As you might have heard—considering the entire political establishment has spent the past seventy-two hours debating it—Standard & Poor’s followed through  on its threat to downgrade the federal government’s credit rating.
Standard & Poor’s declared in April that if $4 trillion in savings was not achieved in the debt ceiling deal, it would downgrade the government’s credit rating from AAA status. They did so on Friday, citing not only a deal that achieved “only” $2.1 trillion in savings but also  Republican intransigence against raising new revenue and the party’s hostage-taking over the debt ceiling. The agency also downgraded  Fannie Mae and Freddie Mac, since they depend on the federal government for support. Another credit rating agency, Moody’s, is threatening  downgrade as well.
The downgrade is yet another chapter in the bogus deficit drama that has gripped Washington for the past several months. Once again: interest on our debt is 5.7 percent of total government spending, half  of what it was for the past fifty years. Treasury bonds, which are how the government finances its debt, remain highly desirable to investors, and even in the wake of the “downgrade,” maintained their low interest rates.
It’s a deeply silly idea that US Treasury bonds are no longer a safe investment because the solution to a manufactured crisis fell $1.9 million short of an arbitrary goal. As Paul Krugman wrote today, “US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term.” While Standard & Poor’s correctly identified other factors threatening long-term fiscal stability, like inflated healthcare costs and political opposition to new revenue, both were also well-known factors one year ago, and five years before that—but Standard & Poor’s said nothing.
The Standard & Poor’s analysis is all the more silly given the haphazard way in which they calculated the national debt, confusing two different analyses by the Congressional Budget Office and pegging the national debt $2 trillion too high. “This is like an undergrad student mistake,” Robert Pollin, a professor of economics at the University of Massachusetts and co-director of the school’s Political Economy Research Institute, told The Nation.
Nobody is laughing at the report’s collateral damage, however. Stocks continued to plunge Monday morning, in what Forbes called  the “Standard & Poor’s stock market crash.” Pollin correctly predicted  last week that a downgrade would likely not have an impact on Treasury bonds but could rattle stocks, because investors often “act on the basis of incomplete, or even inaccurate, information” and could “interpret the downgrade as evidence of a rising default risk.”
Additionally, it’s possible that the Fannie and Freddie downgrade could lead to higher mortgage rates for Americans, since the firms back nine out of ten mortgages and might face  higher borrowing costs due to the rating change.
The downgrade also further entrenched deficit hysteria into American politics. As my colleague Ben Adler wrote , Republican presidential candidates are stepping over themselves to use the downgrade as evidence that the country’s finances are in deep trouble and that President Obama is to blame—while, of course, ignoring everything Standard & Poor’s said about Republican fiscal policies.
Many Democrats are quick to highlight those portions of the report—Senator John Kerry said  yesterday this was the “Tea Party downgrade”—but are nonetheless validating both Standard & Poor’s credibility and the idea that the country is approaching an inability to pay bills. President Obama largely embraced  the Standard & Poor’s report in a press conference this afternoon, specifically the part about political dysfunction and the need for a balanced approach to revenue reduction.
The bipartisan desire to use the Standard & Poor’s report is one possible explanation for their downgrade—since it certainly wasn’t economics. Remember that the private rating agencies business model is now seriously endangered.
The Securities and Exchange Commission recently erased  rating agencies from all federal rulebooks—meaning they cannot be used as a legal standard for determining safe investments. Moreover, the SEC created entirely new standards of creditworthiness that it hopes will provide a “workable alternative to credit ratings.” Already, only four US corporations hold AAA ratings, as highly successful companies like Berkshire Hathaway and General Electric surrendered them years ago without  consequence.
The changes are a result of the rating agencies’ atrocious performance in evaluating—or not—the real safety of mortgage-backed securities before they badly damaged the global economy despite AAA ratings. A bipartisan Senate subcommittee just named  rating agencies as a “key cause” of the financial crisis, and lawsuits are in the offing—Connecticut already sued  Standard & Poor’s for its role.
Viewed through that lens, Friday’s downgrade was a smashing success for the company. The president of the United States just had a press conference to address their report. It was the topic of conversation on every Sunday show, as politicians from both parties held it up as an indictment of the other side.
Pollin speculated this could be rehab for Standard & Poor’s previous transgressions—that now the ratings agencies are trying to create an image that “they’re hard nosed, they’re courageous; this is their best objective analysis. All of a sudden, after being shill for the financial bubble, they’re going to be hard-nosed.”
Given the possible ulterior motives of Standard & Poor's, even if Democrats are able to score short-term points against twisted GOP economic policies, they should be wary of promoting the company's analysis—and also because the analysis as a whole is plainly unsound. “The cross-currents between political manipulation and actual economic analysis have gotten completely confused. That in itself is dangerous,” Pollin said.
The downgrade report serves Standard & Poor’s interests in other ways, too—it now has a much higher profile than Moody’s or Fitch, the other rating agencies. It seems unlikely Obama will return to the podium to address a subsequent downgrade by Moody’s.
Pollin floated one additional bit of speculation: that Standard & Poor’s is catering to potential Chinese business by issuing a report that allows China to browbeat the United States. The Chinese state newspaper published  a commentary immediately after the downgrade, saying China has “every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.” As the largest holder of US Treasury bonds, China has the most to gain if indeed investors flock the bonds and interest rates rise. “Maybe [Standard & Poor’s is] calculating that the real money now is Chinese,” Pollin said.
Nobody actually knows what is motivating Standard & Poor’s to act in this manner. But one thing is clear: it’s not sound economic analysis.