Friday, August 12, 2011

Credit Rating Blues Riff

With the news that, for the first time in recent history at least, the credit rating of the United States Government has been lowered from its normal AAA rating to AA+.  Standard & Poors, one of the three credit rating agencies that perform this service, made this announcement on Friday, August 5th, after the stock market closed.  
This announcement has sparked a running dialogue with myself over the state of things in my country.  I am not a political nor economic expert.  A lot of what I'm thinking are gut reactions, conclusions I've reached because it just feels like the right answer.  But, when I look out across the sprawling landscape of modern media it appears to me that not knowing what one is talking about doesn't seem to be stopping many other people from speaking their minds these days, so why should I not share my thoughts as well.  
If anyone thinks I don't understand the situation, or that I'm just plain off my rocker, or, even better, has some proof or documentation that they think will open my eyes to the truth, then please feel free to post your comments.  As long as you're not a spambot trying to use my blog for advertising, I'll post it.    
My reaction to the announcement that our country's credit rating was less than that of a country like the Isle of Man followed a series of thoughts.  The first one was: 
"I feel like a character in a Vernor Vinge Novel."  
For those of you who don't know, Vernor Vinge is a masterful science fiction writer.  His books are big, thick things whose action often cover huge arcs of the galaxy, pitting normal people against forces or intelligences that are as far beyond them as we are to the ants at our feet.  Often these characters are struggling against these forces or intelligences have only limited information and power with which to cope.  One of my favorite characters was a minor character from Fire Upon the Deep.  A starship captain who has just lead his fleet into battle based on a message that he couldn't verify.  With the battle done, most of his fleet destroyed and crew dead, he can only wonder if he did the right thing.  
The debt crisis, and the state of the economy that sparked it, are big.  B-I-G big.  It's all I can do to keep my own financial state in order.  I can't buy enough American made TVs, cars, dishwashers or whatever to make a difference.  Even if everyone in the United States bought the same American made product tomorrow, a lamp let's say, it would cause a spike in the economy at best.  The thought of my relationship to the problem, as if Mr. Vinge were writing the story or our debt crisis, was followed quickly by, "What the hell can I do about it?" 
Then, another thought came to me...
"Wait a sec...  Aren't these the same guys that said those credit-default swaps that started this mess were AAA rated, too?"  
Remember the credit-default swaps?  They were the new financial tool everyone was so hot about.  You take a bunch of loans, like home loans, and roll them up into a package, then you sell them on a market similar to a stock market but where all the buyers are other financial institutions.  Everyone was buying them because Standard & Poors, and the other credit rating agencies, said that these swaps were AAA.  A terrific deal.  As solid an investment as the United States Government.  
They weren't,  We all know that now.  And, once the loans inside those swaps were actually analyzed, it became clear that they were basically garbage.  So, it kinda brings the judgement of Standard & Poors into question.  And the question I had was how they they reach their conclusion.  When I found out, I thought...
"This is Payback."  
Standard & Poors and the other credit rating firms were pretty well raked over the coals once their part in the financial disaster became documented.  Deservedly so, too.  They may not have caused the problem, but their pronouncements of those credit default swaps as being triple-A rated was definitely an enabling factor.  After such humiliation, I think those companies were left with the desire for a little payback.  A chance to show they weren't as stupid as everyone was saying they were, or a chance to show that the people calling them stupid, the senators and representatives in congress, were even more stupid.  Or even both.  
The way Standard & Poors made their announcement underscores this belief.  In the initial announcement they cited the size of the impending debt as the reason for their decision to downgrade the government's credit rating.  But then it was shown that they had made a 2 trillion dollar in their calculations.  What?  They forgot to carry the "1"?  Once this was pointed out, the company held a conference call for the news agencies.  They held fast to their conclusion, that the American government deserved to have its rating down-graded.  The "real" reason, however, wasn't the financial one they named before.  It was a political one.  The spectacle of the stand-off over raising the debt limit was an indication that the American government was too divided and lacked the political will to do whatever was necessary to fix the budget deficient.  It seemed clear to me that the decision to down-grade the government's credit rating was foregone.  When their math error took away a clear financial reason for doing so, the company replaced it with a more subjective political rationale.  
"They may have a point."  
There's an old French proverb that even a clock that is stopped is right twice a day.  For my younger readers, this saying refers to an analog time piece, before everything was digital.  
Going back to my first thought, the problems were the economy, with our government's method of raising money and spending that money, are big problems.  Huge.  So big that I am thinking that I'll grow old and die before I see them resolved.  And the political atmosphere is not one where anyone who can be called "reasonable" will make any headway.  I have heard too many people come back with, "I AM compromising!" right after someone has pointed out that they are holding out to get everything they want.  It's insane.  
So...  Do I think the American government is a credit risk?  Or, more of a credit risk now than before?  No.  And a large number of people seem to agree with me.  I listened to a financial report this morning about how treasury bonds are being bought up.  People are nervous and are buying the very thing that was downgraded as a way to feel safer, American governmental debt.  
I don't have a great deal of hope for the future, though.  Unless the elected officials pull their heads out of those places where they currently have them inserted, and soon, and actually deal with the problems, then the only thing wrong with Standard & Poors' decision is that they may have made it a little bit too soon.


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