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Standard & Poor's Tugs on Superman's Cape

letsgetitdone's picture

Last December, my friend beowulf had this to say at the time Moody's began to make noises about downgrading US debt. He said:

”I don’t think we’ll see Moody’s or any other rating service based in the US ever downgrade US Treasuries. It would cause a tremendous amount of financial loss and would leave Moody’s and its executives exposed to criminal prosecution. If I were Moody’s general counsel, I’d tell the CEO in no uncertain terms, Do Not Tug On Superman’s Cape.

14th Amendment, Sect. 5

”. . . .the validity of the public debt of the United States, authorized by law… shall not be questioned”

Criminal Mischief statute

18 US 1361. Government property or contracts

"Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both."

But, Standard & Poor's has decided to tug on Superman's cape by downgrading US debt to Double A status for the first time in history. Don't get me wrong, I'd love to see S & P executives frog-marched out of their offices and imprisoned for a year for violating the criminal mischief this statute. After their role in the Crash of 2008, that's the least they should get from an outraged populace. However, I have to say that their action will be of little or no consequence if the Treasury responds correctly to their foolishness.

Contrary to popular belief, and also the apparent belief of this Administration, ratings agencies and the bond market itself don't actually control the interest rates that Governments like the United States must pay. Sure, they will determine interest rates if the Government sits idly by and lets them drive the market.

However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating bank reserves. Specifically, one way to do this (As Warren Mosler suggests), is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That's basically how the Japanese keep their bond interest rates near zero, and that's how we can do the same.

Alternatively, another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for the Treasury to stop issuing debt in advance of deficit spending. If we did this, the credit rating agencies and the interest rates in the bond market would be irrelevant from that day forward. And we can do it using Proof Platinum Coin Seigniorage (PPCS) to generate revenues to pay back debt, and deficit spend current or future appropriations.

In short, the bond markets and the ratings agencies aren't in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. So, their tug on Superman's cape is of no consequence for us, directly.

On the other hand, the ratings agencies are currently hurting US states, and Eurozone nations with their deeply corrupted ratings processes and judgments. We should take very seriously Bill Mitchell's Conclusion in his post on outlawing the credit rating agencies:

"The real question that I always ask is why governments allow these undemocratic criminal organisations to exist. They can just outlaw them. This would force the corporate players to create better ways of informing the markets about their risk characteristics and leave governments alone to do what they are democratically elected to do – advance public purpose.

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Submitted by lambert on

... and the (newly emerging) State is located elsewhere than we think, somewhere in the (neo-feudal) operations of the network of trans- or post-national rentier elite, it makes perfect sense that the ratings agencies wouldn't be subject to national law.

letsgetitdone's picture
Submitted by letsgetitdone on

But we haven't had a change in "the Constitutional Order," we just have a kleptocracy doing all manner of illegal things and getting away with it, because they have the power to undermine the Constitution and ignore the law. We need frog marches and orange jump suits for them. The sooner, the better.

letsgetitdone's picture
Submitted by letsgetitdone on

but I think not quite. If the constitutional order has not changed, then the new order where power is in the hands of the oligarchy, is illegitimate, which means that there's more chance of breaking the power of the oligarchy than there would be otherwise.

Submitted by lambert on

... so far as we are concerned. Perhaps the elite feel it is more static than it is. (We have a regime of secret laws, remember, and there are the trade treaties as well....)

Submitted by jm on

As much as I respect beowulf's take on fiscal issues, his metaphor here is not a good one. Think, rather, of the US as a very large, very aggressive dog that is being baited by the rating agencies pulling its tail. You'd think this would annoy the one holding the dog's leash, but in this case the dog's owner is encouraging the dog baiters, indeed, may even be paying them to get the dog enraged. The point is to keep everyone in range of the dog's jaws, should the dog be released, frightened (and confused) and submissive to the dog's owner.

This all goes to what lambert is saying above. Sovereignty does not lie with the people, but with the oligarchy who own the process through which government policy is set. This has been true for a long while, of course, what's new is how the oligarchy now is flaunting the fact so baldly.

While the media are portraying debt/deficit conflation as a win for the proponents of smaller, more limited government, the question that isn't asked nearly enough is who benefits materially and how?

My understanding of finance is sketchy at best, but this looks like a no-lose situation for people who store wealth in government bonds. If interest rates go up bondholders benefit from a higher return. If rates remain more or less stable at a low level, ala Japan, but the economy continues to sputter as a result, then bondholders benefit due to low inflation. Their investment retains more of its value over time. If the economy tanks, it's even better. Deflation would add value to their investment since their return would have more purchasing power.

