Lots of talk across the blogosphere regarding Standard & Poor’s “downgrading” of US Treasury debt. But let’s recall the source.
Standard & Poor’s, together with Moody’s, is one of the great dupes of the recent financial crisis (villains, if you are more cynical). It repeatedly issued AAA ratings to what we now know — and what any sharp-eyed reasonable observer then should have known — to have been toxic waste. Highly speculative mortgage-backed securities and other CDOs were repeatedly given clean bills of health when they were full of mortgages doomed to foreclose. What’s more, very high percentages of these CDOs were put in the AAA tranches, sometimes as high as 90%: how in the world can 90% of these things be in the very safest tranche? It put Lake Wobegon to shame.
None of this means that the S & P “finding” is irrelevant. Rather, it is to say that merely because S & P says something does not make it true or even slightly profound. S & P analysts have biases and blind spots just like anyone else — and in fact, they may have more than anyone else because they exist in a world of high finance with little connection to on-the-ground realities. As high finance people, they also have political biases: somehow, S & P came out with this in 2011, but didn’t utter a peep in 2001 (Bush tax cut I), or 2003 (Iraq war), or later in 2003 (second Bush tax cut), or 2005 (Medicare Advantage), or late 2010 (tax cut deal). The Affordable Care Act according to the CBO will substantially cut the deficit, but nary a word from S & P.
S & P is not a machine; it’s a collection of very flawed people. Like most people on Wall Street, their analysts put their hats on one horn at a time. We just need to remember that. And some enterprising sociologist might have an interesting paper in locating the “systemic risk” of error in S & P”s ratings.