S&P rating is out of order

May 20, 2011 09:04 AM

We sometimes get too busy to comment on some important issues as was the case with last month’s announcement that Standard & Poor’s revised its outlook on the long-term AAA rating of U.S. debt to negative from stable. It caused a stir especially from tea party folks and GOPers who only discovered the budget deficit recently.

What struck me most about the announcement was the source. Frankly, I can’t give much credence to any of the official ratings agencies who arguably are the most guilty entity in our current economic crisis. They are the ones that slapped AAA ratings on the toxic subprime assets behind the crisis and who had conflicts of interests with those that created those securities. Turns out their current analysis may not be much better. Jay Feuerstein talks about how they are off the mark in a recent op ed piece titled "S&P is dead wrong about U.S. debt."

Feuerstein points out that the U.S. may be in better shape today than after the last credit crisis following the S&L crisis in 1988.

He writes, “According to data from the Treasury Department, interest expense as a percentage of GDP has been steadily declining since the last real estate crisis in 1988. That year, approximately 4.23% of GDP went to pay for interest expense. Today that number is closer to 2.8%. This means the ability of the U.S. to service its debt has increased by nearly 6o% over that time period.”

Don’t get me wrong, our growing debt is a huge problem and our leaders continue to demagogue the issue rather than attack it. We have pointed that out here in numerous posts. A case in point is the compromise to extend tax cuts for the rich as well as extending unemployment benefits out 99 weeks. If our leaders were serious the compromise would have involved each side giving up something important to them in order to decrease the deficit, not increase it.

The government continues to miss the point. This may be illustrated by the fact that there still is an S&P ratings agency. That type of failure should have put them out of that business for good.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.