 pts off of the stock market today too - yea blame who is responsible - the tea party...

Desi Babu said...

Your post is very insightful. But I have a slightly different take on this, which may not agree with the sound economic "theories".

A nation is much more than S&P ratings, and it is much more than what its stock exchange index says it should be. A nation is defined by its people, its culture and its ability to survive during tough times.

The United States has passed this test with flying colors many times in the past, and it will again come out on top. Have faith in your country, because I do. And, it is not even my country!

Desi Babu

Anonymous said...


The US government has the privilege of making our money (limited only by the ridiculous debt ceiling). If you were able to make money, do you think that others should worry that you wouldn't have enough to pay them?

The US could pay all debts tomorrow and never issue another treasury security.

Anonymous said...

I couldn't finish reading your response because I realized how much you're a Conservative Republican hack. You don't get it do you? The downgrade was totally justified and the budget deal that Congress got out after all the nonsense proves that our downgrade is justified.

I've discussed in my Political Action VIII entry on my blog; Your welcome to comment or debate with me anytime.

Anonymous said...

to The Anonymous Moderate

How are we more likely to default?

Anonymous said...

Also to Anonymous Moderate

if you don't like someones blog or comments don't read it.. you are not paying for it.. its completely free.

don't be a worthless piece of shit ass and insult the writer.

disagree with him fine, but at least be civil

Anonymous said...

damn ..., you all sound as if you actually have genuinely grounded personal opinions...; and 'genuinely grounded' means what ever it seems to mean.

... but the exchange has re-invigorated some hope in fellows, thanks.

Trade Shows Live by Popup Stores said...

If you live in Europe and see the result of rating... Grece, Portugal, Spain, Italy.

We have to change the way of ratting or we loose the economy.

The Economic Maverick said...

Fantastic post. And looking at how the market has reacted, S&P look like even bigger idiots. 3 days in a row Treasuries rally, regardless of the stock market moves. Then they turn around and maintain AAA "ratings" on US and even French banks, but the markets don't buy it, and the large financials sell off hard. Can we now say that S&P is now fast becoming irrelevant?

Happy Misanthrope said...

I have to agree with Olavo. We can argue about the wisdom of the S&P, but much of the reason for the downgrade was not the the US COULD not pay its debt but that a significant part of the Republican party spoke flippantly about defaulting on the debt and seemed to be clueless about the implications of the discussion. Remember it's not just about our internal politics; alot of foreign governments were amazed that this discussion could be taken seriously over here.

Unknown said...


Anonymous said...

Ah, thank God for bloggers. The ones of us without careers to ruin.

Michael LaPenna said...

Someone on Bill Mahr's show pointed out the politicians often study law or poli-sci and there aren't enough business people, doctors, city planners or engineers in politicians with the mind-set to be saying F*** politics! The patients are bleeding, the building are falling and the ice caps are melting! Let's HURRY! (and for the record, I'm an Independent for that very reason).

Secret..Sauce said...

S&P channeling Henry IV?

Secret..Sauce said...

S&P merely published an opinion. Feel free to ignore it if you like. Trade on it at your own peril.

elposta said...

Nice blog

casino en ligne sans telechargement said...

Completely true!!!

Anthony Hopper said...

Great post! I personally believe that the current ratings industry/environment has significant flaws. On the whole, none of the big three ratings agencies (S&P, Moody's, and Fitch) produce first-rate work. This is a significant issue given that these agencies have tremendous power and influence over the global economy. As just one example, their failure to posit accurate ratings for sub-prime loans abetted the Great Recession.

With that said, can anyone think up a better ratings system? We (the U.S./world) might be able to improve the big three's performance if we created an oversight authority to audit/monitor them. However, I do not believe that this is a realistic option.


Unknown said...

The whole stock market and economic system of our government is a pyramid scheme. It's starting to fall. It's a part of a grand scheme to keep the wealth of the world in the hands of a few.

Bill said...

I sure as hell HOPE the Tea Part candidates win the next election! It's about time someone returned this country to being able to live like capitalist Americans, instead of like muslim communists.

commoncents said...


Common Cents

Anonymous said...

hey bill whats it like to be uneducated and racist?

Whitehawk said...

We do not have revenue problem.


To work from the assumtions that:
1. It is not necessary to have a budget.
2.You can spend whatever amount you want without regard to income.
3. There will be no adverse repercussions if you do.

Is either foolishness, malice or dishonesty.

hakan said...

good one!

NFL Coach said...

It's all about keeping up with the Jones. ...or destroying them!

Congratulations on your Blog of Note from; NFL Classifieds

Johnny Ponders said...

This... saddens me. And it will be my generation who has to deal with the result of all this turmoil

Mean Mister Mustard said...

