Standard and Poor’s was established in 1860 and was bought by the publishing giant McGraw-Hill in 1966. It is the largest of three major credit rating companies in the country. The other two are Moody’s and Fitch.
A large part of the revenues that are generated by these companies come from the actual issuers of these financial instruments. It is exceedingly difficult to be objective in evaluations if issuers are being paid by the institutions who want a high rating so they can sell their financial instruments. It is also difficult to determine if a company or government is in trouble or about to go under or default.
Thus, all the mortgage-backed securities that Wall Street was pedaling actually had the highest rating as they went under. This is nothing new! I remember from the 1970’s various high rated bonds being downgraded only after they filed for bankruptcy.
The Financial Crisis Inquiry Commission called the credit-rating companies “cogs in the wheel of financial destruction.” A report by a Senate subcommittee criticized S&P and Moody’s for giving overly optimistic assessments on tens of thousands of high-risk securities so it would not lose the business of financial firms that paid for the ratings. There are also on going investigations by the SEC and Justice Department, Congress and federal regulators who are discussing ways to implement the Dodd-Frank Act. The Dodd-Frank Act contains several provisions aimed at reducing the raters’ role in the financial system and creating more competition in the ratings industry.
Now let us discuss the debt of the United States and other Monetary Sovereign Nations. The U.S., Britain, China and Japan are examples of nations who can create their own money. California, Spain, Greece, Italy and Ireland are examples of States who can not. Therefore, they can create money and pay off their debt, which creates an excess inflationary risk not a default risk!
There is a substantial difference between the United States and all other countries. The first is that the United States Treasuries are the only reserve currency in the world. This means that other countries have to hold these bonds as reserves in their central banks or Treasuries. The second is that all of the global oil production-market is currently denominated in dollars. The third is the massive-super power status of our military makes it very safe to hold Treasuries. (Yes, there is something good coming out of our massive over spending in the military-industrial complex.)
Because of these reasons, there is no shortage of buyers of these Treasuries even at these unusually low rates, no matter what the ratings are. In fact, governments and commercial banks that hold these bills, notes and bonds, as reserves own over half of our debt of $14 Trillion. This figure includes the $4+ Trillion that the Federal Reserve and Social Security Trust fund holds. Does this make any sense?
It only makes sense if one understands that the only way we get money into the economy is through the issuance of debt, both public and private. We call this “debt created money”. This is a decidedly limited, narrow, monopolistic and inefficient way of doing it. This is the cause of the Great Recession - NOT how much we tax and spend (fiscal).
What is happening now is that there is a shortage of money in true circulation, due to the fact that the larger creation and infusion process of the private commercial banks was severely limited by the financial crisis. Therefore, there is less borrowing (by both lenders and borrowers) and more loan pay offs - over 1 Trillion since 2008. Therefore, the government goes into deficit spending, forcing the Federal Reserve to create money by buying our own Treasuries. No, this system does not make sense! To learn more visit the Monetary Policy Section at www.progressive-economics.com.
Republished with permission from the Valley Dems United Newsletter, Margie Murrary, Editor