What to do about the ratings agencies

by John Quiggin on August 7, 2011

S&P’s decision to downgrade US Treasury bonds from AAA to AA+ has elicited various reactions, some of which I’ll doubtless repeat here. Obviously, S&P has no particular expertise (apparently it couldn’t even get the arithmetic right) and based on its historical and continuing performance, its opinions ought to carry no particular weight with anybody (they say so themselves, when under pressure over obvious cases of misrating, asserting that they are merely offering an opinion).

On the other hand, it’s also pretty obvious (and even more so after the Repubs successful use of the debt ceiling to force Obama to abandon any call for tax increases along with the cuts they both wanted) that the US has some fairly intractable problems in dealing with its (technically quite manageable, but still substantial) public debt. Finally, as I said last time I discussed this, a decision of this kind (including a decision to maintain AAA ratings) is inherently political

There are two reasons why S&P’s choice of rating matters more than, say, my own opinions on the matter
* First, a lot of investors still pay attention to ratings agencies, for whatever reason
* Much more importantly, agency ratings are embedded in global regulations concerning prudent management of investment. If a second major agency were to join S&P in downgrading, large numbers of institutions would be debarred, under existing rules, from investing in Treasury bonds

That’s clearly unsustainable, so what will happen?

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Another Boxer

by John Holbo on August 7, 2011

This one goes with the others. (Having posted two, it would be more strange not to post a third.)

Fred Welsh (LOC)

In other news, I notice that Erick Erickson has some difficulty with the is/ought distinction. He reasons that, since Republicans in fact will not raise taxes under any circumstances, it follows that one can’t fault Republicans for not raising taxes. That would be like blaming the rain for raining. Or something. A nice illustration of the advantages and disadvantages of extreme intransigence for political life, perhaps.