Debt Watch II

And so the United States continues its rapid descent toward banana-republic status, at least as determined by Standard and Poor's.  The debt-rating agency downgraded US creditworthiness Friday, based upon concerns about political paralysis and the ever-growing size of the national debt.  Some have complained that S&P should not base credit ratings on political (in)activity, since the rating agency has no way of knowing what the future political climate will be.  The imminent formation of a congressional "super-committee" to address the national debt will surely herald a new era of good feelings and pajama-parties between Democrats and Republicans.  Standard and Poor's demonstrates unwarranted pessimism by projecting continued political dysfunction/

Hey, it could happen.

We, however, object more to S&P's financial logic.

Standard and Poor's downgraded US credit because of the growing multi-trillion dollar national debt.  Sounds prudent enough. . . until you think about it for more than a second and a half.

Why has the debt has grown so huge?  The debt has grown enormously over the last few years at least partially because of stimulus projects undertaken by both the Obama and Bush II administrations.  Why did the administrations undertake these stimulus projects?  To counteract the worst effects of the financial crisis of 2008--and arguably they succeeded in averting a worldwide depression.  And what caused--or at least exacerbated--the financial crisis?  The collapse of the housing market.  And why did the housing market collapse cause so much pain?  Because investors had poured money into mortgage-backed securities, which turned out to be worthless.  And why did savvy investors pour so much money into impenetrably convoluted funds that turned out to be worthless?  That probably had something to do with the fact that these investors were assured that these impenetrably convoluted funds were relatively safe investments.  And what made them think this?  The fact that ratings firms like, oh, Standard & Poor's rated these funds AAA.  In other words, investing in mortgage-backed securities was promoted as being as safe as investing in the unshakable institution known as United States treasury bills.

Now, one could argue that the downgrading of US debt simply reflects the admirably chastened attitude of bond raters.  Rather than risk being burned again by overly rosy ratings of securities that are, at bottom, fundamentally unsound, Standard and Poor's has taken a more conservative approach, thereby serving their clients well.  We can't help, however, but find something at best hypocritical and at worst unethical in S&P's downgrading of debt that they themselves are at least partially responsible for causing to skyrocket.  But then, the Solipsist is just an English teacher, not a sophisticated economic analyst; what seems to us disingenuous financial chicanery must be something else.

Mustn't it?

Solipsistography
"Amid Criticism on Downgrade of U.S., S&P Fires Back"