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Moody's: Bring It On!

letsgetitdone's picture

Yesterday, as reported in Money News, Moody's made me laugh, with the following pronouncements:

” . . . it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law. . . .

“The plan agreed to by Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years . . .

“A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

“For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasurys, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.”

Here Moody's is referring to the increase in the debt, and the debt-to-GDP ratio caused by the tax deal, and also to the predicted lesser value of Treasuries which will presumably lead to the US paying higher interest rates and having greater interest costs on the national debt than it otherwise would have had. In addition, Moody's believes that the likely $900 billion cost of the tax deal will make the US more likely to default on the national debt.

I found this a laughing matter for a number of reasons. First, as Jane Hamsher points, out only 5 days earlier Moody's had said there was no prospect of a ratings cut if the tax deal passed. Their sudden change of opinion greatly undercuts their credibility.

Second, as is widely known, all the ratings agencies including Moody's gave the CDOs and CDSs that led to the collapse of AIG their highest ratings. In addition they downgraded Japan's credit ratings a long time ago, with no measurable impact on its bond interest rates or costs, even though Japan's debt-to-GDP ratio has continued to increase over time and is now in the neighborhood of 200%. So, one may be forgiven for wondering why anyone should listen to the ratings ravings of Moody's and the other agencies at all. In fact, one may begin to suspect that their ratings have little influence on the bond markets, and also, given the Japanese case, that the bond markets don't control the interest rates that Governments sovereign in their own currency must pay.

Third, since the United States is a nation with a fiat non-convertible currency system, with a floating exchange rate, and no debt denominated in any foreign currency, it is impossible for the United States to be forced into a default by any external party, simply because its ability to create the money it owes its obligations in is unlimited. Voluntary default could be caused by a Congress which acts stupidly, and in a manner contrary to the Constitution, to constrain the Treasury from paying its obligations when they come due, coupled with a Treasury that accepts Congress's constraint in conflict with the clear admonition of the Constitution that the debts of the United State shall not be questioned.

The objective risk of default by the US Government is not increased by the increased size of the deficit, debt, or debt-to-GDP ratio. And Moody's view that the risk of default is increased by such increases, only shows that Moody's doesn't understand the monetary operations of nations sovereign in their own currencies. Increases in these numbers don't in any way lessen the constitutional authority of the Government (including the Congress) to spend or make money. It's basic solvency, in other words is untouched by the tax deal, and if Congress allows the Executive to use its currency powers, then the risk of default as a result of the deal is exactly zero. Whatever additional risk exists as a result of the deal, comes only from the increased likelihood that Congress, mistakenly thinking that the Government is like a household, or, or ideological reasons, determined to "starve the beast" might constrain the Executive from meeting its obligations, and declare a US default of its obligations when there is no reason to do so.

Fourth, my biggest laugh came at the underlying assumption of Moody's report, namely that its ratings and the bond market itself actually control the interest rates that Governments like the United States must pay. Sure, they will determine interest rates if the Government sits idly by and lets them drive the market. However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating bank reserves. Specifically, one way to do this, is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That's basically how the Japanese keep their bond interest near zero, and that's how we can do the same.

Alternatively, another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for Congress to stop requiring new debt issuance in coordination with deficit spending, and for the Treasury to stop issuing debt. If we did this the credit rating agencies and the interest rates in the bond market would be irrelevant from that day forward.

In short, the bond markets and the ratings agencies aren't in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. In fact, at this point in our history, Congress is mandating that we have a national debt. It is forcing us to have one.

Congress mandates that we borrow our own previously created money from the Chinese, Japanese, and Middle Eastern nations and pay them interest on a commodity (our money), that we have an unlimited ability to create, while they also complain about the very same national debt they are always re-creating and increasing, and then tell us that we can't afford unemployment insurance, enough Federal Spending to create full employment, Social Security, Medicare for All, good educations for our kids and grandkids, and emergency programs to create new energy foundations for our economy.

Forget about Moody's! They're part of the great distraction preventing us from focusing on our real problems. There's nothing that Moody's and the bond markets can do to hurt us, unless we let them. Let's not let them. Tell them to bring it on! And, if they do, tell them to keep in mind Beowulf's admonition:

”I don’t think we’ll see Moody’s or any other rating service based in the US ever downgrade US Treasuries. It would cause a tremendous amount of financial loss and would leave Moody’s and its executives exposed to criminal prosecution. If I were Moody’s general counsel, I’d tell the CEO in no uncertain terms, Do Not Tug On Superman’s Cape.

14th Amendment, Sect. 4

”. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned”

Criminal Mischief statute

18 US 1361. Government property or contracts

"Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both."

And Bill Michell's Conclusion in his post on outlawing the credit rating agencies:

"The real question that I always ask is why governments allow these undemocratic criminal organisations to exist. They can just outlaw them. This would force the corporate players to create better ways of informing the markets about their risk characteristics and leave governments alone to do what they are democratically elected to do – advance public purpose.

