Getting Angry at the Ratings Agencies

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 |  Includes: SPY
by: Modeled Behavior

By Adam Ozimek

There’s a lot of anger and indignation being expressed at parties passing judgement on the U.S. for its political and economic problems. Here is Paul Krugman mad at S&P:

So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment….

So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.

I understand people who want to argue with S&P’s logic, I think there is a case to be made that they are in fact wrong. Maybe the possibility of a loss of confidence in U.S. debt should be of zero concern right now, and a debt crisis is extremely unlikely. I think the uncertainty here makes it difficult to say that is not a serious possibility.

On the other hand, perhaps Rogoff is right and we do need to address our long-term fiscal position immediately or risk another crisis. This is a debate to have, and I can understand people being angry if they think S&P’s analysis is wrongheaded and apt to make the situation worse.

But I’m not sure why people would attack the fact that they are judging in the first place. If S&P has no authority and is in no position to decide whether a country has an AA+ rating, then they are in no position to decide whether they have an AAA rating. They didn’t start passing judgement yesterday. They were passing judgement last week, last month, and last year.

Maybe we no longer want ratings agencies to have the legal power we’ve bestowed upon them, but surely we don’t want ratings agencies to have the legal power and only the ability to make positive judgements, or judgements that ignore crucial aspects like the “effectiveness, stability, and predictability of the sovereign’s policymaking and political institutions”.

I also want to highlight that despite his criticisms, Krugman does have a lot of agreement with the logic of the report, which cites debt ceiling brinksmanship as part of the problem. He writes:

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

I think the value of S&P’s action is that it has given both sides ammo where they need it, which seems like it should strengthen our ability to make a deal. Ironically, perhaps the act of issuing this report will help make the conclusions of the report less true. I hope so anyway.