@Josh Smith
It doesn't matter if you are satirist, Tea Partier, S&P employee or what, this still made me laugh out loud:

"Let's look at the "faulty" math for a seccond. $2 trillion mistake. Out of $14 trillion that isn't that much. They were only off by 7%. If S&P was a student that would be the differnce between a 100% and a 93%. That's still an A grade."

Leon said...

I enjoyed reading this post and fully agree

RG said...

Thats an interesting view.
In the global media S&P are being taken very seriously and majority being unaware of the error in judgement are beginning to think as the beginning of another recession.
Lets hope for the best.

Khan said...

I agree - sonds like a lot of chest pounding by S&P. Very poor comeback by the organization. I wonder if it was motivated by a desire to "make up" for past failures in Subprime and others. Or potentially a way to make headline news.

I wonder how S&Ps parent company McGraw Hill could let this happen?

Khan said...

By the way - I agree with the author of this blog. Not the idiot who posted ahead of me.

Unknown said...

Cool - Nice site
You can follow me back here.

nowaysj said...

Good to hear truespeak.

Greg Cooper said...

Actually yes, the individual in my example DOES have assets that can be sold. Generally speaking, you don't get to $350,000 in debt without having a home, car etc...

Meanwhile, the U.S. government doesn't really have much in the way of assets to sell. A few hundred billion in gold, sure...Of course, right now our debt grows at a rate of (roughly) $4 billion a DAY so, all that gold doesn't go very far.

Sell the post office or medicare? It's hard to make money by selling operations that lose money. And don't even suggest selling off forest though the Government would commit any open act of desperation like these. One thing that WOULD make sense would be to sell the services of our's really the only exploitable resource wholly owned and operated by the government!

Of course, there's the stellar argument "it's SO much more complex than that, you're clearly an idiot". Okay fine, these are the finance policies that apply to nations, such as Ireland and Greece so we should ALL just breath a sigh of relief and raise that debt ceiling! SPEND SPEND SPEND!

Oh and yes we print our own money, sadly if we double the number of dollars in circulation the value of each is cut in half...which will lead to an even better credit rating!

Stella said...

The rating agencies, the governments, and the rich in general are in the same gang -- a bunch of smart drones who live off the worker ants. They say whatever serves their interests. I bet republicans, tea party members and democrats slap each other on the backs after each parliamentary sessions, debates or whatever show they have on. Their rivalry boils down to whose snout is first at the trough, while providing panem et circenses (bread and circuses) for the plebs. The truth is that capitalist economy is nothing but a global Ponzi scheme disguised with fancy terms and phoney financial structures (stock exchange, bonds, fiat money etc), and as such is riding for a fall.
The rating agencies, the banks, financial lawyers and other "experts" perfectly knew where the sub-primes sham would land them, otherwise they should be considered mentally retarded -- they've successfully stashed piles of money and ingots in tax havens and Swiss banks and won't let go a cent of it, so to keep the status quo they have to convince us the morons that we have to tighten the belt, slash social services, pay more taxes and work more. No one ever willingly sells assets to pay off debts; instead, they'll rip off someone else.
Does anyone know if the US can eternally raise debt ceiling? What if China (I heard the US's biggest creditor) suddenly asks US to settle the debt or the payment is due? Will the US default? Would it mean foreclosing the country's assets? Are you sure Federal Reserve is still full? Have you seen the vaults full of ingots? Or will the US resort to old-as-the-hills strategy -- if you want to avoid paying off your debt, kill the creditor. I'm sure neither US no Europe have the intention of ever paying off the debts, it's all about speculation with interests and stringing idiots along. No one takes loans they can't possibly liquidate in the foreseeable future and intends to do so. But this, I'm afraid, is the road to another WORLD WAR.

Unknown said...

To say that the Tea Party is in its heyday is presumptuous. To say that they're crazy is a mistake. If it is crazy to adopt conservative values when conservation is needed, then it's crazy to make a grilled cheese sandwich with bread and kraft singles.

Anonymous said...

The USA is another dominant empire at the end of its days, you are bankrupt financially, some might say morally too.

Empires rise and empirs fall, the UK had to get used to the end of its empire, ditto Spain, France.

Talk about rearranging deckchairs on the Titanic

Linda Grace said...

Thank you for your unique insights into something most of us would have no idea about. I really enjoyed it and learned from it. Cheers,
Linda Grace

Scott MacDonald said...

I absolutely agree with you about the S&P downgrade. I think the only thing the downgrade did was to prove the insignificance of the S&P credit ratings system.

I appreciate the insight. It is nice to see another sane voice rise from the crowd.

Sasha said...

