Wednesday, April 20, 2011

Standard and Poors Downgrades Congress

A couple of days ago, Standard & Poors announced that there is a one in three chance that it will downgrade US debt from its customary AAA rating within the next two years. The bond market barely flickered, indicating that nobody who mattered was terribly concerned. Granted, S&P's reputation for accurate evaluation of risk suffered somewhat in 2008, but the real reason for the collective yawn was that bond traders understood the announcement was a political rather than an economic statement.

(Yes, the stock market took a bit of a dive following the announcement as the amateurs panicked, but it rapidly recovered. One might be curious to know just who was shorting the most volatile stocks just prior to the S&P pronouncement.)

So, what was the political point S&P wanted to make? In the words of the shop teacher from South Park, "Hey, you kids! Quit messing around!"

More than anything else, Wall Street values stability — especially since it has shown itself to be so inept at risk management. While nobody in his or her right mind believes the US ever would default on its debt, S&P probably thinks there might be enough idiots in Congress to create instability by playing politics with the debt ceiling right up until the last minute. If the rest of the world gets to thinking that our government is approaching critical mass for idiocy, US debt markets — private as well as public — could suffer.

A statement similar to S&P's was sent by the bond trader PIMCO earlier this year, when it announced it no longer would be purchasing US debt, thereby implying distrust of government. The real reason PIMCO is getting out of the market for government debt is that is pays such low interest — specifically because it is so very safe an investment.

Look a little deeper, though, and there may be cause for concern. S&P issued virtually identical statements — twice — with regard to UK debt. It is widely believed that those "devaluations" helped elect the Cameron government, and encouraged the current British austerity program.

Would Wall Street prefer a compromise closer to the Ryan proposal than to the Obama proposal for debt reduction? Well, S&P speaks for a lot of very wealthy individuals. What do you think?

No comments: