The ratings agency as Anarchist
Over at Baseline Scenario, James Kwak makes an excellent point about ratings agencies: they’re really only useful for ratings on stuff that we don’t know about. And we know pretty much everything there is to know about the US.
Enormous amounts of information about the government’s finances are open to the public and are pored over by thousands of analysts from all around the world. Moody’s is no better at estimating future tax revenues and spending commitments than anyone else.
The media seems to be confusing and conflating a default by the US with a downgrade by Moody’s. I tweeted today … there’s a difference between a downgrade and default. Downgrade takes us to AA. BFD. A default takes us to D. Very different. Yes, but … @lizzieohreally tweeted back that a downgrade would be a big deal, and she’s right. I was being a bit flippant. Because a downgrade would immediately trigger a bunch of selling by funds and other instruments that include covenants forbidding them to hold non AAA securities. As James Kwak puts it:
If, say, every money market fund suddenly has to dump all of its T-bills, that could cause systemic problems.
Or, as @ruthlessgravity tweeted pithily, “dwngrad would cause havoc”.
Indeed. But would Moody’s really call a downgrade and let loose the dogs of systemic failure? When we know that the debt ceiling carry-on is really about politics and not about our actual, practical ability to raise the debt ceiling? Would they really blow the whole place up, just to try and rehabilitate the ratings agencies’ reputation for not being on top of things?
