Since no one in the media has a long enough memory to actually reach back for the truth, let's all go back over what contributed to the financial meltdown again, in simple, so-easy-a-CNN-reporter-can-understand-it terms.
- Bankers decided to sell mortgages as securities. To spread the risk, they carved them up into separate "tranches".
- The mortgages they packaged up were high-risk, toxic loans to people who never had even a small itty-bitty chance of repaying them.
- Yet, agencies like Standard & Poor's and Moody's gave these bonds triple-A ratings, along with the brokerage houses who sold them.
- The house fell down. Rating agencies shrugged and said "Huh, I guess we were wrong."
Moody's Corp and Standard and Poor's triggered the worst financial crisis in decades when they were forced to downgrade the inflated ratings they slapped on complex mortgage-backed securities, a U.S. congressional report concluded on Wednesday.
In one of the most stark condemnations of the credit rating agencies, a Senate investigations panel said the agencies continued to give top ratings to mortgage-backed securities months after the housing market started to collapse.
The agencies then unleashed on the financial system a flood of downgrades in July 2007, the panel said.
"Perhaps more than any other single event, the sudden mass downgrades of (residential mortgage-backed securities) and (collateralized debt obligation) ratings were the immediate trigger for the financial crisis," the staff for Senators Carl Levin and Tom Coburn wrote in their report.
And lo, it came to pass that Wall Street got some anemic regulation, including the rating agencies. And verily, since November Republicans have been doing their best to block that regulation, including defunding agencies' enforcement arms, and introducing legislation to repeal the Dodd-Frank provisions entirely.
What we have today from them is a little temper tantrum. No, actually, it's a big temper tantrum.
"The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012," said S&P credit analyst Nikola Swann.
S&P maintained its top-tier 'AAA/A-1+' credit rating on U.S. sovereign debt, saying the nation's "highly diversified" economy and "effective monetary policies" have helped support growth. But the ratings agency lowered its outlook for America's long-term credit rating to "negative" from "stable."
If you don't think we're being played with this (and the markets, too), guess again. On some level, this can certainly be read as leverage for Republicans to quit screwing around with the threats on the debt ceiling, and it can also be read as leverage for rapid and strong deficit reduction. Nevertheless, it is really just simple manipulation, and these agencies know it. From CorrenteWire last December when Moodys threatened the same thing:
The objective risk of default by the US Government is not increased by the increased size of the deficit, debt, or debt-to-GDP ratio. And Moody's view that the risk of default is increased by such increases, only shows that Moody's doesn't understand the monetary operations of nations sovereign in their own currencies. Increases in these numbers don't in any way lessen the constitutional authority of the Government (including the Congress) to spend or make money. It's basic solvency, in other words is untouched by the tax deal, and if Congress allows the Executive to use its currency powers, then the risk of default as a result of the deal is exactly zero. Whatever additional risk exists as a result of the deal, comes only from the increased likelihood that Congress, mistakenly thinking that the Government is like a household, or, or ideological reasons, determined to "starve the beast" might constrain the Executive from meeting its obligations, and declare a US default of its obligations when there is no reason to do so.
The question here is not whether the rating should have been lowered or not. The question is why anyone, least of all reporters, would believe what these people put out there. I can show you report after glowing report about the CDOs they rated AAA+ when they were full of poison from these agencies. They're fighting any regulatory authority or limits on what they do, and we're supposed to believe this crap?
When Alan Greenspan reversed himself on the Bush tax cuts after saying the way to head off economic instability was to pay off the debt, I called it BS. and was proven right. I call Standard & Poor's symbolic move the same thing. It's just a way to rock the markets and give the idiots on Fox and CNN ammunition to fearmonger while playing ordinary Americans as fools.
Are there real problems ahead? Possibly. We've got student loan debt approaching $1 trillion, thanks to the for-profit colleges that were happy to take care of putting them in debt with no job on the exit side while college fees continue to climb and students are squeezed from all sides. It's a problem, no doubt. But it is not an "oh-my-god-we're-going-to-die-and-go-bankrupt" kind of problem, no matter what the Fox talkers and CNN hand-wringers tell you.
Whether or not there are bumps ahead, this much is true. Rating agencies play politics with their ratings today just as they did in 2007, only this time, it's the US government they're playing with, which is a bad, bad idea.
Perhaps, just perhaps, it's time to give them no weight.