According to this source (Table 2), as of 2007 the top one percent of the wealth distribution owned 60.7% of all financial securities, which include government bonds (this does not include stocks which are accounted for separately). The top ten percent owned 98.5%. I suspect the Venn diagram of bondholders and members of the oligarchy approaches the appearance of a single circle. If this is the case, then the economic outlook for the rest of us is not promising by any stretch.

I'd be happy to be shown where I'm mistaken here.

letsgetitdone's picture
Submitted by letsgetitdone on

However, the US is still Superman if it can free itself from the silly constraints imposed by various Congresses.

1. As I say in this piece, the US can control interest rates contrary to the deisres of the bond markets and the vigilantes.

2. The US can de-certify the ratings agencies and also prosecute Rating agency executives for fraud. And

3. The President can do this, and kill austerity for good.

So, I think that's Superman!

Submitted by regulararmyfool on

There is a rumor going around that on July 25, some bets were placed in the big casino of Wall Street. The rumor is that it was $1 billion that the government bonds would be downgraded.

Wonder if the S & P crooks had a part in something like that?

An honest Justice Department would investigate, but we have Holder, worse than useless. Prosecutions of huge robberies by Wall Street and the big banks - none.
Prosecutions of low level marijuana users - thousands.

Submitted by Hugh on

I agree this is all manufactured and that the government has the ability pay debts, control interest rates, and deal with the ratings agencies. But the goal of our elites is not to fix anything that might benefit us but rather to orchestrate more and better looting for them. A credit downgrade is really about adding to the kleptocratic rationale to loot Social Security, Medicare, and Medicaid.

As for the government having the tools but not using them, I am reminded of Hannah Arendt's description of totalitarianism and the Nazi regime. Hitler never dismantled the structures of the German government and republic. He simply ruled without reference to them. (He of course took this much further both with regard to the party and even elites within the party) I think we are seeing something similar with regard to our kleptocratic elites vis-à-vis our laws and Constitution. They keep the forms but invest them with no power.

beowulf's picture
Submitted by beowulf on

Of course the Administration won't do anything about it, but yes it could file charges under the malicious mischief statute (18 USC 1361) as well as, surprisingly enough, the Patriot Act. [Via]:

Title 18, United States Code, Section 1361 is a general statute that applies to actual destruction of government property when a more narrowly-tailored statute does not apply....

Section 1361 is a designated "Federal crime of terrorism" if the offense is "calculated to influence or affect the conduct of government by intimidation or coercion, or to retaliate against government conduct . . . ." 18 U.S.C. § 2332b(g)(5). If such is present, the FBI is the primary Federal investigative agency. See 18 U.S.C. § 2332b(f).

[See also].

And of course, Obama could reverse the decision by brute force if he wished under two different national security statutes, the Defense Production Act and the International Emergency Economic Powers Act (note, at link I accidentally dropped "Emergency" from Act's title).

But none of this matters because nobody pays to watch the Washington Generals win! The wild card in all this, Meadowlark Lemon's Bucketeers, if you will, is if New York Attorney General Eric Schneiderman steps on the court (or rather, goes to court). Possible charges [under NY State law] could be:

S 145.10 Criminal mischief in the second degree. A person is guilty of criminal mischief in the second degree when with intent to damage property of another person, and having no right to do so nor any reasonable ground to believe that he has such right, he damages property of another person in an amount exceeding one thousand five hundred dollars. Criminal mischief in the second degree is a class D felony.

S 135.60 Coercion in the second degree. A person is guilty of coercion in the second degree when he compels or induces a person to engage in conduct which the latter has a legal right to abstain from engaging in, or to abstain from engaging in conduct in which he has a legal right to engage, by means of instilling in him a fear that, if the demand is not complied with, the actor or another will… 2. Cause damage to property; or 3. Engage in other conduct constituting a crime… or 9. Perform any other act which would not in itself materially benefit the actor but which is calculated to harm another person materially with respect to his health, safety, business, calling, career, financial condition, reputation or personal relationships. Coercion in the second degree is a class A misdemeanor.

S 135.65 Coercion in the first degree. A person is guilty of coercion in the first degree when he or she commits the crime of coercion in the second degree, and when: 1. He or she commits such crime by instilling in the victim a fear that he or she will.. cause damage to property… Coercion in the first degree is a class D felony..

