Wednesday, August 10, 2011

Paul Krugman and Nate Silver Explain the Historical Errors of S&P; The Firm that Downgraded the U. S.

They Are Right and They Are Irrelevant

Of the three major ratings agencies, only one, Standard and Poor’s has downgraded the credit quality of the U.S. government debt. 

FiveThirtyEight - Nate Silver\'s Political Calculus 
Nate Silver is the premier mathematical analyst of economics and politics and his blog in the New York Times, Five Thirty Eight is the premier source for quantitative information on economics and politics.  Paul Krugman is a Nobel Prize winning economist whose column and blog for the New York Times is the absolute best of its class.  Both have written accurately scathing articles on Standard and Poor’s and why there “credit ratings” are not very credible or reliable.

Mr. Silver concludes in a piece aptly and cleverly entitled, “Why S. & P’s Ratings Are Substandard and Porous”

relying on the consensus of the market is almost certainly better than relying on Standard & Poor’s, whose advice has more often than not led investors toward the losing side of bets.

And Mr. Krugman writes in his regular column

Notoriously, S.& P. gave Lehman Brothers, whose collapse triggered a global panic, an A rating right up to the month of its demise. And how did the rating agency react after this A-rated firm went bankrupt? By issuing a report denying that it had done anything wrong.

S&P Rated Them A - Right Until They Got the F
Photo:  Last Two Employees Leaving Lehman Brothers

And goes on to say

Before downgrading U.S. debt, S.& P. sent a preliminary draft of its press release to the U.S. Treasury. Officials there quickly spotted a $2 trillion error in S.& P.’s calculations. And the error was the kind of thing any budget expert should have gotten right. After discussion, S.& P. conceded that it was wrong — and downgraded America anyway, after removing some of the economic analysis from its report.

Now both of these gentlemen are correct.  But this issue is not financial it is political.  Republicans in 2012 will campaign on the simple theme that under Mr. Obama the U. S. lost its Triple A credit rating.  A true and irrefutable statement of fact, even if the facts are neither justified nor set out by a credible source. 

Such is the nature of politics.

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