During the financial crisis of 2008-09 it became clear that S&P and its chief competitor, Moody's Investors Service, would give a triple-A rating to pretty much any security issued by a paying customer. For private sector and municipal ratings, the agencies are paid by the entities whose securities are being rated.
Is it a big surprise that the agencies would overrate the securities of paying customers? And as ProPublica recently reported, little has changed in how the agencies do business since the financial crisis ended.
Nice little economy you got there. Shame if something happened to it
The U.S. government doesn't pay for its ratings. You can bet that if it did, S&P and Moody's would assign it a triple-A rating in perpetuity. S&P and Moody's have been jumping all over themselves to warn about the vulnerability of the government's triple-A rating since 2009.
The agencies may be motivated as much by the attention they receive on the issue as by the value of their information. One person who served in several of Washington's highest economic positions told me that S&P's warning was "a publicity stunt." (This person asked not to be identified.)
This isn't to say that the U.S. doesn't have a massive debt problem. With the budget deficit near 10 percent of GDP and the government debt at about 100 percent of GDP, no one needs the ratings agencies to tell us a crisis is here.
An attack on the Treasury market?
The agencies' warnings may help prompt Congress and the White House to act on cutting the deficit more quickly. But they were already headed in that direction, and the biggest impact of the warnings may be to roil the bond market, which doesn't help anyone, except those who have shorted Treasuries.
Moreover, Treasuries certainly remain one of the safest government bond investments in the world, if not the safest. Several developed nations have stronger fiscal positions than the U.S. But probably none has the potential to grow out of its problems like the U.S. does, assuming we indeed tackle the deficit.
Star bond fund manager Bill Gross -- who is short on Treasuries now -- recommended last year that investors ignore the ratings agencies. That advice is appropriate now more than ever.
Image via Flickr user yumiang, CC 2.0