So, there was a lot of late Friday sound and fury over S&P’s downgrading of America’s debt.
As I commented last week, I give no credibility to the whims and determinations of credit agencies that made abysmally wrong-headed judgments about the subprime meltdown.
And as Holman Jenkins of the WSJ, whom I quoted last week, noted:
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.
Same applies this week as last week. Look no further than the price of the 30-year US Treasury bond over the last six months. Translation: they don’t care what the damaged credit ratings agencies say — especially one like the S&P that rushed to insert itself into the political discussion while making reported math errors and ignoring them.
Recessions are great for Obama’s bondholder pals. Heckuva job, Barry!
Update (DP): Harry Reid has responded to the news of the S&P downgrade. You’ll be as surprised as I was to learn that Reid thinks this is a clear sign that we need tax increases. US finances might not be predictable, but that isn’t the case when it comes to Reid’s solution for any problem. “Raise taxes” is like duct tape in the Democrats’ tool box — it can fix anything. Harry Reid makes any one-trick pony look multi talented.