Bill Miller, chief investment officer of Legg Mason Capital Management, had this to say about Standard & Poors’ downgrading of American debt: “The action was wholly unnecessary and the timing could not have been worse. Compounding this, the reasoning was poor and consequences, both short and long term, for the global financial system unpredictable.” In short, he’s not pleased.
Miller, like economist Robert Reich and others, also pointed out the irony involved in the safety of U.S. debt being downgraded by the organization that kept the safety ratings of crumbling mortgage-backed securities at AAA until well past the time they should have been downgraded. This was a costly error—if indeed it can be called an error.
Further, Miller notes that S&P, a privately-owned/for-profit firm, seems to have wormed its way into a position of great authority, not only lecturing the U.S. government on what it must do (to retain the highest debt rating) but also having a direct effect on markets all over the world.
U.S. stock markets, as you know, began the day Monday by tumbling more than 3.5% (where it was still poised to fall further as this brief essay was written). It is easy to conclude that we’re in the midst of a crash and perhaps further into another (deeper) recession than we’d begun to fear.
Into this state of anxiety, allow me to inject a bit of hopefully grounded thought. This past weekend, Paul Krugman wrote, “In those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong. Consider, in particular, the case of Japan, which S.& P. downgraded back in 2002. Well,
nine years later Japan is still able to borrow freely and cheaply. As of Friday, in fact, the interest rate on Japanese 10-year bonds was just 1 percent.”
Krugman concluded, “So there is no reason to take Friday’s downgrade of America seriously. These are the last people whose judgment we should trust.” Instead, the dollar is still trusted.
What we saw last week was actually a strong inclination among global investors to continue utilizing U.S. Treasury securities as the safe haven for frightened money. The ten-year note’s yield declined in a dazzling way as investors sought what they still perceive as the safety of the U.S. Treasury security.
Admittedly, the S&P downgrade has the stock markets doing a St. Vitus dance as if the harsh judgment of the gods had somehow been unleashed on the markets. This, too, I feel, will soon pass.
But once it does pass—and interest rates firm a bit, and stock markets invite the bottom-fishers back into the pond, and we continue to see a gradual improvement in real estate data—we will still have several problems to deal with. First, can we make the support of our economic recovery less a matter of bipartisan political theater and more a matter of reasoned steps toward economic health? Can we think of the national—even of the world—economy before we theorize ways to advance the Democrats’ or Republicans’ political power? (This, you’ve noticed is the task that has been laid at the feet of the “Super Committee” that will theoretically reduce our nation’s debt without emaciating its economic strength.)
The failure over the past few years, and especially the last few months, represents not so much an economic problem as does a political one. Almost all of us seem to know this. But few of our voices are being heard, much less acted upon.
So far, the markets are casting votes of no confidence on the debt ceiling agreement and on S&P’s downgrading. Time to apply genuine creativity and skill to reigniting the jobs market, the credit markets, the real estate markets, and the overall economy.