Further. as part of my preferred financial market reforms I would render illegal a whole swag of derivative assets which would lessen the problem of pricing risk.

It is time to wean the private financial markets off these agencies. The best way would be to declare them illegal.

The last thing that a sovereign government should be doing right now is cutting back on its fiscal stimulus."

Which, of course, is exactly what Moody's wants us to do.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

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Submitted by Hugh on

Moody's has also hinted it may downgrade the credit rating of the universe saying it didn't seem like it was all that it was cracked up to be.

Submitted by lambert on

As lets points out, these are the guys whose fake ratings enabled the crash in the first place. (Bill Black alert: "Distributed or emergent accounting control fraud." IOW, who said the border for fraud was the firm?)

Orange jumpsuits!

letsgetitdone's picture
Submitted by letsgetitdone on

Isn't it Berkshire-Hathaway? Obama's going to tell us to look forward, not backward.

Submitted by jawbone on

in less than a week.

Well, it seems a few folks have noticed a very interesting situation. Richard Smith at Naked Capitalism and Jane Hamsher at FDL notice a distinct change in message from Moody’s based on prior statement a week before. Also, Scarecrow at FDL has a related post up now.

It basically looks like they were for it before they were against it. This is odd and can only come under the heading of something’s rotten in Wall Street.
So, this week’s actions of note is that they seemed to have changed their tune from what they were saying prior to the cloture vote this week. On December 7th–via Scarecrow’s link to Jane–we can see Moody’s approach to reckless tax policy was simply “No Problem”. This comes from Bloomberg.

“The extension of the current tax rates is for a temporary period of two years and we think that if that’s all there is to it — it does not have ratings implications,” Steven Hess, senior credit officer at Moody’s in New York, said in an interview today. “We have a stable outlook. We don’t feel it will get changed downward in the next year or two.”

A week later, the same Steven Hess puts out a completely different vibe to The Hill. This is the message I read when I wrote my post last night.

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth. Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years,” Moody’s analyst Steven Hess writes.

So, reasonable minds would like to know what changed Mr. Hess’ mind so quickly? Was it that he was greasing the vote before the cloture vote and now he’s setting us up for something else since this horrible tax plan looks like it will pass? Richard Smith snarks in the affirmative. ....

Go to Sky Dancing to get Dakinikat's links. I haven't followed them all, nor yours, lets (and see you've caught to flip), and I really need sleep! G'night, all.

letsgetitdone's picture
Submitted by letsgetitdone on

The flip is interesting because it highlights the likely corruption in their whole process.

However, the larger point I'm making is that they're ratings of Governments sovereign in their currency don't matter, are of no importance, represent the illusion of power, because sovereign Governments unlike those in the Eurozone, State Governments, and Governments that owe money in foreign currencies, can control the interest rates they pay on bonds, and, in fact, don't need to issue bonds at all.

I think that's a much more important point to take away from the Moody's episode than the curious fact of the flip.

Submitted by jawbone on

Were they trying to ensure passage of the Uberwealthy Wealth Protection part of the tax plan, then beginning their campaign on behalf of the Austerians and anti-deficit hawks a tad early?

I mean, WTF? How could Hess have two nearly polar opposite evaluations of the same tax plan, less than a week apart?

The Obama Republican game plan seems to be to follow the Norquist strategy of increasing debt, then cutting government to make it small enough to drown in a bathtub. Or indebted enough to make, given the unending MCM drumbeat for austerity, to "force" cutting away the socail safety nets.

While I can't explain your stand as well as I need to for people not familiary with it, I understand what you're saying. But iwhat you are saying is overwhelmed by the din coming from the MCM, supported by the economists they choose to allow to be heard. The comparison of Greece to the US is, on its face, ludicours; but it works to scare the hell out of voters who don't know any better.

So, is Moody's merely corrupt -- or politcally and ethically corrupt?

I just caught the tail end of Robert Scheet being interviewed by Terrance McNally on WBAI (NYC's Pacifica outlet), and Scheer made the point that the meritocracy's most important objective is to raise up very intelligent people not born to the money and power class and train them to figure out how to best please the monied and powerful. He also said they are trained to look at short term objectives.

We will have no improvement in the US until 1) we are a smaller, less aggressive, more social democratic country and 2) develop a new brand of economic and social liberal populism. That part of the Democratic Party has been lost.

Now, back to putting the yard to rest for the winter....

beowulf's picture
Submitted by beowulf on

That Moody's thinks they have that much power, or that the US Government probably thinks they have that much power too.

Thinking about, I guess Dr. Phil was right. We train people on how we expect to be treated. Obama (and Bill Clinton before him) expects Wall Street to call the shots, no one should be surprised when, surprise surprise, its Wall Street that calls the shots.

letsgetitdone's picture
Submitted by letsgetitdone on

We have to spread this meme!