S 105.05 Conspiracy in the fifth degree. A person is guilty of conspiracy in the fifth degree when, with intent that conduct constituting: 1. a felony be performed, he agrees with one or more persons to engage in or cause the performance of such conduct… Conspiracy in the fifth degree is a class A misdemeanor.

S 240.50 Falsely reporting an incident in the third degree. A person is guilty of falsely reporting an incident in the third degree when, knowing the information reported, conveyed or circulated to be false or baseless, he: 1. Initiates or circulates a false report or warning of an alleged occurrence or impending occurrence of a crime, catastrophe or emergency under circumstances in which it is not unlikely that public alarm or inconvenience will result… Falsely reporting an incident in the third degree is a class A misdemeanor.

S 105.00 Conspiracy in the sixth degree. A person is guilty of conspiracy in the sixth degree when, with intent that conduct constituting a crime be performed, he agrees with one or more persons to engage in or cause the performance of such conduct. Conspiracy in the sixth degree is a class B misdemeanor.

Since debt ratings certainly qualify as investment advice, New York’s very broad Martin Act (“the act’s powers exceed those given any regulator in any other state.”) is also available to Schneiderman.

Submitted by lambert on

and I tinkered with the formatting and added a link to the malicious mischief statute, hope that's OK.

* * *

I'd argue the ratings agencies are not prosecuted not because the Obama administration is spineless or even corrupt, but because the transnational elite of rentiers are grappling to have the sovereignty that the nation state once had.

beowulf's picture
Submitted by beowulf on

Long term, clearly there's a need for a "Consumer Reports" style rating corporate or state bond offerings, there's no reason for the US or any sovereign govt to be rated). If Congress wasn't completely bought off they'd delegate the task to a single nonprofit rating agency (just as the official recession start and end dates are pegged by a nonprofit- the National Bureau of Economic Research) by an annual registration fee.

lizpolaris's picture
Submitted by lizpolaris on

question - why is it a bad thing to have an independent ratings agency? Govt bonds are not the only things they rate. If corporations are allowed/expected to inform the markets 'about their risk characteristics' I'm fairly certain that the public will not be better informed. What makes the ratings agencies inherently criminal? I'm not following the logic here.

Submitted by lambert on

I can't find the post from Yves I want on this, but back in the day, like the 1980s, when they stuck to stuff that could be researched, like corporate or municipal bonds, things were OK. But when it comes to rating derivatives it's not even clear such a thing is possible (and there are big issues with fraud, as well).

Also, IIRC, the sovereign ratings aren't funded, so there's no staffing for research. I've heard the S&P downgrade described as an Op-Ed, and from the excerpts I've read, it basically is.

UPDATE And what Beowulf said, below.

beowulf's picture
Submitted by beowulf on

One of the factors to the mortgage crash was because rating agencies were corrupted by private clients who paid them for AAA ratings (Al Franken's amendment to Dodd-Frank forbidding bond issuers from selecting their own rating agency naturally was diluted drastically before final passage).

What's going on here isn't about this pay to play rating scam per se, other than it seems S&P has the balls to attack our Public Credit as a means to push back at efforts by the SEC and other federal regulators to tighten up on private sector ratings.

Uncle Sam is not a client, and since it doesn't actually have to borrow, a rating cut can't really hurt govt operations (other than to further the impression that the US Govt is both weak and incompetent). However many financial institutions and other fiduciaries have legal requirements that they invest only in AAA securities. Indeed, S&P has stated previously that no US financial institution can have a debt rating higher than the US Govt, so we may see a slew of banks and insurers hit with rating cuts on Monday. I guess we'll have to stay tuned to see what happens next.

Submitted by lambert on

... a "dysfunctional" host is a host that cannot deliver whatever sustenance the parasite craves -- rent, in the case of our body politics.

Isn't an across the board ratings downgrade a rent hike?

beowulf's picture
Submitted by beowulf on

S&P may have screwed the pooch for itself and the other rating agencies. They're reliant on Congress for political protection and on Wall Street to pay their fees. If, as they expected, S&P starts downgrading US financial institutions, you're going to start seeing political pressure to genuinely reform the rating system.

And to clarify what I said above-- the rating system (vs "rating agencies") were corrupted by the clients paying for AAA ratings. There's no telling if the clients solicited the rating agencies or vice versa. Since they both agreed ("conspired" if you will), legally its irrelevant whose idea it was first.

Turlock