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Downgrading the credit agencies

Robert Reich

Kai Ryssdal: Given that this is all still in the land of hypotheticals, the sequence of events next Tuesday could go a little something like this: We miss payments on our debt, S&P and the other ratings agencies downgrade us, and the world ends. I exaggerate, but not by much. That's the conventional wisdom out there. Even the White House is saying it's more worried about a downgrade than anything else.

But commentator Robert Reich says ratings agencies -- heal thyselves.


Robert Reich: It's perfectly appropriate for a credit rating agency to warn that America's credit rating will be downgraded if it defaults on its debts next week.

But Standard & Poor's has gone a step further: It says even if the debt ceiling is raised next week, it might still lower the nation's credit rating -- unless the deal also contains a credible, bipartisan plan to reduce the long-term budget deficit by $4 trillion. This is something neither Senate Majority Leader Harry Reid's nor House Speaker John Boehner's plans would accomplish.

Now I don't mean to be impertinent, but as long as America pays its debts on time, who is Standard & Poor's to tell America how much debt it has to shed and by when?

Until the eve of Wall Street's collapse in late 2007, S&P gave triple-A ratings to what turned out to be some of the Street's riskiest packages of mortgage-backed securities.

Had S&P done its job, we wouldn't have had the debt and housing bubbles to begin with. That means taxpayers wouldn't have had to bail out Wall Street. We probably wouldn't have had a Great Recession. Millions of Americans wouldn't be jobless and collecting unemployment benefits. There'd be no need for the stimulus that saved 3 million other jobs. And far more tax revenue would have been pouring into the Treasury.

In other words, had S&P done its job, the federal budget deficit would likely be far smaller than it is today -- and S&P wouldn't be threatening the United States with a downgrade if we didn't come up with a plan for shrinking it.

And why has S&P decided to get into public policy now anyway? Where was it when President George W. Bush turned a $5 trillion budget surplus bequeathed to him by Bill Clinton into a gaping deficit?

Here's some free advice to Standard & Poor's: Stick to what you know.


Ryssdal: Robert Reich was secretary of labor for President Clinton. His most recent book is called Aftershock: The Next Economy and America's Future. Our future? Well, you never really know. Right? But David Frum will be here next week. 'Til then, send us your comments -- click on this contact link.

About the author

Robert Reich is chancellor's professor of public policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.
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Once again, Mr. Reich subjects us to his open disdain for the free market.

The S&P ratings agency is a private buisness and they have every right to assess a business, person or country any way they see fit. They are accountable to the people who use their information to make investment decisions and if they choose wrong they won't be in business.

I'm not sure whether Mr. Reich is counting on most Americans not understanding how credit ratings agencies work or if he really is foolish enough to think that by his Rhetoric he can convince them to let the country to continue to borrow it's way into oblivian.

If you don't like being subjected to the assessment of a credit agency then don't get into debt...It's that simple.

Thanks, Professor Reich. Although, after watching "Inside Job", I have to ask: What do these guys know, anyway?

It is nice to see that the blood is again flowing at S&P. Thank you, Mr. Reich, for expressing my thoughts regarding their late arrival at the party. Where were they from 2000 to 2006 when much economic pain could have been prevented?

Superb piece of commentary Mr. Reich. The country seem to be divided almost evenly so unfortunately it is like a half-glass full situation. People who are rational can see that surplus that Bush inherited got evaporated in eight straight years. Where were the so called proponents of small government and fiscally responsible lawmakers when decisions were made to pour billions every month bombing and then rebuilding Iraq and Afghanistan? The debt ceiling was raised with little questioning then. As a foreign-born US citizen I'm completely appalled at the stalemate due to bipolarity. I always believed that two-party system is key to the strength of American democracy. But the same seem to be biggest weakness in dire times.
It is not a question of weak leadership as often portrayed in some media..Obama made it loud and clear even from the campaign days that the nation will have to make difficult choices to come out of economic troubles. But his remarks were never taken seriously but considered smooth part of an eloquent speech.
Many thinks US will not default but all the bickering about how to avoid default has surely enliven the nightmare that this could happen. This may have satisfied the soul of Bin Laden who vowed to bankrupt America. Why on earth we are losing sense that cutting down on wasteful spending and living within means is not only for families, corporations but also for cities, states and federal government. The fundamental problem of our society has been over-optimism, which makes us forget plan for bad times, like this. America has been a country of full of abundance, be it land, natural resources, drinking water, civil liberties, economic opportunities and so on. Our psyche only drives forward for growth and hardly thinks of rough or lean times. Only if the S&P would hire bunch of psychologists and not only economists!

