Downgrade this

Downgrade This

by digby

Quick thoughts on the S&P downgrade.I imagine David will chime in as well at some point.

First, recall that this is the agency which rated all those worthless mortgages AAA that caused this fetid financial mess in the first place. They gave Lehman a Triple-A rating one month before bankruptcy. The real question is why they are still taken seriously by anyone.

Indeed, they are out on a big limb in terms of their own relevance. Here's JP Morgan earlier this week:

We don't think a downgrade is of first-order importance for economic growth: conditional on fiscal metrics such as debt-to-GDP ratios, we see no major implications for borrowing costs due to the actions of one or more rating agencies.

CNBC reported this earlier:

The humiliation of a credit rating downgrade for the U.S. would exact some psychological damage but is widely viewed as less likely to cause any actual carnage on interest rates.

Few fixed-income experts are looking for a major surge in rates even if Standard & Poor's follows through on its threats to cut the US rating from the coveted triple-A status down to double-A.

So this is rally more of a political play. While one might assume that it was the Republican intransigence that led to S&P's prediction of permanent fiscal clusterfuck, S&P adopts the He said/She said Rule:

"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process," reads a statement from S&P. "We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade."

Considering the fact that they made a 2 trillion dollar arithmetic error before they released the report, it's rather laughable that they are taking this holier than thou attitude about medium term deficit projections. Moreover, the president of the United States put the magical 4 trillion dollar, entitlement slashing nightmare on the table in exchange for a request for a couple of niggling little oil subsidies and some symbolic piece of crap about corporate jets ---- and the Republicans walked away. I only wish it had been equal intransigence.

Unfortunately, the practical results of this are all too clear. While many of my colleagues are quoting the revenue side of their statement as an indictment of the GOP, I'm drawn to the sickening part where they insist that there be "near-term progress" on entitlement spending. True they said "or raise revenues" instead, but I think it's fairly clear that the chances of that happening are about as real as my winning the Olympic gold medal in Ice Dancing next year. I'm afraid this empowers the Super Committee to really stick it to the old people. And I'm also afraid that's exactly why the S&P did it. (They threatened to downgrade again in a few months if it doesn't see progress.)

Let's wait and see what really happens with the markets before having hysterics.In all likelihood the real money people will shrug this off -- what with S&P being wrong about everything all the time and all.

Update: better yet, forget everything i just wrote and read Krugman. S&P's actions are just more up-is-downism on steroids.