Who’s Regulating the Regulators?

I’ve spent most of this week railing about Congress’ inability to realistically deal with 2011 budget and the looming collision between government spending and the debt ceiling.

The situation is made significantly worse by the threat of a debt rating downgrade. A debt downgrade would raise borrowing costs by $100 billion a year as Treasury bond prices fall and interest rates rise. That, in turn, would make home and auto loans more expensive.

That’s clearly not the best outcome.

In the past, we’ve seen partial government shutdowns as Congress and the sitting president ironed out their differences on a debt deal. And there’s no doubt that the government can do some paper-shuffling and furloughs to keep debt payments going out well after the August 2 deadline.

Again, not the best outcome, but doable.

Perhaps we should be turning more of our attention and anger to the rating agencies, primarily Standard & Poor’s.


S&P seems to be frothing at the mouth to cut the U.S. debt rating. It may do so even if Congress raises the debt ceiling. It seems to me S&P is trying to insert itself into America’s political process in pursuit of specific policies.

Is that S&Ps job? Is it S&P now an Op-Ed firm as well as a ratings agency?

I always thought a ratings agency was supposed to simply assess the ability of an entity to pay back loans. I think there’s little debate that America can — and will — pay its debts.

That’s was the sentiment from the Fitch rating agency yesterday. Unlike S&P and Moody’s, Fitch hasn’t put the U.S. on review for a downgrade. In fact, in a new report Fitch wrote:

"The exceptional size, dynamism, and diversity of its economy enables the U.S. to issue debt securities on an unparalleled scale… There are no alternatives among other low-risk bonds that could easily replace the size and scope of the U.S. government’s outstanding debt…"

Now obviously, this statement is something of a backhanded compliment. Just because the U.S. can issue debt on an "unparalleled scale" doesn’t mean we should. But my point is, Fitch doesn’t see the same potential for default that S&P does.

Maybe S&P (and Moody’s) are just trying to show they have some teeth after they completely missed the deep problems with mortgage-backed securities that became a major player in the financial crisis?

I wonder: who’s regulating the regulators?


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