All the folks in the prior thread who criticize reich by complaining about Clinton's performance need to have a look at the CBO numbers; those locate the vast bulk of responsibility for the current deficit in two factors: (1) BushCo's disastrous decision to go to war in Iraq (which had LESS THAN NOTHING to do with 9/11) and (2) BushCo's ridiculous tax cuts for the wealthy. Regardless of what Reich says those are the simple facts.

Second, no one elected the rating agencies. They did a crappy job at keeping the investment wizard's from inventing more and more opaque instruments, thereby undermining the fundamentals of any well-functioning market.

So, while you may not like what Reich says, none of you criticisms touch the basic point here. S&P, et al failed at the actual job (to our detriment) and they are intervening now in a totally hypocritical manner.

Remember that S&P is owned by News Corporation, which is run by Rupert Murdoch. They also own Fox News. So much for integrity!

This a link to just one source clarifying the Clinton "surplus:

http://wiki.answers.com/Q/How_much_surplus_did_the_US_have_when_Clinton_...

Summary is that Clinton looted off-budget funds. Specifically:

For example, in 2000, Clinton claimed a $230B surplus, but Clinton borrowed
$152.3B from Social Security
$30.9B from Civil Service Retirement Fund
$18.5B from Federal Supplementary Medical insurance Trust Fund
$15.0B from Federal Hospital Insurance Trust Fund
$9.0B from the Federal Unemployment Trust Fund
$8.2B from Military Retirement Fund
$3.8B from Transportation Trust Funds
$1.8B from Employee Life Insurance & Retirement fund
$7.0B from others

The simple reality is that borrowing, with no intent to repay, is WRONG. It is theft from the pockets of people unborn. It is pathetic that neither Congress or the President is concerned by this.

Mr. Reich does not appear to have this simple understanding. Blaming the ratings companies ignores the much bigger issue. True, had ratings agencies properly rated some companies, it is likely that some current problems could have been mitigated. But, not totally. The real issue of a government borrowing almost half of what it spends would still exist. With all the unfortunate consequences. Without the meltdown in 2008, the current situation would have only been delayed a few years, at best.

Credit ratings are based on the ability of the potential debtor to repay an investment - usually involving a assesment of available assets and their potential to grow, existing liabilities (against those assets), and (of course) probable revenues. Even though the S&P's position may be an "inconvenient truth", Mr. Reich, has no right to make a moral attack given his history of active embellishment of events and invented dialogue from his book "Locked in the Cabinet". His longstanding relationship the truth firmly rooted in distance and highly creative to reflect his personal opinion, separates his views from any semblance of credibility.

Please, Please, discontinue his commentary before his credibility and Marketplace's merge to the lowest common denominator.

I agree with previous comment. Please write an OpEd on this for NYT or WP. I have been having repeated thoughts about this "Who is S&P" to exercise such ratings power, when they were so incomptent, dare I say corrupt, in the housing bubble which crippled our economy. Go get 'em!

Fantastic. Robert Reich, once again, has explained it in spades. Why should we worry about credit agencies that advised us into the mess we are in right now. It seems to me that now is the time to rethink much of our financial infrastructure. Perhaps, it is time for the government to take over the credit rating system and go into banking itself. They certainly could do no worse than the so called private sector. It this radical. Well yes and no. But as one who has been looking for a full time job, and working part time, for the last 8 years, I am fed up with the poor shouldering the burden of Wall Street fat cats who are clueless about the realities of life.

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