Karen De Coster
LRC Blog
April 19, 2011

With all of the brouhaha over Standard & Poor “negative” outlook on the long-term AAA credit rating of the U.S., I have not come to the conclusion that this is a significant move. While the media bobbleheads and most independent bloggers seem to be scrambling to unwind the drama and make the case that politicians are being ‘put on notice,’ I see it differently.

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One bond strategist was quoted in Bloomberg as saying,  “It’s truly a shot across the bow and a message to Washington, which has been clowning around on this and playing politics when they should toss ideology aside and focus on achievement.” This statement was made with the belief that there is a depraved political-ideological government on one hand, and, on the other hand, we have this creature called ‘good’ government wherein some magical powder can be sprinkled on the politburo to purge its kingpins of their affinity for all things megalomaniacal. All government, by definition, is political-ideological, and all politics, by definition, is coercion. A ‘non-political’ political structure does not exist. Why is that so hard to understand? Politics is the act of using one’s position and power to execute acts of theft, redistribution, and the promotion of advantage to selected recipients. Are people — even really smart people — just desperate to believe in something “good,” even if it is pure fantasy?

Getting back to the Bloomberg piece, the author points out that this “negative” outlook on the government’s long-term credit rating means the following:

The cost to protect against a default by the government and the nation’s banks jumped and stocks declined after the New York-based firm’s statement, which assigns a one-in-three chance that it will lower the U.S. rating in the next two years.

A 1-in-3 chance on a 2-year time horizon. Can you say ‘long shot?’ Or media showboating? Or is this perhaps a publicity stunt? Are all of the bears, reality hardliners, and independent thinkers being placated with this feeble concession? The Wall Street Journal reported this today: “Standard & Poor’s analysts are about to host a call explaining some of the rationale for their decision to keep the U.S. at a AAA rating, but move the outlook to “negative.” Oh the drama. And this rather weak statement (“negative outlook”) took how long to come to fruition? Meanwhile, I am seeing an abundance of quotes from bureaucrats who point out that Fitch and Moody’s haven’t budged. That is their best defense for a country whose fiscal policy is the Titanic on steroids.

Martin Weiss of Weiss Ratings presented this challenge to the three rating agencies about a year ago.

Dear S&P, Moody’s, and Fitch,

You are the world’s three dominant rating agencies, largely controlling the ratings of bonds and debts issued by thousands of corporations, municipalities, and sovereign governments.

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I am the chairman of Weiss Ratings, an independent rating agency. (See Weiss Ratings’ press release onMarketWatch or “Weiss Is Returning to Ratings Business” in the Wall Street Journal.)

And today, I challenge you to promptly take the bold action that you have so far avoided — to downgrade the long-term credit rating of the U.S. government in order to help protect investors and prod Washington to fix its finances.

As a reminder of how incompetent (or, better described as non-independent) these rating agencies are, here is a link to the 1994 Government Accountability Office study that determined the three largest rating companies failed to downgrade the obvious: failing insurance companies.

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