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The role of ratings agencies in the mortgage meltdown....
The Financial Crisis Inquiry Commission reported in January 2011 that: " The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms."
Nobel Laureate Joseph Stiglitz....
“I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”
Standard and Poor's (S&P)....was one of those three ratings agencies.
It seems obvious, then, that there is no good reason to pay much attention to the stunt S&P pulled last night when they downgraded U.S. debt from AAA to AA+.
Go here to read about the changes being implemented in the regulation of ratings agencies in the Dodd-Frank bill. It seems to me that S&P may be actually threatening...extorting...concessions from the government on the implementation of some of these new regulations....and using their "power" to rate debt as a weapon.
From my understanding of Dodd-Frank vis-a-vis ratings agencies....the agencies could now be held legally accountable by investors bringing lawsuits if their ratings were constructed irresponsibly....as they were just before the mortgage derivative market meltdown. Perhaps S&P is seeking leverage over implementing these new accountability rules by threatening the U.S. government. Maybe not.
The one thing that is clear about S&P is that no one should take their ratings or analysis seriously. After S&P's utter failure before the mortgage meltdown, why would anyone look to them for economic analysis ever again?
But there's something else which S&P included in their AAA-AA+ "downgrade" of U.S. debt...which I found interesting.
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.
If there are those conservatives out there who still insist on taking S&P seriously....then those conservatives should recognize that at least part of S&P's justification for downgrading U.S. debt is
the fact that Republicans will never permit taxes to be increased.
For a long time, economists of all stripes have been stating that we can't possibly deal with national debt and deficits without new tax revenues being part of an overall package. Yet the Tea Party controlled Republicans insist that taxes can never be raised again...ever. All but a handful of congressional Republicans have signed Grover Norquist's anti-tax oath...which includes rejecting closing any tax loopholes as well as rejecting any tax rate increases.
It is THAT fact....that over 230 House Republicans have taken an oath never to raise taxes...which led S&P to downgrade the creditworthiness of the U.S.A.
This is yet another example of how the Tea Party fringers, made popular by a corrupt corporate media intoxicated with the novelty of teabagged hats and patriots carrying loaded guns to political events, are helping to destroy the nation.