Yesterday Standard and Poors, a credit rating agency, lowered its outlook on the prospect of the US political system making serious progress on dealing with the mounting debt. There was no change in the actual rating they give to US treasuries and bonds which remain at AAA, but it hardly matters because no one cares what S&P has to say about US debt.
Why? Well, the point of the rating agencies is to tell us something about bonds that we dont know. For example, how safe are the bonds of Kenosha, Wisconsin?
But everyone knows about the situation in the US and the bond market sets the price daily. How risky is US debt? Check the price on the bond market:
The bond market confirms what everyone knows, the US is not going to default on its debt obligations. US debt has been a safe haven for money during the global recession.
S&Ps announcement has not gone over well with some economists, here is a sampling from the NY Times Room for Debate feature:
Yves Smith
Barry Ritholtz
Barry Eichengreen
Of course Smith and Ritholtz referring to the central role the credit rating agencies (who are paid by banks for their services) had in the mortgage market meltdown and subsequent recession. These agencies gave AAA ratings to MBS and CDOs that their clients were selling, when in fact they were junk.
Which gets us back to what they agencies are supposed to do tell less informed investors about the relative risk of investment that they have researched thoroughly. As many have pointed out, however, they make all their money from the very firms whose investment vehicles they are supposed to analyze subjectively. The basic economics of incentives suggests that this is not going to happen. And for these CDOs, it didnt they rated stuff they didnt understand, and should have been suspicious of, AAA when in fact it was toxic.
Eichengreen is essentially making the same point that I am: S&P doesnt really tell us anything we dont know about the market for US debt and if you want to know how the insiders feel, just look at the market equilibrium prices where there is little sign of a risk premium being charged.
So in the end the S&P announcement got lots of press but was, to me, a complete non-event.
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