The recent downgrade of the USA’s credit rating has done more than hacked away at the tired Obama administration; it has revealed some nasty skeletons lurking in recent financial history…
Standard & Poor’s recent downgrade of the US credit rating from its coveted AAA to AA+ has drawn criticism and scorn from across the political divide. Whilst Obama insists that the USA remains a ‘triple A nation’, Speaker of the House of Representatives John Boehner maintains that the downgrade is the latest consequence of Washington’s ‘spending binge’. The Tea Party is, as usual, foaming at the mouth, as the nation’s will for fiscal stimulation evaporates and pressure grows on the Federal Reserve to do the heavy lifting.
Secretary of the Treasury Timothy Geithner has been particularly vociferous in his denunciation of S&P’s decision – perhaps quite rightly – maintaining that S&P based their downgrade on a $2 trillion mistake. S&P based their downgrade in part, claim the Treasury , on the $2 trillion shortfall of the Budget Control Act, which will reduce the US Budget deficit by $2 trillion over the next decade (i.e. S&P expected it to wipe off $4 trillion). Clearly here, the $2 trillion gap was considered significant, but, claims the Treasury, S&P then understated the deficit reduction by the Budget Control Act by $2 trillion (anyone else a bit dizzy with all those $2 trillions?). When alerted to this, S&P maintained that this figure was insignificant, though it clearly painted an altogether different picture of US debt sustainability. The Treasury claims that S&P moved away from economic justification, to founding their decision on a political argument.
If this is true, it is bad news all round in Washington. As the Guardian’s editorial rightly acknowledged in yesterday’s leader comment, this is disastrous for Obama. No President in history has ever won an election on such high unemployment, and coupled with his grim new status as the first President to preside over a US credit rating downgrade amidst a stalled recovery, the name ‘Jimmy Carter’ leaps out from the data sheets to scream the place down. Peanuts.
But the downgrade reflects poorly on the wider political establishment; if S&P’s decision was politically based, then it must surely centre on the dogged slogging matches fought in Congress over the past days and weeks. The Tea Party must accept its fare share (or perhaps more) of the blame; at times, its members have been startling in their immaturity. Eric Cantor stormed out of meetings, whilst the resounding Republican voice during the negotiations was not of Boehner-ite reason (oh no, he’s not Mr Popular any more), but of the rabid denunciations of Bachmann et al. who seemed almost in favour of a default to show the “Socialist kiddies” in the White House what happens when you eat too much maple syrup: you throw up. Any sensible parent would have taken the syrup away long before it got to that.
But simply blaming the Congress isn’t particularly satisfying either. In all of these debates, we would do well to remember some history – recent history. Take Timothy Geithner, for example. The man now so fumingly critical of S&P’s decision was a man who, for many years, as a Wall Street Executive, colluded with ratings agencies of its kind to dishonestly and insanely rate sub-prime loans as AAA and banks as completely safe (including Lehman Brothers in 2008, which received a top rating days before its collapse) all the while contributing to the securitization chain time bomb.
S&P, Moody’s and other ratings agencies deserve some scorn, without doubt. For years, during the bubble leading up to 2008, these agencies were paid by banks to rate Collateralised Debt Obligations (CDOs) made from the riskiest (sub-prime) loans as AAA or thereabouts. In truth, these loans, dished out to American and global lenders (to the average tune of >90% of the value of their house), were in fact worthless. The irresponsible Credit Default Swap system enabled banks to be ‘underwritten’ by conglomerates such as AIG, which, in truth, held no reserves of capital and was entirely unprepared for an actual claim from a bank, when (as they inevitably did), CDOs turned bad. In fact, banks such as Goldman Sachs were actively betting against their own loans using the Credit Default Swap system; loans which they sold to customers with AAA or AA ratings.
At the centre of this all were the credit ratings agencies and regulators themselves, and Standard & Poor is no exception. They had the ability to stop the mushrooming of sun-prime, predatory lending, which caused the housing bubble and led to financial collapse and economic crisis in 2008. In almost any other situation – scientists testing a new drug, for example – payment of ‘impartial’ analysts by the producer or involved party would be entirely unacceptable, yet the ‘opinions’ of credit rating agencies, we were told, were reliable and unaffected by the huge bonuses and incentives paid to them by the major banks. All of this was a consequence of a securitization chain that meant nobody cared if lenders couldn’t pay: it was profits all the way.
Thus the USA credit rating downgrade has a delightful twang of irony in it: perhaps the one time when a downgrade was not needed – the US economy does not have a sovereign default issue, and it is stable, if sluggish, in growth – a reading of something different than AAA has been produced. Perhaps, given Robert Gnaizda’s comment that Obama’s administration was a ‘Wall Street government’, the downgrade is a ghost come to haunt all those former bankers and financiers who thought they’d never see one.
By Taylor Carey
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