Monday, August 08, 2011

Thoughts On The Downgrade

During the run-up and throughout the 2008 crisis, it was made clear that the US Government, the Fed, and the financial system were one in the same. Each component was wholly dependent on one another, tightly coupled, and failure of one piece threatened collapse of all. Nothing exemplified this situation better than the complete capture and assimilation of the Obama Administration by Wall Street. Even during the debt ceiling "crisis", the talking heads of finance and the administration were in lock step. Obama has even gone so far as to sell out major blocks of his constituency in order to satisfy the financial elite.

That's what makes the S&P downgrade a total game changer. The modern financial system in the US is purely debt-based, relying on a foundation of both the infallibility of US sovereign debt, and debt coinage based on ratings by the NRSROs. Ultimately, the NRSRO model was created and operates at the behest of the US Government and the Fed, and by downgrading the US rating at this juncture, they're truly biting the hands that feed them.

This could be a gambit by S&P to weaken the Administration in an attempt to get a Wall Street friendly Republican elected in 2012, but this is a huge gamble. The NRSRO model was on shaky ground in 2009, and if the Republicans don't carry the day, they might find themselves on the other side of some major "reform".

1 comment :

Phil said...

Could it be that the downgrade is based more on the log term outlook than politics? I don't follow this stuff closely, but personally I'm a lot more worried about the ability of the US to carry the increasing debt (i.e. the big picture) rather than a single missed/late payment. And that would be even more important to me if I held any of those bonds.

I think I would actually prefer several missed/late payments but a better long term picture (i.e. sustainable long term plan), than a perfect payment record right until everything goes off the tracks.