On debt crisis, the rating agencies show up late — again

At the risk of establishing a precedent for fortnightly references to Robert Reich, I was intrigued by another piece the former labor secretary wrote for the Huffington Post. But unlike last time, I actually agree with much of what Reich says about the credit-rating agencies, the financial collapse and the current national-debt crisis.

In particular, Reich blasts Standard & Poor’s, which is warning it may downgrade Washington’s credit rating if Congress and the White House can’t agree to $4 trillion in deficit reduction:

Who is Standard & Poor’s to tell America how much debt it has to shed in order to keep its credit rating?

Standard & Poor’s didn’t exactly distinguish itself prior to Wall Street’s financial meltdown in 2007. Until the eve of the collapse it gave triple-A ratings to some of the Street’s riskiest packages of mortgage-backed securities and collateralized debt obligations.

Standard & Poor’s (along with Moody’s and Fitch) bear much of the responsibility for what happened next. Had they done their job and warned investors how much risk Wall Street was taking on, the housing and debt bubbles wouldn’t have become so large — and their bursts wouldn’t have brought down much of the economy.

Had Standard & Poor’s done its job, you and I and other taxpayers wouldn’t have had to bail out Wall Street; millions of Americans would now be working now instead of collecting unemployment insurance; the government wouldn’t have had to inject the economy with a massive stimulus to save millions of other jobs; and far more tax revenue would now be pouring into the Treasury from individuals and businesses doing better than they are now.

In other words, had Standard & Poor’s done its job, today’s budget deficit would be far smaller.

I would even agree with Reich that the coziness between the rating agencies and the Wall Street firms whose products they were supposed to be evaluating was a key factor in their missing the boat on the not-so-safe securities they kept approving as AAA. I would, however, go a step further and point out that the Securities and Exchange Commission contributed to this coziness by maintaining a three-headed oligopoly of approved rating agencies; some more competition among rating agencies might have led at least one of them to do a better job examining these securities and looking out for those purchasing them, instead of only those who were selling them.

This of course relates to the debt-ceiling debate. The same rating agencies that got too cozy with the financial firms cannot have been too eager to make too much of a fuss about the finances of the government that shielded them from competition. If S&P, et al. are finally speaking out, things must truly be bad. But, given the way the sparring sides in the debt-ceiling talks have wielded the threat of a credit downgrade, it would have been very helpful to the taxpayers if these alarm bells had been sounded, say, a year — or three — or five — ago.

That doesn’t mean S&P and the others are wrong or can be ignored now, just that they’ve undermined their own role by showing up to the party so late…again.

The nexus and interdependence of Big Government and Big Business erode both good government and free markets — and spark many of the problems we face. On that, even a true-blue progressive like Reich and I can agree.

– By Kyle Wingfield

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