Deficit in Logic: Moody's Threatens to Downgrade the United States

[depakid]

The media have been bombarding the public with scare stories about the country's "record" budget deficits. Newspapers and news shows that never bothered to mention the growth of the $8 trillion housing bubble that eventually crashed the economy are giving us an endless barrage of stories claiming that current and projected future deficits will bankrupt our grandchildren. The implication of most of these stories is that we have to cut back Social Security and Medicare for all those high living seniors as a matter of generational equity.

Most of these deficit stories feature a potpourri of wrong or misleading information. One item that is especially effective at raising fear levels in the public is the warnings from Moody's, the huge bond-rating agency, that it may downgrade its rating of U.S. government debt. U.S. government debt has always held Moody's highest AAA rating. If Moody's were to lower the rating on government debt it would be a huge embarrassment to the country; essentially an indictment of the government's poor financial practices. It would also could have the practical effect of raising the government's interest burden as a downgrade could lead to higher interest rates on U.S. government debt.

Before we rush to cut our parents' Social Security and Medicare it would be worth asking a couple of questions. First, people should know a bit more about Moody's and the other major bond-rating agencies. It would be nice to think that we had bond-rating agencies that could be trusted to examine the books of governments and businesses and tell us the truth about their financial merits. However, that is not the country in which we live.

Moody's and the other bond rating agencies have featured prominently in the build-up to the financial crisis. These agencies gave investment grade ratings to complex financial instruments filled with subprime mortgages and other bad assets. These ratings allowed Goldman Sachs and other investment banks to sell this trash around the country and the world, ensuring that the effects of the collapse of the housing bubble would reverberate throughout the financial system.

It was not just incompetence that caused Moody's to misunderstand the quality of the issues it was rating; it was corruption. Moody's and the other bond rating agencies were getting paid by the banks whose assets that they were rating. The bond-rating agencies knew that these companies wanted investment grade ratings for their issues. As one examiner for Standard&Poor's said in an e-mail, they would give investment grade ratings to products "structured by cows."

This record must be kept in mind when considering the possibility of a Moody's downgrade of U.S. government debt. It is no secret that many on Wall Street would love to see Social Security and Medicare cut back or even privatized. Investment banker Peter Peterson has even committed $1 billion toward promoting this agenda. When Moody's threatens to downgrade U.S. government debt, or if it actually does so, it may reflect its actual assessment of the creditworthiness of the U.S. government or it could be a reflection of the Wall Street agenda to cut back these key public programs.

[Grand Taurean]

1. Moody's should be shut down.

[Grand Taurean]

2. See this from The Nation:

http://www.thenation.com/doc/20090302/greider

David Walker should consider a very long walk over a short pier.