Monday, August 8, 2011

What is Standard and Poor's?

Standard and Poor's (S&P) is a private company, which is a division of the McGraw Hill Company. Among other things, S&P is one of the "big three" credit rating companies, which also includes Moody's and the Fitch Group (who have not downgraded US credit). Ostensibly, credit rating companies assess the "credit worthiness" of a particular borrower by determining her ability to pay back a loan.

Like many other features of contemporary capitalism, S&P is an unelected, democratically unaccountable entity that has, as recent events have shown, a large amount of influence over political and economic matters. And, like other democratically unelected entities with enormous influence over political and economic matters, S&P is often draped in the apolitical language of "technical expertise". This is a key cornerstone of neoliberal ideology. S&P, just like the IMF and the WTO, are legitimated by reference to technocratic expertise, not to a democratic will. According to their official self-image, such institutions are neutral bodies filled with smart technocratic experts who have administrative power over purely non-political matters. In the case of S&P, the self-image is one of a neutral, impartial bystander who merely deals in "information services".

But is S&P really just a neutral assemblage of impartial experts and wonks who have no political or economic interests or power of their own? Of course not. As Paul Krugman recently pointed out, "it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?". S&P, like other elements of the financial sector, was a substantial player in the 2007 economic meltdown, fomented in part by labyrinthine non-sense like "collateralized debt obligations". As Krugman puts it, "S.& P., along with its sister rating agencies, played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste." Worse still, "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."

Now Krugman mainly intends to impugn the credibility of S&P's self-image as a competent body of experts, but in impugning their credibility he unintentionally sheds light on S&P's tendentious political/economic leanings. S&P wasn't merely making poor judgments in giving AAA ratings to mortgage-backed securities, it was fulfilling a determinate function in a financial system hell-bent on massive, short-run profits. This evinces an alleigance to a particular sector of the ruling class, the financial sector (or, if you like, "finance capital"). That's anything but neutral. It is no exaggeration to say that S&P is an instrument for finance capital (e.g. to assess risks from its own narrow perspective, to exert pressure to push for its interests in political and economic contexts, etc.).

So what is the reasoning behind S&P's decision to downgrade the US government's credit-worthiness?

First, let's look at their own words. S&P's report said that "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." What the hell does "fiscal consolidation" mean? Who knows, but I think it's just short hand for austerity. In the view of S&P, the brutal regime of budget cuts soon to be imposed was not enough to "stabilize the Government's debt dynamics". In other words, S&P is arguing that more cuts were needed to enable to the US to better pay off its debt.

Again, this is extremely tendentious, as Krugman points out. In order to make that claim, S&P has to commit itself to controversial and politically conservative neoliberal theories which, if recent history is any guide, have little grounding in fact. As is well known, massive cuts (to the tune of several trillons) in social spending stand to further cripple the economy, thus reducing government revenue and, hence, its ability to pay down its debt. This completely contradicts the "cut, cut, cut" line pushed by S&P and others on the Right. As Richard Seymour explains:
As we've already seen in Ireland, Greece and Spain, the attempt to pay [government debt] off by cutting spending only further weakens economies that depend significantly on such investment, thus reducing the revenues needed to pay any deficit. It can only contribute to pressures toward a 'double dip', as the Eurozone crisis brings us back to 2007/8. Corporate investment is weak, job growth is terrible, wage growth ditto, and consumer spending is fragile because households are still up to their ears in debt. It would take very little to tip the economy back into crisis. What's more, Wall Street traders appear to be perfectly well aware of this weakness, as they have been panic selling stocks since the debt deal was reached.
This is basically another phony crisis manufactured by a specific sector of the ruling class in order to create the conditions in which massive austerity for ordinary Americans can be passed off as legitimate. In Seymour's words, it is a "raw exertion of class power", a threat leveled at society meant to push hard for deeper cuts to working-class living standards.

