Photo: dbking, Flickr
Last Thursday, S&P came out with a big warning to America: Pass a budget that seriously reduces the national debt, or else lose your AAA rating.As we said at the time: This is the part where the ratings agencies destroy the recovery, as they dictate to the country how much austerity it has to endure to maintain its pristine credit rating.
At first blush, attacking a ratings agency for damaging the economy seems like the worst kind of shoot-the-messenger reasoning, much like what European politicians are engaged in right now, as they threaten to establish new ratings agencies every time Moody’s or S&P downgrades another peripheral nation to junk.
But there’s a really crucial difference. In Europe, the market has been ratings the PIIGS at “junk” for a long time now. The raters are behind the curve, and telling people what they already know. In Europe, attacking the raters is the worst form of denial.
In the US it’s different: The market is resoundingly indicating that the US debt problem is a phony issue ginned up by politicians who are either trying to score political points, or are confused.
So after enabling the housing boom by failing to adequately rate various AAA-rated structures, the raters are now basically playing into Washington’s game, as S&P conveniently pegs the need for deficit reductions at the number Obama wants: $4 trillion.
Now you might ultimately agree with the ratings agencies, that the US is facing some kind of fiscal problems, and that’s fine, but they’re clearly playing a different, prescriptive role in the US that makes their behaviour different than in Europe.
Ultimately, as we’ve known for a while, the world needs to move to a system that doesn’t rely on these third parties for so many financial transactions.