Naked Capitalism is doing an excellent job of analysis on this issue, as well as cooling panicky thoughts on the possible outcomes of the Standard and Poor's downgrade of the U.S. credit rating.
Investors that are required to hold AAA paper can continue to rely on the AAA ratings from Moody’s and Fitch. Two ratings will suffice for virtually all users (and there were media reports of various regulated investors seeking opinions and getting waivers if they thought they might need them). In case there were any doubts, the Fed, Treasury, FDIC, NCUA and OCC told S&P to go to hell and issued a press release saying that the entities they regulated to carry on as before.
Naked Capitalism had touched on S&P threats about a week ago, and continue to discuss the political implications of this downgrade. As many of us suspected, something stinks:
Yves suggests that "this is really a power struggle over who wields authority".
People are focused on the market implications of the downgrade, but that isn’t what this is about. It’s about a President who will now be relentlessly tagged with responsibility for a rating given by a disgraced organization whose victims should have liquidated them long ago.
As Politico reported, White House officials feared a downgrade more than they feared default. They know what it means, too. The Masters of the Universe have spoken...
I part company with Yves analysis a bit here as she purports the move was also a partisan move to discredit the current occupant in the White House. However, in the face of the Republican "victory" to control the framing, debate and outcome of the debt ceiling battle, this downgrade is certainly a slap in the face to the republicans as well, and current republican leadership. Congress has to ride that train also. This is more about who actually controls these market driven governments...a much larger issue.
Yves quotes Macrobusiness's spot on analysis of this downgrade:
Who exactly are these ratings agencies? Oh, those corrupted, easily deluded companies who are to sane analysis what a croupier at a roulette table is to an insurance policy. They showed in the lead up to the GFC that they go to the highest bidder and that they have little or no credibility. Suddenly these private companies have authority over the US government? And then let’s look at what happens to demand for US dollars if there is a downgrading. Nothing. The $1-2 trillion that they are arguing about is about six hours trading in the greenback. The US dollar is the world’s reserve currency and will be for some time….
There is a deeper issue here, as Yves and Macrobusiness points out: the attempt by these private credit rating agencies to actually govern, something our government ought to be doing, first by "taxing the lunatics in the derivatives and HFT markets?"
Macrobusiness suggests a "small tax". I'll part ways with Macrobusiness here and say, why not tax the hell out of them? Here is some of their excellent analysis:
They are nevertheless a symptom of a much deeper, long term issue — the replacement of the nation state with the market state, as historian and professor of law Phillip Bobbitt describes it. The issue is not about big government or small government, although they are certainly issues in a country that is rapidly losing its middle class. The problem is whither government itself? So successful has been the attack of the libertarian market worshippers, there is no government worthy of the name in the Western post-industrial financial system.
I'm not a fan of so-called free market capitalism. Global capitalism is driving us all to a state of poverty. I'm a socialist. However, if your gonna have market capitalism, then at least regulate it already, for the sake of us all.