How people continue to think that America is even moderately a meritocracy amazes me. Look at the banks. The Federal Reserve loans them money at low interest rates and allows them to lend it out at high interest rates. It would be like if Apple gave only you and your close friends the right to buy iPhones for ten bucks. You could then sell them for the going rate. You could not possibly lose money, right? Well, that’s what the Fed does for bankers because they are the “right” kind of people.
A similar thing is going on with the credit rating agencies. They are supposed to make sure that investing is sound. If they rate a bond as AAA, an investor should know that while the returns on that bond are poor, it is safe. But a big problem with the housing bubble was that banks were packaging a bunch of highly risky mortgages together and the the credit rating agencies dutifully rated them as safe investments—even AAA at times! When the financial crisis happened and all those ratings were shown to be dead wrong, the rating agencies just shrugged. “You can’t blame us,” they said. “It was just our opinion.” They make billions of dollars but aren’t accountable enough that their total failures even cause a ripple in their business models. S&P is supposed to make money because, you know, they are the “right” kind of people.
In 2011, around the time of the Debt Ceiling debacle, Standard & Poor’s (S&P) downgraded the federal government’s credit rating from AAA to AA+. That was the first time that this had ever happened. And for good reason. If the United States gets in a situation where it can’t pay its debts, it would mean that the entire world is struggling with Armageddon. So it wasn’t surprising that the S&P downgrade caused not the slightest blip in the borrowing costs of the United States. Apparently, companies are all for paying S&P and the other ratings agencies for legal cover. But actual investors knew that the S&P downgrade was meaningless.
Well, there’s big news out this morning. Standard & Poor’s has upgraded the federal government’s credit rating! Actually, its credit rating outlook. It is still AA+, but the outlook has changed from “negative” to “stable.” I’m sure that this will have as big an effect as the original downgrade. But something puzzles me. If S&P had this sub-credit rating tool, why didn’t they use it two years ago? Instead of downgrading us from AAA, they could have just changed our outlook to negative. That would have made the point without the embarrassment of demonstrating just how irrelevant the rating agencies are.
According to Politico:
On Monday, S&P said it was improving its credit outlook because of “tentative improvements” on several fronts, including the fiscal cliff deal that helped put a dent in the deficit and “stronger-than-expected private-sector contributions to economic growth” coupled with the recent profits of Fannie Mae and Freddie Mac.
This strikes me as very weak tea. If there was any real concern in 2011, it was the fact that the House Republicans were willing to cause a federal government default over the Debt Ceiling. Otherwise, our debt situation was fine. We still face a Debt Ceiling crisis at the end of the summer. And despite what many want to believe, it looks serious. There are many in the Republican Party who really do want to refuse to raise the limit. And the lack of crisis over the Fiscal Cliff and the Sequester has just made them think that fears of catastrophe are over blow. So S&P is just continuing on with their pretend analysis.
The United States is divided into the “right” kind of people and the “wrong” kind of people. The “right” kind of people are the rich. If a poor person manages to claw his way to become rich, well, that just shows that the system works. And that is why for the last 35 years the rich have systematically made it harder and harder for the poor to do just that. At the same time, they’ve made it almost trivial for the “right” kind of people to get even richer on the backs of the “wrong” kind of people. And today we see another example of the “right” kind of people getting paid for useless analysis. If you invest based upon their advice, you are the “wrong” kind of people. The caste system is alive and well in America!