The Corner

A Word about the Ratings Agencies

The ratings agencies — all-knowing, all-seeing, omniscient — have weighed in on the U.S. federal debt “crisis,” talking about downgrading U.S. paper in anticipation of a Beltway failure to cut a deal to raise the debt ceiling, thus engendering a “default.”

Oh, please. Can anyone believe that the global capital market cannot distinguish between a Greek-type situation, in which the government literally cannot service its debts, and the U.S. condition, in which a political dispute might delay some interest payments for a few days? The question answers itself. More generally, has there ever — ever– been a case in which Moody’s or Standard & Poor made an announcement in light of information not already known by everyone? The ratings agencies, always closing the doors on empty barns, are virtually worthless, and would be unlikely to survive an elementary market test were it not for some legal requirements that their ratings constrain certain investment decisions.

Moreover, even the underlying premise is incorrect: In the event that the debt ceiling is not increased, federal revenues will be far more than merely sufficient to service the existing debt, roll over maturing debt, etc. Revenues will be sufficient to pay Granny, our servicemen, and other such untouchables. The ethanol producers and myriad other interests might have to extract their snouts from the federal trough for a few days; but so what?

Pay no attention to the ratings agencies or to the media shouting about this early warning of Armageddon to come. America can and will pay its bills, and the real question is whether long-term discipline will be imposed upon the Obama effort to create a federal behemoth so metastatic that the nation will face a Hobbesian choice between massive inflation and a value-added tax. That is the real “default” scenario, about which the ratings agencies are clueless. The Republicans should and must stand firm: Send a small increase in the debt ceiling to the president, coupled with equal or greater reductions in outlays, and force him to sign or veto.

— Benjamin Zycher is a senior fellow at the Pacific Research Institute and a visiting scholar at the American Enterprise Institute.


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