Sunday, April 24, 2011

Lower Outlooks

The S&P's decision to lower it's outlook on U.S. debt is being variously described as a "threat," a "wake-up call," and a "warning shot across our bows." Perhaps without intending to, all of these phrasings suggest an element of power and deliberate manipulation on the part of the S&P. And what I find fascinating, and fairly shocking, is that no such well-intentioned warning was deemed necessary for private banking institutions when, no long ago, the S&P revised their rating methodology to include the assumption that banks will always be bailed out by the government.

I think the tension between those two judgments ought to be given a great deal of attention. Isn't there something seriously wrong when private investment banks can be considered essentially immune to default, but national treasuries cannot? Placing these two pronouncements by the S&P in context with each other, can there be any doubt as to where the greater share of the power in this country resides? Who's in charge when it is explicitly assumed that the government will bail out financial institutions, while it is accepted that the government must stand or fall on its own, with no expectation of the financial sector to float it the cash to keep running?

I'm looking for one of two breaking points from this. Either we fully acknowledge the injustices of the economic imbalance of which this is a part, and move to change the structure of a system that demands that governments take a back seat to financial systems, or we sit back and watch as a decreased rating for the government undermines the bailout assumption and drags down the ratings of the banks until both institutions are fractured and depleted.

Those are just the breaking points, though. The more likely outcome, as always, is the preservation of the status quo, which in this case means that the government will agree to raise its debt ceiling again, and Congress will ram through some dubious budget compromise to capitulate to the "threat" that has been issued by the S&P, which is, apparently, powerful enough to easily push around the entire federal government.

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