August 08, 2011
A front page NYT article on the impact of the S&P downgrade included several assertions that were not supported by evidence. For example, the article told readers in the second paragraph:
“Even before the panel [the congressional commission established in the debt agreement] is appointed, its mission is expanding. Its role is not just to cut the annual budget deficit and slow the explosive growth of federal debt but also to appease the markets and help restore the United States’ top credit rating of AAA. Otherwise, taxpayers may eventually have to pay more in interest for every dollar borrowed by the Treasury.”
This assertion is not sourced to anyone. Also, in the wake of the downgrade, interest rates on Treasury bonds have fallen, not risen. While this is likely the result of concerns over the survival of the euro, it indicates that financial markets are not especially concerned over S&P’s downgrade.
The article also asserted that members of the congressional panel will have to “mute ideological disagreements.” It is not clear that members of Congress have ideological disagreements. Members of Congress get elected because of their ability to appeal to powerful interest groups. The differences around proposals to cut programs like Social Security and Medicare or to raise taxes on the wealthy most obviously stem from the different interest groups being represented. It is not obvious that the ideology of individual members of Congress matters, since their ability to keep their jobs will depend on the extent to which members of Congress can keep their backers satisfied.
It also would have been useful to include the views of members of Congress who ridiculed the downgrade, pointing out that S&P had rated hundreds of billions of subprime mortgage backed securities as investment grade. It also had given top investment grade ratings to both Lehman and AIG until the day they collapsed. It also was off by $2 trillion in its calculations of U.S. indebtedness. In other words, there are very good reasons not to take S&P’s ratings seriously and there certainly many people who do not, including it seems investors in financial markets.
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