Just ask yourself: how on earth is it legitimate for an unelected, democratically unaccountable body to have such leverage over the conditions of life for the vast majority? This is the reality of capitalism: a small, unelected body of elites enjoy concentrated economic power owing to their ownership and control of the commanding heights of the economy. A radically democratic social order, a socialist society, would mean an end to all of this. It would mean bringing every basic social institution that affects the life prospects of citizens under the democratic control of the community. It would mean subordinating the workings of the economy to human development, rather than the other way around. No more technocratic experts lording over us, no more ruling elites enjoying private ownership of the basic structure of society.

So this downgrade is, as we've noted, a massive exertion of class power. But what is its goal from the perspective of finance capital? Pabhat Patnaik's view is as follows:
While many progressive economists have been rightly emphasising that in the midst of a recession a large fiscal deficit is necessary for stimulating the economy, and that it cannot possibly do any harm, not even on the inflation front (since the inflation in the US, not alarmingly high in any case, is not caused by excess demand), the financial interests and the media controlled by them have been systematically wanting a cut in the fiscal deficit. This is hardly surprising: finance capital is always opposed to any form of State activism except that which promotes its own interests. It propagates not just the view that what is good for finance is good for the economy, but an even stronger version of it: only what is good for finance is good for the economy.
I think this is key. Finance capital loves government intervention and spending when it serves its own interests, i.e. when it involves mobilizing billions to bail out dysfunctional banks and insurance companies. But when it doesn't serve their short-term interests, spending and government activism are bad. Here threats are in order (even if it means leveraging the debt incurred by bank bailouts to force through cuts to the standard of living for the many). We have to interpret the downgrade, I think, as a maneuver by finance capital to secure short-term gains at the expense of long-term stability. In Seymour's terms, "Of course the hedge funds, ratings agencies, banks etc are less than concerned about the effect of underfunded infrastructures such as health and higher education. As far as they're concerned, spending is too high and they don't much care how it comes down. Theirs is a very narrow perspective." It's obvious that they do not even know how to solve the economic crisis from their own perspective. It's as if they are only interested in gathering what they can in the short term, only to "raise the flood barriers, hoard their capital, let others take the pain, and allow governments to police the inevitable fall out."

What are the solutions to this mess? Krugman blames everything on the Republicans and the Tea Party. In his world, were it not for the simple ignorance of these groups, the progressive soul of the Democratic Party could finally shine through and an era of Keynesian reformism would be upon us. Krugman's world, however, has little in common with the real one on this score. Krugman asks why we don't raise taxes on the wealthy and implement a single-payer heath system, and then answers his question by citing "death panels" and Republicans as the culprits. This is non-sense. The Democrats had super-majorities in the Senate as well as crushing majorities in the House, a popular President and political capital to boot. The subsequent health care shit show that followed was almost entirely the Democrats' fault. Democratic Senator Max Baucus, we do well not to forget, received the most campaign contributions from the insurance industry of any member of the Senate. He was, of course, the chair person who oversaw the writing of the bill that subsequently passed. Moreover, Obama started off in the campaign with a right-wing position on health care. He defended RomneyCare from the get go, nothing more. Moreover, he and other leading Democrats loudly announced at the beginning of the health care "debate" that "single payer is absolutely off the table". It wasn't even discussed as an option. We weren't even to utter the words in the halls of power. Why not? Because the Democrats are not a progressive party. They defend the interests of the rich. Most of the party's big wigs are more in favor of cutting existing social programs than in expanding them. Obama's advisers are almost entirely ruling class alumni, who are sure to find a niche back in the private sector after their role as a "public servant" is finished. Bill Clinton, let us not forget, is a long-time advocate of Social Security privatization. Are you kidding me with all this "blame the Republicans for everything" nonsense? Take a candid look at the Democratic Party's actions and tell me what you see. It's not pretty.

Progressives should divest from the Democrats and discontinue verbal support, financial donations and volunteering. Join a USUncut chapter instead. Participate in a grassroots social movement. Join a Left organization that has a genuine oppositional perspective. It is clear that the Democrats are a political dead end. You give them the biggest majorities anyone has enjoyed in a generation, and they shit the bed. It's time to rebuild the Left in this country.

1 comment:

JM said...

Hmm and to think Krugman was critical of Obama just last year.