S&P versus United States: Who's Rating Who?

This note follows up my earlier comment on money market funds -- the consequences of a downgrade on the prices of short-term government securities and the like.

I just want to point out some press coverage of extreme arrogance at a time when what is called for is extreme humility, in my view anyway. From The New York Times today --

Oddly, because Treasuries have always been considered perfectly safe, many rules are written as if there were no possibility that their status would deteriorate. The federal government, in other words, does not really need a credit rating, which is reflected in the fact that it does not pay a fee to the ratings agencies, while everyone else does.

Banking regulations, for example, accord Treasuries a special status that is not contingent on their rating. Regulators consider Treasuries risk-free for banks to hold. Some investment funds, too, often treat Treasuries as a separate asset category, so that there is no need to sell Treasuries simply because they are no longer rated triple-A.

And get this: Moody's is now backing down from its threatened downgrade of the U.S. credit rating, although Standard & Poor's is saying they'll mark us down if we don't cut spending by $4 trillion. But some are now saying that doesn't matter:

Arnaud Mares, head of sovereign strategy at Morgan Stanley, told investors during a conference call on Thursday that a downgrade primarily would undermine S & P's credibility.

"A downgrade of the U.S. government would, in our view, not cause that many investors to dispose of their Treasuries," Mr. Mares said. "We think it would accelerate the ongoing trend toward less reliance on ratings in regulation and investment mandates."

"So the effect," he said, "would be more on the use of ratings than on the market itself."