US will shrug off credit ratings

By Arthur I. Cyr

"I am shocked, shocked to find ... gambling ..."

This famous line of the cynical Captain Renault to night club manager Rick in the film classic "Casablanca" comes to mind in reflecting on the practices of prominent American credit rating agencies and the mixed fate at their hands of beleaguered Uncle Sam.

The standing of the United States federal government has just been notably downgraded by Standard & Poor's, from AAA to the next highest level of quality, while equally well known credit agency Fitch reconfirmed our country's Triple-A rating, though with reservations. Meanwhile, global demand for U.S. government bonds increased even as credit downgrade by S&P made international news.

S&P has been widely ridiculed, even before this latest move, by critics well aware of the truly shocking manner in which this still influential dispenser of financial status cavalierly handed out high ratings to complex financial derivatives, including credit default swaps which have proven to be based on little or no tangible real value. This sparked the enormous global financial crisis as U.S. and then other housing markets collapsed.

S&P officials state the downgrade reflects the high and growing deficit and debt levels of the U.S. government, which should be distinguished from the U.S. economy, and their doubts about the capacity of those in authority to correct the situation. With moralistic solemnity, the credit crunchers announced that this is the first time in history that their vaunted evaluation company has moved the U.S. downward from AAA.

When a probing interviewer on National Public Radio asked an S&P representative about their shocking lapses in evaluating derivatives, the response was that such decisions were handled by another branch of the company, not the sovereign debt analysts. In "Casablanca" vernacular, the S&P guy played dumb and passed the buck.

This brings us to President Harry Truman, who proudly displayed a sign on his desk in the Oval Office which stated "The Buck Stops Here." Truman suddenly was thrust into that office on the death of President Franklin D. Roosevelt in the closing months of World War II.

Seemingly endless challenges confronted American leaders and citizens of that time, including the Cold War which began soon after the unconditional surrenders of Germany and Japan, and U.S. deficit and debt ratios significantly greater than today. New federal programs to aid the retired and unemployed, educate millions of returning veterans, and regulate labor and management were uncertain regarding either effectiveness or expense.

Yet S&P did not downgrade the United States at that time. Why?

Because equating the U.S. national government, which commands vast actual and potential assets, with the balance sheets of even enormous commercial corporations is absurd.

In that turbulent earlier time, national unity was essential. A credit ratings company which downgraded our government would have rightly been aggressively attacked.

S&P publications of that era reveal a Wall Street cheerleader constantly exhorting people to buy stocks, described as undervalued. Yet average people remained on the sidelines. For years after the Great Depression, credit ratings firms were widely regarded as suspect agents of discredited Wall Street. Despite economic revival, stock prices did not rise to levels predating the 1929 crash until 1953.

The downgrade of the U.S. takes place in a different context. Banks resent re-regulation by Washington at a time when many in the general public have a cynical, alienated view of government. S&P is supported by banking and associated financial interests.

Arthur I. Cyr is Clausen distinguished professor at Carthage College. He is also a columnist for Scripps Howard News Service (www.scrippsnews.com). E-mail him at acyr@carthage.edu.