The delicious irony of the downgrade

Konstantin Inozemtsev/iStockphoto

Article Highlights

  • Rating agencies are only the publishers of opinions, and they make mistakes like everyone else #S&P

    Tweet This

  • Ironic: rating agencies are only given attention because of the government - now they've bit the hand that feeds them

    Tweet This

  • The irony of the downgrade #S&P

    Tweet This

In the wake of all the angst about Standard & Poor's downgrading the credit of the U.S. government, we need to consider what rating agencies are. They are exactly what they themselves say they are: publishers of opinions. In other words, they are one group of scribblers among others, trying to forecast the future and its risks like hundreds of other people, naturally making many mistakes, like everybody else.

It is a delicious irony that the opinions of these particular scribblers get special weight only because the federal government has given it to them. Government regulations require financial entities to use the ratings issued by government-designated rating agencies for investment decisions. Now S&P has turned on the source of its privileged position and profits. If the government does not like the force of this disloyal pontification, that's its own fault.

The Federal Reserve hastened to announce that the S&P downgrade would have no effect on the risk-based capital requirement for banks that invest in U.S. government debt. There is no reason it would need to be changed, but note: There is a deep conflict of interest on the part of financial regulators, who are employees of the government that issues--and needs to keep on issuing great amounts of--the debt in question. The regulators are not likely to be very critical of the debt of their employer. Indeed we can count on their continuing to promote it.

From an overall financial perspective, it is perfectly logical to think that internationally diversified, cash-generating, well-managed companies with low leverage are better credit risks than nationally concentrated, negative cash flow, poorly managed, highly leveraged governments.

Alex J. Pollock is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex J.
Pollock

What's new on AEI

Expanding opportunity in America
image Moving beyond fear: Addressing the threat of the Islamic state in Iraq and Syria
image Foreign policy is not a 'CSI' episode
image The Air Force’s vital role
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Event Registration is Closed
Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.