MOODY´S AND THE DEBT THREAT / THE NEW YORK TIMES EDITORIAL ( HIGHLY RECOMMENDED READING )

March 21, 2010

Editorial

Moody’s and the Debt Threat

We were, briefly, chilled when the credit rating agencies — Moody’s, Standard and Poor’s, and Fitch — warned that they might have to downgrade the triple-A debt of the United States if it failed to bring its budget deficit under control. Then we remembered it was not too long ago that these agencies were tripping over one another to bestow triple-A ratings on many of the incomprehensible financial confections the banks crafted out of mounds of dicey mortgages.

That doesn’t mean we shouldn’t worry about the deficit. But it is a reminder that for all of their sophisticated mathematical models and financial expertise, the raters are certainly not omniscient, they are not even disinterested observers. As the Securities and Exchange Commission suggested in a 2008 report, their ratings of mortgage-backed securities were undermined by a fundamental conflict of interest: they were paid by the very same banks whose securities they rated.

Right now the agencies seem to be following Wall Street’s new favorite meme that “runaway government spending” in response to the (brought to you by Wall Street) crisis represents a mortal threat to the American economy.

Republicans are also deploying it against the Obama administration, presumably hoping voters will forget how the previous Republican administration turned a budget surplus of 2.4 percent of the nation’s gross domestic product into a deficit of 3.2 percent of G.D.P., or how the world economy nearly imploded on their watch.

The nation’s leaders will have to deal with the long-term budget imbalances. But focusing on it now is exactly the wrong course. With consumers and businesses shocked into sudden frugality, the only thing that has saved us from a real depression has been government stimulus spending. With unemployment still near 10 percent, we need more such spending, not less.

We also suspect the downgrade will never happen since downgrading the United States would probably require downgrading all the American banks — the agencies’ main clients.

Even if it did, it is hard to envisage that it would have a huge impact. Despite all the concern expressed by raters, Republicans and Wall Street talking heads, the yields on Treasury bonds are at their lowest levels in 30 or 40 years. Investors still seem to trust the Treasury more than they do the raters.

Copyright 2010 The New York Times Company