Monday, January 26, 2009

Lowering the rating on US Treasury bonds.

Yesterday, after babbling along a bit about The New York Times, the new administration, etc., I ended up with a brief discussion of the credit rating agencies. I want to pursue that point today.

I wrote that "I'd just like to point out in a cynical spirit that S&P and Moody's could strike back were they to feel really threatened by any regulatory change. They could lower the credit rating of US Treasury bonds. How devastating would that be to the ability of the US to keep borrowing on a world-historically absurd scale."

The chairman of S&P's sovereign ratings committee, John Chambers, raised the issue of lowering that rating four months ago.

Now, ask yourself: does this really have deterrent value? Would it be devastating? I can imagine treasury Secy Geithner telling President Obama, "Our bonds will be just as valuable the day after their downgrade as they were the day before. There will still be the uninterrupted history, from Alexander Hamilton's day to my own, in which every payment has been made on every bond. Are there lots of other institutions with such a 200-year-plus track record? Let's not fear S&P. They can't make our bonds unattractive by calling them names."

But if Geithner gives such a speech to the Prez, won't it imply that markets can IN GENERAL look beyond the S&P rating (and the Moody's rating too) and reach rational conclusions about the instruments being rated?

Are the ratings agencies irrelevant, or are they important? If they are important enough to be worth regulating, aren't they important enough to be a serious threat to the marketability of bonds?

Obama might after all reply to Geithner in our imagined conversation in the Oval Office: "If we shouldn't fear S&P, it is because they don't really matter to the buyers of such instruments. But if they don't really matter, what is the point of regulating them?"

And that would be a very good question.

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