We can understand what happened to the stock market over the last couple of days with a few simple facts. These facts are not brought up by commentators because a) they are not dramatic, and b) they reveal that everything these people DO say is meaningless drivel.
So here's what's going on:
Fact one: 90% of the gross fluctuations in stock markets is driven by fluctuations in bond rates, and vice versa. If returns on bonds go up, institutional and other professional investors buy bonds. They get the money for those bonds by selling stocks, which lowers stock prices. At that point, investors take advantage -- as they have been in the last few days -- of lower stock prices by selling bonds and buying stocks.
Fact two: The actual meaning of the "risk" ratings is supposed to be that they determine rates of return. The more safe an investment is, the lower the rate of return expected, the cheaper it is to borrow. There was much talk about the fact that the lower rating made borrowing more expensive for the U.S. government, which is true, but none about how that higher rate of return for an investment whose actual risk had not changed made treasuries such an attractive investment for professionals. (One wonders, though. Is this true? Did the AAA ratings for CDS's mean they had low rates of return? Did the rating change mean that the rate of return on newly issued treasuries changed?)
The background to all of this is the inability to counter the myth that the stock market is an investment system that puts money to work. It is not. The financial investment system in this country has been transformed into the largest legal gambling casino in the world. None of the money that is recorded in what is refered to as "Wall Street" is being drawn out to pay for factories, offices, or other productive economic purposes. It all circulates within the closed world of the banks and investment houses, with only a few minor factors drawing money out, such as actually paying retirees. And the system is doing its best to close these spigots, as well.
Finally, once we realize the above, we can understand that what happens on Wall Street really does not have that much meaning for the rest of the economy, other than the fact that it is siphoning huge amounts of money out of the middle class in the form of retirement funds and government bailouts. And since it is nothing but a casino, that money is then lost to the productive economy, dragging us down even further.
But we can't talk about that. We can't discuss this scam. We can't tell workers that their retirement money is being played with, and they'd be just as well off taking their savings to Las Vegas.
One question I'd like to see someone look into, to expand on the above. Did this change by just one rating agency have that much influence on the rate of return for Treasuries? What happened with the other two rating agencies? Did some investors base their rates of return on S&P, and others on Moody's, or what? DID the rate of return on new issues actually change, or was it determined by the Fed? If rates for already issued bonds changed, what did that do to the actual payment for those old securities on maturity? Well, not one question, but it's all related.
Finally, of course, is the big question of the continuing scam in the investment world of inventing investments that are marketed as having high rates of return, yet, remarkably, low risk (foreign govenment bonds in the 80's, junk bonds in the 90's, CDS's in the 00's, etc.). Understanding these scams and how they are related would be very beneficial to the general public, as well as helping us understand why regulating banking and investments is necessary. It would be good if people understood that, yes, free markets are self-regulating; sometimes, they regulate themselves by collapsing. It would, however, cut into profits, which cannot be allowed.
P.S.: The other factor to look at here is the "moral hazard" issue, related to the S&L disaster that Reagan brought about. If investment houses don't want to be deregulated, fine. Just then don't have the government bail them out. If the government does take on the burden of insuring banks, etc. against losses, it then gets to regulate the risks of the investments these instutions make. One without the other, time and time again, has been the recipe for disaster. For us poor schmuck taxpayers, however; not the bankers who get to keep their billions.
A bit of follow-up to the above:
The rates of return on the Credit Default Swaps (CDS's) was pretty high. This was because the original rates on the loans that were supposedly the basis for the swaps was high, because the loans were extremely high-risk (i.e. there was no way the poor schnooks who took out the loans would be able to pay them off once the variable rates kicked in). The crooks in Wall Street invented a bogus bit of math that misused the idea that multiple, unrelated, high-risk investments can often earn a high return, because if just one of ten investments (bets, really) pays off, that makes up for the rest of the risks failing. The rating agencies were able is sell their bogus math to give the CDS's a AAA rating, even though the rates of return were still supposed to be high. In other words, the actual risk of the investments was measured by their rate of return (both high) rather than the rating.
This shows that the ratings from the agencies are not just false, but worthless. They have no relation to the rates of return, and are just a way of tricking unwise investors -- many of whom are the idiots in charge of large institutional investments that the Republicans tell us are worth the millions they get paid -- into thinking that they have beaten the system by picking up low-risk, high-return investments. This was the same incentive at the root of the junk bond scam of the 80's, and the government bond scam of the 70's, and probably a long, long list of scams going back to the day after the invention of investment techniques.
So we can conclude that the answer to my question is, the change in the rating for T-bills has no real effect on the return on those bills. The Fed sets the rates for new issues, and the only change to that rate is if they are sold for an amount different than the face value -- which is the basis for the bond market, again showing that it is a form of gambling, nothing more. The S&P rating change was just PR that gave day-traders and others with priviledged access to market computers an excuse to broaden the swings in the daily stock prices, which is how traders make money.
Oh, and one other thing, which I learned from a book called Proofiness that I do recommend. The charts we see on tv showing these "wild" fluctuations in the Dow are also bogus. They show the top 1% of the overall Dow price. Look at the lower left part of the chart, and you will see that the "bottom" of the chart is 11,000 or 12,000. If they showed us a chart of the daily fluctuation of the Dow with the bottom of the chart at zero, we would not be able to discern the size of the fluctuations (the top of the chart would be almost straight), even with the swings of the last couple of weeks.
Again, though, that would not be "dramatic" and would not give the cable channels anything to yell about all day. Tragic.