I was noodling around on a column for tomorrow titled “Who elected the credit agencies?” But it can’t wait.
It’s been aggravating to hear Republicans join Democrats on this fear-mongering meme — holding America hostage to the whims and determinations of credit agencies that made abysmally wrong-headed judgments about the subprime meltdown.
Since when did politicians pledge allegiance to S&P’s and Moody’s? And since when is it Washington’s job to avert overdue credit downgrades based on decades of profligate policies?
Holman Jenkins at the WSJ beat me to the punch — and draws an important distinction between a government shutdown and a default.
Even without the Treasury empowered to borrow, plenty of cash will still be coming in, plenty of assets exist that can be liquidated. John Silvia of Wells Fargo told Bloomberg TV that a partial government shutdown (which still isn’t a default) might not be needed for at least two weeks beyond the artificial Aug. 2 deadline set by the Obama administration in the wholly artificial debt-ceiling crisis.
But now we have a new problem. The rating agencies, especially Standard & Poor’s, have decided to join the politicians in turning an artificial crisis into a real one. S&P says it plans a U.S. debt downgrade, regardless of any debt-ceiling outcome, unless it sees a “credible” plan to reduce future deficits by $4 trillion over the next 10 years.
This has become the real worry for Wall Street, but why? America’s spending debate does not remotely make it any more of a default threat than it was a week or month or year ago. America’s IOUs are still completely acceptable to the markets.
Even in the long term, the threat is not to bondholders. The threat is to Americans under 50 who think they can rely on Social Security and Medicare. The threat is to countries that hope the U.S. will fight their wars for them. The threat is to K Street bandits trying to live off federal handouts.
But the debt to bondholders will be the last to be dishonored—not least because, unlike a lot of claimants, bondholders can be satisfied with inflation-ravaged dollars.
For the unwarranted power granted to rating agencies, which after all merely issue opinions, blame U.S. law and regulation. These require bankers, pension funds and other regulated investment funds not just to consult ratings, but to act on them.
When the cart is properly positioned in relation to the horse, notice what happens. Ratings opinions are treated as opinions. S&P recently downgraded the debt of Japan. The price of Japanese debt actually went up because the market made its own judgment. Citigroup and Goldman Sachs last week promoted a package of Triple-A commercial mortgages to investors. Investors vetoed the deal because they didn’t agree with the ratings.
This is not to say that America doesn’t have bitter political wrangles ahead. But S&P and others offer nothing of value in rating the messiness of our political debates.
On the contrary, they step out of line in presuming they must be satisfied with our current spending priorities in order to be satisfied with the long-term payability of America’s formal debt.
Investor Jim Rogers puts it more bluntly: “The US has lost its AAA status. Anybody who knows what’s going on knows that the US is now the largest debtor nation in the history of the world. It’s only Moody’s and S&P that haven’t figured out what’s going on. The world, the investment world, the financial world knows that America is not AAA anymore. Who cares what Moody’s said? Moody’s has gotten everything wrong in the past 10 years, why do you pay attention to them?”
From last week: Obama’s backdoor negotiations with credit ratings agencies.
And from the always trenchant and pithy Doctor Zero John Hayward via Twitter: “Perhaps the more immediate question is: how do we “vote” Moody’s out of our lives? Answer: don’t carry $14T in debt.”
Jimmie Bise Jr. has a different take — applying political jujitsu, as I understand it, to use the credit ratings agencies against Dems.
Update…Word from Washington is that Republicans are coalescing around House Speaker John Boehner’s plan.
A close friend’s prediction over the weekend about the Kabuki outcome by the end of this week and his investment advice for the politically panicked:
1) the debt ceiling will be raised at the last minute.
2) politicians will boast that they achieved spending cuts, but this will be done via accounting tricks. For example:
- classifying spending reductions that were already scheduled to occur as cuts;
- appointing a bipartisan commission to identify spending cuts. the commission’s recommendations, however, will not be binding and will be ignored.
- spending “caps” that are supposed to go into effect 5-10 years from now, but which will be ignored when the time comes.
In truth, expenditures will not be meaningfully reduced.
3) there will be no tax increases.
4) the U.S., which is already heavily in debt, will go much further into debt.
5) Credit rating agencies will downgrade U.S. treasuries. It will have no effect on interest rates because there is no serious risk of default and because no one cares what the credit agencies say.
This is a deal everyone can agree on. Republicans can vote for it because they don’t want to be blamed for a government shutdown (remember 1995?) and because the deal will not raise taxes. Democrats can vote for it because it doesn’t really cut spending and because it provides the debt ceiling increase they need to finance the programs they refuse to cut (Medicare, Social Security, discretionary spending, etc).
The bond market is not at all worried about default. The stock market is not at all worried about default (up 6 percent in the last month). Neither am I. Ignore the headlines. Stay the course.
Update 11:55am Eastern…The CBO scores the Reid proposal…cuts derived from massive reductions in military spending….he’s trumpeting the CBO analysis on Capitol Hill at this hour.
The Congressional Budget Office released a report Wednesday morning that credits the Senate bill with reducing budget deficits by about $2.2 trillion through 2021, nearly three times the $850 billion credited to the Boehner bill on Tuesday.
Part of the disparity is owed to the fact that the House bill takes a two-step approach to raising the debt ceiling and therefore postpones actions on major entitlement savings until November and December. For this reason, Boehner’s forces would argue the race has just begun, and the scores now are an incomplete picture.
But the bigger issue is sure to be the Senate’s willingness to take advantage of CBO baseline rules and claim large savings from winding down U.S. military operations in Afghanistan and Iraq.
In essence the Senate plan allows a full $127 billion for war-related costs in 2012 and then caps future spending at $450 billion. Republicans argue that these limits have no relevance to the debate at hand, but under CBO rules they yield at least $1.044 trillion in additional savings not in the Boehner package.
Dumb diatribe of the day: Charles Schumer going bonkers over a Ben Affleck film scene that GOP leaders used last night to whip House members into backing the Boehner plan.