US Gov is striking back with investigation into the sub-prime bundling getting AAA rating.

Jonsy said...

The S&P ratings were a judgement of whether there was 100% faith that we could pay off our debts. In the face of democrats and republicans bickering in congress and procrastination in the formulation of a plan to curb our debts, I think S&P did the logical thing. That being said it hurt our economy in ways that will affect us down the road.

It is not up to congress, and Barrack Obama to save this economy. It is the duty of every citizen of this country to get out there and create something from the ash in the midst of what seems like a chaotic environment. Life will go on and new companies will emerge, the economy of the world will bounce back and we will get our ratings again. We will see a penny pinching patch of rough though. It was inevitable.

Next Pixel said...

very interesting blog.

Anonymous said...

Very insightful and well written.

Keith said...

S&P dropped the ball by lowering Venezuela's credit rating based on political reasons. Venezuela wanted to move their gold reserves out of London and into their country. So yea its kind of interesting to see the very institutions we are told to trust being untrustworthy.

Captain Bailey said...

Capitalism worked for a long time, but it's obviously not working so great these days. Human beings are not commodities. When we are treated that way, we become sick and unhappy. Most of us were brought up with the idea that hard work and responsibility would equal success, but that doesn't happen in a world when the dollar is the end that justifies the means.

Even educated people have had a hard time understanding the diddling behind the giant sucking black hole mess of the mortgage bailout, and there has not been enough public outrage. I saw some PR-dripping ads recently about how Goldman Sachs is helping rebuild New Orleans and I honestly wanted to vomit.

My heart freezes when I read comments about recent events being the harbinger of another World War, but I frankly don't see anything happening to stop the decline brought on by dollar-worship until our basic survival is at stake.

Then we really won't care much about our credit rating.

Anonymous said...


"Most of us were brought up with the idea that hard work and responsibility would equal success"

That still holds true if you add in one little part at the end "and you save more than you spend". People took advantage of the easy credit that was provided to them (cars, homes, iToys etc) and then get pissed when it was all taken away from them.

Always save more than you spend and it doesn't matter what happens with anyone or any company.

As far as the general public's understanding is because no one is explaining it properly. You are missing half the story.. you just can't blame wall street without blaming the american public as well and NO newspaper or tv station wants to alienate their viewers by saying "if you are watching this show you contributed to this mess".

Blaming one company (or an industry) is idiotic. Yes, the banks may have been selling some toxic shit and made a lot of money off of it, but someone still had to buy it. If i showed up at your house and said here buy this, it will make you rich, you might just think twice (I am hoping?). People became complacent when the market was good and bought whatever. If they did their diligence and refused a buy or two banks may not have sold the crazy stuff.

I am not trying to absolve the banks from this mess, they 100% did their share, but so did every American Citizen.

a04bpaine said...

I am a politics student in the UK and I think your posts are very insightful. I would have to say that I would have to disagree with you though. Yes S and P have made an error and they should be reprimanded for it. I would say though that in the context of US debt (around 14 trillion) a mistake of 2 trillion is rather a red herring. I think that America should forget about whether the debt is 12 or 14 trillion and look to why their debt has got to trillions in the first place. In my opinion the political system is broken and they are using the relatively small mistake to avoid what would be very unpopular political reforms.



Truthful James said...

There was a simple work around for the debt limit, which I believe should have been considered and which would go a long way towards rationalizing budgeting and debt in any event.

The Federal government has been misusing debt for a long time through the use of omnibus financings. In the days of yore when issuances were relatively small and accounting for the debt was done by hand, there was an excuse, but no more.

The simple rule for any other issuer is that debt incurred must not extend beyond the expected economic life of the asset being financed. Assets had a purpose and a finite life. A longer liability meant that you were financing a second asset while an older liability was still outstanding and interest was still being paid on it.

The exceptions were war and welfare, although each may be said to have a useful life and are paid as all assets are from a combination of current revenue and debt. Each has extraordinary costs.

The British came up with an extraordinary solution to pay for the Napoleonic Wars. They issued Consols -- debt with no fixed maturity which could be bought back and retired only from the market and on which was a fixed periodic interest rate. They could be traded in the market. The last Consol was retired, I understand, in the nineteenth century.

Not having a fixed maturity, I believe, is a valid reason why such an issuance should not apply to the debt ceiling. If so, then they could be issued by the Administration, should the Congress pass appropriation bills.

I would prefer that the Federal government rationalize its spending as above, but this should be a stopgap method used for refundings among other purposes.

Anonymous said...

It's really interesting and insightful. Rating agancy lately has been acting with a good dose of nonsense.
It's important to see other views on the matter, and I'm still surprised of the power they mantain even after the crisis.