Monday, August 08, 2011

Egg on S&P's Face

So after making a $2 trillion error in the basic accounting of the US budget, Standard & Poors downgraded US government bonds anyway and the stock markets sold off everywhere. So where did investors go to find a safe investment? Into...US government bonds, driving the rate on 10-yr bonds down about 0.24 percentage points:

What a fine mess they caused.

By the way, if you actually read S&P's release of last Friday announcing their downgrade, they explicitedly say it isn't because the US spends too much:
"Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing."
(that is to say, Mitt Romney was completely wrong today), but because the politicians can't get it together:
"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and
will remain a contentious and fitful process."
They said the real problem is that the recent government actions "falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade," they do call out the Republicans:
"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act."
Paul Krugman, who seems to me to have the best understanding of all of this, wrote more about Standard & Poors track record, including their "A" rating on Lehman Brothers before they went down the tubes. Also, see this.

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