U.S. Credit Downgrade Is Pure Madness

What’s the Latest Development?

The private credit agency Standard & Poor’s (S&P) has downgraded America’s credit rating from AAA to AA+ with a negative outlook. Based on S&P’s projections of U.S. debt as a percentage of G.D.P., the credit rating agency initially gave economic justifications for the downgrade—there was too much debt in America’s future. But when the U.S. treasury pointed out S&P had miscalculated by $2 trillion, the agency removed the economic justification from their report, falling back on a purely political analysis, specifically that the debt ceiling debate was a debacle.

What’s the Big Idea?

S&P may be correct that the Congressional squabbling over the debt ceiling was a dangerous farce but what authority does it have to make purely political assessments that put world markets on a razor’s edge? Credit rating agencies, to be sure, have some credibility problems. In January 2011, the Congress’ bipartisan Financial Crisis Inquiry Commission concluded that America’s three largest credit rating agencies, S&P among them, were “key enablers of the financial meltdown” for giving their seal of approval to mortgage-backed securities that proved hollow.