Why S&P Downgrade Makes No Sense To Me

Okay. I understand that our finances are a mess and our political system is broken. We just missed a good chance to improve things significantly, and we chose, instead, to improve things marginally. Several times, our leaders snatched defeat from victory. Neither side could say yes. Yet, they did the minimum and avoided default.

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Guanyu said…
Why S&P Downgrade Makes No Sense To Me

By Robert McTeer, Forbes
06 August 2011

S&P, I don’t get it.

Okay. I understand that our finances are a mess and our political system is broken. We just missed a good chance to improve things significantly, and we chose, instead, to improve things marginally. Several times, our leaders snatched defeat from victory. Neither side could say yes. Yet, they did the minimum and avoided default.

The United States of America pays its debts. It may not pursue sound fiscal policies. It may not be a paragon of fiscal virtue. But it will redeem its bonds. It’s finances may be in tatters, but its credit is not in doubt. It might be, theoretically, if it didn’t have its own currency and its own central bank. But it does have them, and we are the United States of America.

Isn’t a credit agency supposed to opine on the probability of a debtor paying its debts? What difference does it make that it looks silly getting in a position to do so? What difference does it make if the central bank is called upon, or if monetization of its debt leads to inflation? Not that it will. A credit agency doesn’t grade fiscal rectitude. It doesn’t grade inflation probabilities. It’s supposed to grade the probability of the repayment of its debts.

Downgrading the United States of America doesn’t make up for top ratings for mortgage backed securities filled with toxic subprime mortgages. Two wrongs don’t make a right. Enough damage has already been done. Looks to me like Standard and Poor’s is well named.

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