I have been reluctant to condemn the credit-rating agencies for sovereign downgrades because it seemed like shooting the messenger. As the bond markets have noticed, a few European countries have serious fiscal problems. Blaming the raters for also noticing did not seem like an effective response.
However, I think that Standard and Poor's decision -- alone among the major raters -- to downgrade the U.S. has severely discredited the agency (bad pun intended). The U.S. Treasury has posted a stinging note about a calculation mistake underlying this decision. Interestingly, the magnitude of S&P's error was equal to the amount by which it judged the U.S. deficit-reduction plan to fall short: $2 trillion over ten years.
Paul Krugman emphasizes the amateurish nature of S&P's mistake. But what strikes me is that, when Treasury officials pointed out the error, the agency just changed its main rationale for the downgrade and immediately proceeded with the public announcement. It seems that S&P had made up its mind and did not want to be confused by the facts.
A few commentators have tried to defend S&P by claiming that its initial assumptions were as legitimate as, or more realistic than, the Treasury's assumptions. I am no expert on American budgeting, but I do not think that is the issue.
My reading of the Treasury's post is that S&P costed the deficit deal based on one assumed baseline and then subtracted the result from a different baseline. Doing so would be wrong, whichever baseline is right.
Update (August 7): Andy Watt from the European Trade Union Institute has more.
Update (August 8): Krugman has more.
This article was first posted on The Progressive Economics Forum.
Thank you for reading this story…
More people are reading rabble.ca than ever and unlike many news organizations, we have never put up a paywall – at rabble we’ve always believed in making our reporting and analysis free to all, while striving to make it sustainable as well. Media isn’t free to produce. rabble’s total budget is likely less than what big corporate media spend on photocopying (we kid you not!) and we do not have any major foundation, sponsor or angel investor. Our main supporters are people and organizations -- like you. This is why we need your help. You are what keep us sustainable.
rabble.ca has staked its existence on you. We live or die on community support -- your support! We get hundreds of thousands of visitors and we believe in them. We believe in you. We believe people will put in what they can for the greater good. We call that sustainable.
So what is the easy answer for us? Depend on a community of visitors who care passionately about media that amplifies the voices of people struggling for change and justice. It really is that simple. When the people who visit rabble care enough to contribute a bit then it works for everyone.
And so we’re asking you if you could make a donation, right now, to help us carry forward on our mission. Make a donation today.