After two years, Neil Irwin looks back on the Standard & Poor (S&P) downgrade of the United States government from AAA to AA+. And he finds no evidence for it having affected the borrowing costs of the United States. But I’m afraid that Irwin is taking the whole thing too seriously. Even at the time, I don’t remember anyone thinking anything other than that it would not mean a thing. The only prediction I remember hearing was that S&P would embarrass itself. It turns out that S&P did not embarrass itself. It seems that everyone already knew that the ratings agencies are a joke.
There is a problem with articles like Irwin’s: they imply that the ratings agencies are held to some standards. But we know this isn’t true. Even before this ridiculous downgrading of American debt, we got the spectacle of the ratings agencies testifying in front of Congress after the financial crisis. All three of the ratings agencies had given investment grade ratings to subprime packages that shouldn’t have been rated above junk. But it wasn’t their fault. They were just exercising their first amendment rights to talk out their asses. It was just opinion and nothing more.
As far as that goes, I’m right with them. They have a right to charge people money for their useless opinions. The problem is not with them. I wish I were like them: I wish people would pay me billions of dollars for my opinion about investments. I have strong opinions about what’s happening in the tech sector. Anyone want one of my opinions for a few thousand dollars? In fact, I’ll offer a special to all you Frankly Curious readers: $999 and I will tell you what I think will happen in the tech sector or anything else. No takers? Well, you know how to get in touch me.
The problem we have more broadly is that those who run our investment industry are just a bunch of charlatans. I doubt that the people at Goldman Sachs think that the ratings agencies know what they’re talking about. But they use nice offices, drive nice cars, wear nice clothes. They can sell the ratings agencies as a sweetener to investors, “You don’t have to worry because these guys with nice offices, cars, and clothes say it’s safe.” And everyone on the inside feels good about this. Investment bankers say everyone knows the whole thing is corrupt. The ratings agencies know they are providing all the nice offices, cars, and clothes that the investment banks want. And the investors don’t find out about the scam until it’s too late.
After something like the financial crisis, you would think someone would step in and stop it. You know: someone like an umpire whose job it is to make the system fair for everyone. Someone who punishes the grifters and thieves. You know, some kind of governing body. If we had such a thing, I would think, after the crisis, they would have thrown some people in jail. They would have reorganized the whole system. They would have been clear that the farcical and inbred investment system had to change. It sure would be nice if we had such an institution.
I’m afraid that as well intentioned as Neil Irwin’s article is, it only feeds the beast that is our broken investment banking system. Because it may call out S&P in this one instant, but implies that the ratings agencies are something we can normally count on. And they aren’t. They are just a rotting core of pretend expertise that can never be held accountable.
See also: S&P and Anti-Meritocracy