Will the U. S. Lose Its AAA Rating?


The media have been bombarding the public with scare stories about the country’s “record” budget deficits. Newspapers and news shows that never bothered to mention the growth of the $8 trillion housing bubble that eventually crashed the economy are giving us an endless barrage of stories claiming that current and projected future deficits will bankrupt our grandchildren. The implication of most of these stories is that we have to cut back Social Security and Medicare for all those high-living seniors as a matter of generational equity.

Most of these deficit stories feature a potpourri of wrong or misleading information. One item that is especially effective at raising fear levels in the public is the warnings from Moody’s, the huge bond-rating agency, that it may downgrade its rating of U.S. government debt. U.S. government debt has always held Moody’s highest AAA rating. If Moody’s were to lower the rating on government debt it would be a huge embarrassment to the country; essentially an indictment of the government’s poor financial practices. It would also have the practical effect of raising the government’s interest burden as a downgrade could lead to higher interest rates on U.S. government debt.

Before we rush to cut our parents’ Social Security and Medicare it would be worth asking a couple of questions. First, people should know a bit more about Moody’s and the other major bond-rating agencies. It would be nice to think that we had bond-rating agencies that could be trusted to examine the books of governments and businesses and tell us the truth about their financial merits. However, that is not the country in which we live.

Moody’s and the other bond-rating agencies have featured prominently in the build-up to the financial crisis. These agencies gave investment grade ratings to complex financial instruments filled with subprime mortgages and other bad assets. These ratings allowed Goldman Sachs and other investment banks to sell this trash around the country and the world, ensuring that the effects of the collapse of the housing bubble would reverberate throughout the financial system.

It was not just incompetence that caused Moody’s to misunderstand the quality of the issues it was rating; it was corruption. Moody’s and the other bond-rating agencies were getting paid by the banks whose assets that they were rating. The bond-rating agencies knew that these companies wanted investment grade ratings for their issues. As one examiner for Standard & Poor’s said in an e-mail, they would give investment grade ratings to products “structured by cows.”

This record must be kept in mind when considering the possibility of a Moody’s downgrade of U.S. government debt. It is no secret that many on Wall Street would love to see Social Security and Medicare cut back or even privatized. Investment banker Peter Peterson has even committed $1 billion toward promoting this agenda. When Moody’s threatens to downgrade U.S. government debt, or if it actually does so, it may reflect its actual assessment of the creditworthiness of the U.S. government or it could be a reflection of the Wall Street agenda to cut back these key public programs.

There is one way in which the public can better recognize Moody’s motivations. All banks, including giants such as Citigroup and Goldman Sachs, hold huge amounts of U.S. government debt. There are also reliant on the U.S. government for all sorts of reasons, including potential bailouts. If the U.S. government were to default on its debts, then it would almost certainly wipe out every major bank in the country. There is no plausible scenario in which the U.S. government defaults on its debts and the banks will still be able to make good on their debt payments.

This means that if Moody’s were to downgrade the government’s debt, to be consistent it must also downgrade the debt of Citigroup, Goldman Sachs and the other big banks. If Moody’s downgrades the government’s debt, without downgrading the debt of the big banks – or even threatens to downgrade the government’s debt without also threatening to downgrade the debt of the big banks – then it is more likely acting in pursuit of Wall Street’s political agenda than presenting its best assessment of the creditworthiness of the U.S. government.

It is unfortunate that we have to suspect a major credit-rating agency of such dishonesty, but given its track record, serious people have no choice. To paraphrase an old Winston Churchill joke, we already know about the character of the bond-rating agencies, we are only asking if they are prostituting themselves now.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.



Weekend Edition
October 9-11, 2015
David Price – Roberto J. González
The Use and Abuse of Culture (and Children): The Human Terrain System’s Rationalization of Pedophilia in Afghanistan
Mike Whitney
Putin’s “Endgame” in Syria
Jason Hribal
The Tilikum Effect and the Downfall of SeaWorld
Gary Leupp
The Six Most Disastrous Interventions of the 21st Century
Andrew Levine
In Syria, Obama is Playing a Losing Game
Louis Proyect
The End of Academic Freedom in America: the Case of Steven Salaita
Rob Urie
Democrats, Neoliberalism and the TPP
Ismael Hossein-Zadeh
The Bully Recalibrates: U.S. Signals Policy Shift in Syria
Brian Cloughley
Hospital Slaughter and the US/NATO Propaganda Machine
Paul Street
Hope in Abandonment: Cuba, Detroit, and Earth-Scientific Socialism
John Walsh
For Vietnam: Artemisinin From China, Agent Orange From America
John Wight
No Moral High Ground for the West on Syria
Robert Fantina
Canadian Universities vs. Israeli Apartheid
Conn Hallinan
Portugal: Europe’s Left Batting 1000
John Feffer
Mouths Wide Shut: Obama’s War on Whistleblowers
Paul Craig Roberts
The Impulsiveness of US Power
Ron Jacobs
The Murderer as American Hero
Alex Nunns
“A Movement Looking for a Home”: the Meaning of Jeremy Corbyn
Philippe Marlière
Class Struggle at Air France
Binoy Kampmark
Waiting in Vain for Moderation: Syria, Russia and Washington’s Problem
Paul Edwards
Empire of Disaster
Xanthe Hall
Nuclear Madness: NATO’s WMD ‘Sharing’ Must End
Margaret Knapke
These Salvadoran Women Went to Prison for Suffering Miscarriages
Uri Avnery
Abbas: the Leader Without Glory
Halima Hatimy
#BlackLivesMatter: Black Liberation or Black Liberal Distraction?
Michael Brenner
Kissinger Revisited
Cesar Chelala
The Perverse Rise of Killer Robots
Halyna Mokrushyna
On Ukraine’s ‘Incorrect’ Past
Jason Cone
Even Wars Have Rules: a Fact Sheet on the Bombing of Kunduz Hospital
Walter Brasch
Mass Murders are Good for Business
William Hadfield
Sophistry Rising: the Refugee Debate in Germany
Christopher Brauchli
Why the NRA Profits From Mass Shootings
Hadi Kobaysi
How The US Uses (Takfiri) Extremists
Pete Dolack
There is Still Time to Defeat the Trans-Pacific Partnership
Marc Norton
The Black Panthers: Vanguard of the Revolution
Andre Vltchek
Stop Millions of Western Immigrants!
David Rosen
If Donald Dump Was President
Dave Lindorff
America’s Latest War Crime
Ann Garrison
Sankarist Spirit Resurges in Burkina Faso
Franklin Lamb
Official Investigation Needed After Afghan Hospital Bombing
Linn Washington Jr.
Wrongs In Wine-Land
Ronald Bleier
Am I Drinking Enough Water? Sneezing’s A Clue
Charles R. Larson
Prelude to the Spanish Civil War: Eduard Mendoza’s “An Englishman in Madrid”
David Yearsley
Papal Pop and Circumstance
Christopher Washburn
Skeptik’s Lexicon