S&P Payback

Shortly after S&P downgraded the nations debt rating from Triple-A to Double-A Plus, John Bellows, Acting Assistant Secretary for Economic Policy at the U.S. Department of the Treasury, responded with a scathing critique.

In a document provided to Treasury on Friday afternoon, Standard and Poor’s (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one.

...

Independent of this error, there is no justifiable rationale for downgrading the debt of the United States. There are millions of investors around the globe that trade Treasury securities. They assess our creditworthiness every minute of every day, and their collective judgment is that the U.S. has the means and political will to make good on its obligations. The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.

Today S&P retaliated.

WASHINGTON—Standard & Poor's on Monday downgraded the credit ratings of Fannie Mae, Freddie Mac and several other U.S. government entities, reflecting their dependence on federal support.

Included in S&P's latest downgrade were the senior issue ratings on debt issued by Fannie and Freddie, the giant mortgage-finance firms. Ten of the 12 Federal Home Loan Banks, which also provide funding for home loans, also received downgrades. Two of the Federal Home Loan Banks--of Chicago and Seattle--already had the lower AA-plus credit rating.

The downgrades of Fannie and Freddie reflect the mortgage firms' "direct reliance" on the U.S. government, S&P said.

Fannie and Freddie depend on the U.S. government's support to stay afloat, and therefore would be on a shaky footing if the U.S. ever defaulted on its debt.

Is there anybody, anywhere that thinks the U.S. is going default on it's debt?

Comments

[NewYork1]

I like your articles on this.

The important message going into 2012 should be the spending malfeasance of the Obama administration. And there simply aren't enough taxes to go around to counter that spending.

At first glance, the S&P downgrade gave some Republicans glee since "bad news" is usually not good for the incumbent.

The problem is S&P is a joke. Nothing they do should be considered "news" of any sort. And their muddled "analysis" appeared to indict the Tea Party. And Obama can use it to advance the "there's plenty of blame to go around" argument.

The real "bad news" is the unemployment rate, the spending, and the current economic state of affairs that is not up to American standards.

I think S&P's idiocy can get in the way of that message if people aren't careful.

[Tom Bowler]

Thanks, NY1. We can only hope that people come to realize that those unemployment numbers aren't going to improve as long as Obama's policies are allowed to continue, and there is only one sure way to prevent that.

[john lawless]

'Does anyone believe the US is going to default on its debts?'

Yes,I do. The point of QE is to devalue the greenback. If you borrow a trillion bucks from someone and you pay them back in monopoly money, that's defaulting in my book.

[Tom Bowler]

You have a point, John, but inflation and default really are two different things.

[john lawless]

I doubt if the chinese will see it your way. They are going to see it as an immoral way for the US to slime out of paying what they were lent. And when the chinese have the moral advantage, the US is in trouble.

[Tom Bowler]

I think you're right that the Chinese aren't going to be happy. With inflation they get back less then they loaned out, but with default they don't get paid at all. They're going unhappy either way, but it seems to me that default is worse than inflation.

[john lawless]

Well, defaulters usually negotiate so many cents in the dollar. But either way puts a value on American honor which is a lot less than you or I think it is worth.

[Tom Bowler]

Point well taken.