As the smoke billows about the Stoa from the fire at the Great Dismal Swamp, I wish that I were not always so correct on things. No this is not bravado for I am way more humble than you; comfortable with my Stoicism.
I said some time ago that Europe's troubles started in 2007/8 when the PIIGS began showing debt structuring pain and that the Euro was not nearly as strong as everyone thought it was (another item was right on about). It was the rating agencies that shot up the flare warning people that all was not right in the old country.
This was just prior to the debt market/credit market meltdown here in the States, of which the rating agencies had fears of, yet failed to shout loud enough to be taken seriously. There may also be a lot of cases where leadership from within the agencies muted the call in order to keep the money coming in return for good credit ratings.
Either way, it is time for the agencies to pay. Did the Feds have any problems with the PIIGS downgrades of 2007/08? Nope. Did they have issues with the agencies warning the world about the Euro? Nope. Did the Feds have any issues with European insolvency? Not really, we just printed up a few hundred billion greenbacks and floated them a loan.
All this chaos cause by "the rating agencies" and the Feds just shrugged and said, "what are you gonna do?" The Europeans were ticked because the agencies have their headquarters in the US and they felt that there was something fishy going on.
Well, the credit downgrade finally came to us and we were appalled. Appalled, I say! I just waited for the coordinated stories to come out and today I've finally seen enough to know the effort is underway to "Alinsky" the rating agencies.
Lets see, in the span of 48 hours I have seen:
The Justice Department is investigating S&P for not reporting the risk of the credit/debt swaps of the last 12 years.
The JD is investigating S&P for silencing reports of the same by their leadership.
Cities and other municipalities are blaming the agencies, Moody's in this case, for downgrading their bonds, sometimes giving them "super downgrades", that is, a multi-level reduction in their credit-worthiness.
There are so many more. The flag dropped and the MSM is away and running with sob stories and stories of evil agencies. So predictable.
The Feds feel that by shooting the messenger they will dampen the message. Actually, they are only ignoring reality. The rating agency is the fire alarm, designed to warn the government and public when the debt situation is getting worse (among other things).
Taking an axe to the alarm does not put out the fire.
Why the Super-downgrades, I was asked? Good question.
Well, before the melt down in 2008, the agencies just sort of worked in the margins of society and people did not pay them a whole lot of attention. Decades of service and only the financial type business or government folks really knew much about them. They had been mandated years ago to make sure that things like the Great Depression didn't happen again, by giving fair warning for when the indicators were turning south. Well, it seems like they were not a very transparent bunch, because most people didn't care much about what they did. When the agencies began having to rate these "securitized mortgage debt swaps" they didn't really know what to do with them. On the face of it all, they didn't really pose too much of a risk since the risk was being spread around.
Then the debt vehicle began to evolve and the debt swaps got more complicated, fractured (sliced smaller to make more money) and the trading velocity and penetration to other markets gathered speed. I'm sure many within the rank and file of these agencies began to have their doubts, but there were so many requests for ratings that they were making some serious cash.
So, fast forward past the carnage. Fast forward past the people being foreclosed on by a bank that can not even prove they hold the deed for the mortgage. Fast forward throughout the Trillions in stimulus spending that went down the black hole.
Enter onto the scene, the architects of the financial crisis, the dynamic destroyers of wealth, Dodd/Frank, or Frank/Dodd, depending on who is in charge that day. They will bring transparency where once there was opacity. They will bring fairness where once there was discrimination. They will make sure that those who were wronged by their bungling can SUE to get their money out of these agencies.
See where this is going? Under Dodd/Frank, the agencies can be sued if they exposed clients to risk that should have been easily avoided. Their activities are now out in the open for all to see.
So, what is a consequence of these regulations? Since the agencies are now at increased risk of being wrong, they will err on the side of caution. This means that in years past the agency may have given a municipality the benefit of the doubt. NOT ANYMORE. So, once S&P downgraded the credit of the United States as a whole, the agencies began to pull down the ratings on States and cities. Actually, those downgrades were long overdue and already under way prior to the S&P announcement.
They have seen the government books, Federal, State, and Local and understand how they "finance" their debt. We are in the fast lane towards Greece and the rest of Europe. The agencies are simply laying on the horn and shouting warnings to change course.
Think about all that. Political grandstanding within the realm of national finance is NEVER appropriate. Their actions are mucking up things across the board and delaying the efforts of the market to correct itself.
There are many reforms that need to be undertaken, but most of those are the surgical removal of government and government regulations. The market will take care of itself and has proven that it can time and time again. Study up on your Calvin Coolidge.
With respirator on, I make my way into the smoke banks.
Live well.
--Zavost
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