I Fervently Disagree with Krugman. Surely with credit-ratings there is often a political undertone. The US government has profited from their `good standing’, however in the last decade the economic policy has been a disaster because of tax revenue loss and increased war spending. The US should have lost their AAA rating in the year 2008. Can you imagine how Washington would have reacted? The US empire got the AAA rating in 1917, the collapse has taken shape within a single century. Some more observations ….
Laguna Beach, California (June 6, 2011) – The downgrade craze emerged slowly in the summer of 2007, as the housing boom was shifting into bust mode. By September of 2007, the ratings agencies had downgraded only $85 billion worth of mortgage-backed securities (MBS). But within one year, that number would soar to nearly $2 trillion.
And these weren’t your run-of-the-mill downgrades from AA to A, or some such. These were epic downgrades unlike anything the financial world had ever seen. More than half the nation’s 32,000 asset-backed securities (ABS) with credit ratings received downgrades. Thousands of ABS plummeted from AAA to “junk.”
The credit crisis of 2008-9 ensued. But then the Fed and Treasury joined hands to fix the whole mess. At least that’s the official storyline.
Unfortunately, the Federal Reserve and Treasury did not vanquish the downgrade cycle; they merely swept the downgrades into a different venue, like San Francisco cops sweeping the homeless from the Financial District to Market Street.
Over the last few months, the ratings agencies have been working overtime to downgrade everything from corporate credits to state governments to foreign governments. Even the US government itself, is “under review for possible downgrade.”
Clearly, something is out of whack. When so many participants in the global economy possess so little ability to repay their debts, something is clearly broken.
Bonds are a promise to pay. But the history of the bond market is a history of broken promises. That’s because borrowing is easy. Re-payment is difficult. The near-extinction of the American AAA credit illustrates the point.
In the early 1970s, about 60 US companies possessed a AAA rating. A decade later, that number had tumbled to 30. By the early 1990s, the ranks of AAA credits had dwindled to nearly 20, and when the new millennium dawned, only nine AAA companies remained. Seven companies managed to retain this prestigious ranking until 2009, when Berkshire Hathaway and GE slipped into the AA ranks.
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