S&P is right on the money

Business Times - 13 Aug 2011

S&P is right on the money

Policymaking in Washington has indeed become 'less stable, less effective and less predictable' , given how the Tea Partiers are open to a US govt debt default


IMAGINE if Standard & Poor's had not issued a downgrade on US government debt last week. Obama administration officials and the same economic pundits that are now blasting the global credit rating agency for lowering its US debt score one notch - from the riskless AAA to AA+ - would be spinning S&P's decision to maintain the triple-A rating as a clear sign that America's financial foundation remains strong, notwithstanding the mounting federal deficit and the just-concluded bruising debate over raising the debt ceiling.

'I think that S&P showed really superb judgment,' US Treasury Secretary Timothy Geithner would have stated on one of the television news shows if S&P had concluded that US debt remained risk-free, hailing the decision made by the rating agency as 'professional and credible'.

But in the aftermath of S&P's downgrade, Mr Geithner, joined by a chorus of angry officials, lawmakers and pundits, has been raising doubts about the professionalism and credibility of S&P, citing its performance before the 2008 financial crisis when it handed AAAs to the same banks that had been on the verge of bankruptcy and had posed a clear and present danger to the entire financial system.

Indeed, any serious examination of what could have turned out to be a financial Armageddon will cast S&P and the other major credit rating agencies that had assigned top grades to subprime securities and other financial weapons of mass destruction - in exchange for tidy fees from the same institutions they were rating - as one of the main villains in the historical narrative of the Great Recession.

And, yes, the analysts who staff these agencies - and they include many whiz-kids - do make small and big errors when they add up the numbers. We all do.

But the notion that the markets should not take the judgments made by S&P, Moody's or Fitch too seriously will remain wishful thinking on the part of the critics for at least some time to come. In an imperfect world, business and consumers have to make their decisions operating under time pressure and as they are bombarded by a lot of information that do not always makes a lot of sense.

In that context, the evaluations made by recognised 'experts' - ranging from your smart brother-in-law or neighbour to reporters and analysts on leading cable television business networks and credit rating agencies - are going to affect the choices of market participants in one way or another.

Moreover, there is something mystifying about the one major element in the criticism in Washington of the recent S&P decision on US debt - that it was too 'political', especially when that negative assessment is made by American, well, politicians.

After all, taking into consideration the political risk that is involved in making decisions on whether to invest in a certain economy or do business in this or that country has been an integral part of the way American companies operate worldwide, whether they are members of the energy sector that study the political stability of governments in oil-producing countries (and they were certainly quite busy recently), businesses that are trying to penetrate the markets of politically unstable emerging economies, or for that matter, non-American companies trying to figure out how changes in the balance of power on Capitol Hill - determined by political factors - are going to affect US trade and investment policies.

In fact, there is a huge industry in Washington and elsewhere devoted to assisting companies in estimating political risk and in trying to do something about it, which includes intelligence gathering operations, private security contractors and those infamous lobbyists who provide foreign companies with access to American politicians. These lobbyists will also propose ways to influence political decisions.

And there is even a US government agency - the Overseas Private Investment Corporation (OPIC) - that helps American companies expand their operations in emerging markets by providing them with, among other things, political risk insurance.

So why exactly should S&P avoid making the judgment that policymaking in Washington has become 'less stable, less effective and less predictable' - a view that seems to be shared by many credible American political analysts - especially when Republican Tea Partiers admit that they were willing to allow the US government to default on its debt obligations if President Barack Obama and the Democrats refused to raise the political white flag by agreeing to their demands?

The view that dysfunctional governments have been responsible for the financial problems afflicting many developing economies has been part and parcel of the evaluations made by the World Bank, the International Monetary Fund (IMF) and other international economic bodies studying the performance of political institutions around the world. And there is no reason to exempt Washington from that kind of scrutiny.

While the financial mess in the United States as well as in the eurozone has been analysed to death by economic experts trying to deconstruct the decisions made by central bankers and finance ministers and the positive and negative response by the bond markets, it is important to understand that the American and European financial crises are political in their core.

In Europe, the move to launch a common currency in the 1990s was the outcome of a political decision by the German and French elites to accelerate European integration in the post-Cold War era without creating the necessary political institutions that would provide for a common European fiscal policy.

And the major dilemma facing the European Union today is in essence political - whether the prosperous, mostly Protestant and Nordic North, led by Germany, the Netherlands and Scandinavia, is willing to subsidise the less advanced (and more corrupt) economies that with the exception of Ireland are in southern Europe (Greece, Italy, Spain, Portugal).

Interestingly, the split between North and South is reflected in the political divisions within European countries such as Italy and Belgium. France, with its mixture of northern and southern characteristics, finds itself somewhere in the middle of this political debate, while Britain and some of ex-communist European governments are more sympathetic to the views of Germany and its northern allies.

Similarly, the debate in Washington and around the country over US fiscal policy reflects more than just the philosophical disagreements over economic policies that have received so much attention in the last two years. In a way, this economic debate has also exposed a deep political- cultural split that has all the making of a cold civil war.

On the one hand, you have the Republican electoral base that is located mostly in the Midwest and the South (and other mostly rural 'Red' areas) and consists of a large bloc of older, White and Christian voters whose intellectual roots tend to be conservative, traditional and nationalistic, with its emphasis on the original interpretation of the Constitution, on 'state rights' and a commitment to religious (Christian) values. These people fear the 'Muslim threat' that borders on xenophobia and nativism.

On the other hand, the Democratic electorate is concentrated in the east and west coasts and the large urban centres of the country and includes a coalition of educated professional, minorities and young voters whose members espouse a set liberal, secular, multi-ethnic and open political-cultural system that is more tolerant towards immigrants and more sensitive to the rights of gays and women.

If the Democratic-liberal coalition helped elect the first African-American president, the Republican-conservative bloc has given birth to the Tea Party whose obsessive resentment towards Barack Obama and his real and imaginary traits is well documented.

The political bottom line is this: The Tea Partiers believe that eroding the foundation of the American welfare state - the proud creation of the Democratic-liberal president and Congress - would be a devastating political blow to Mr Obama and the 'coastal' elites that they associate with the 'secular liberals' they despise.

Some of the more centrist Republicans express a genuine concern over rising budget deficit and anti-business attitudes among the Democrats. But the current Republican leadership in Congress is driven first and foremost by political and ideological zealots that have no interest in reaching compromises over fiscal or other policy issues with the other side.

And that may be an unresolved political problem that, in turn, explains why it will be so difficult to form a bipartisan national consensus in Washington anytime soon.


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