I truly doubt that any investor expects the United States government to default on its debt. The underlying assets of the United States -- which is to say, the largest economy in the world -- are rather formidable. And history says that we eventually get our act together on budget matters, even though the politics on the way there is usually ugly.
So I agree with Austan Goolsbee, the chairman of President Obama's Council of Economic Advisors, who said that S&P's "political judgment" should not be given "too much weight." And the Financial Times' John Authers was right to say that "the move is still more symbolic than anything else."That tells us something else we'd do well to keep in mind: Institutional investors have long generally ignored what credit rating agencies have to say. Corporate issuers, financial firms and other market players of course depend on ratings -- pension funds are restricted from investing in low-rated securities, for instance. But studies have shown that the ratings themselves, and the "analysis" that supports them, contain little information that the market hasn't already digested and belched out in the form of prices.
In other words, ratings are necessary in our capital markets, but not especially useful. That's why investors have largely yawned at the S&P move -- it revealed nothing about the state of America's balance sheet, nor about the political obstacles to balancing it. It also helps explain why the ratings agencies whiffed so badly on the financial crisis. Even if the firms didn't rent out their ratings to the highest bidder, their assessments are generally unhelpful in making predictions about the future.
The enemy of my enemy is my friend
So why would S&P insert itself into the political process? Self-interest. The Democrats are obviously far more likely than Republicans to tighten regulations on credit rating agencies. Fanning hysteria about the U.S. hitting the debt ceiling raises the pressure on the White House to slash federal spending. That could slow economic growth and perhaps even send the unemployment rate, which has been inching down, back up. And that clearly wouldn't help the White House's cause.
I'd also be surprised if institutional solidarity weren't playing a role. Rating agencies are still paid by big financial firms, which have drawn a target on Obama. Meanwhile, the government's failure to eventually act to reduce the debt could cause inflation and interest rates to rise. That would hurt bond prices. As University of Texas economist James Galbraith, a noted critic of Wall Street, said in assessing S&P's move:
Political shenanigans cannot be ruled out. That's what lawyers would call the 'rebuttable presumption.' After all, who benefits? The Republicans and perhaps the banks.Dionne zeroes in on another point that's generally being overlooked in the hubbub over S&P. The real threat in getting the U.S. financial house in order isn't the political establishment's unwillingness to cut spending. Both Obama and Rep. Paul Ryan, R-Wis., are proposing to cut that by trillions of dollars over the next decade or so. It's Washington's aversion to any serious discussion about raising taxes.
Overcoming that would be a real political intervention -- the sort that the government, Democrat or Republican, will one day almost certainly have to make.
- Direction Deficit: How the U.S. Could Follow the U.K. Into Another Recession
- Sorry, Tea Party: Why the Debt Ceiling Increase is Already a Done Deal
- Hey, Congress -- Don't Forget There's Another Way to Pare the Deficit
- Obama's Deficit Speech: Finally, a Little Moral Outrage... and No Gimmicks
- Why the "Path to Prosperity" is a Dead End