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In today’s looming confrontation the ratings agencies are playing the political role of “enforcer” as the gatekeepers to credit, to put pressure on Iceland, Greece and even the United States to pursue creditor-oriented policies that lead inevitably to financial crises.
These crises in turn force debtor governments to sell off their assets under distress conditions.
In pursuing this guard-dog
service to the world’s bankers, the ratings agencies are escalating a
political strategy they have long been refined over a generation in the
corrupt arena of local U.S. politics.
Insurance companies, pension funds and mutual funds subject to public regulation are required to “take into account” the views of the credit ratings agencies, provided them with a government-sanctioned monopoly.
These agencies make their money by offering
their “opinions” (for which they have never been legally liable) as to the
payment prospects of various grades of security, from
AAA (as secure
government debt, the top rating because governments always can print the
money to pay) down to various depths of junk.
They make money twice off the same transaction when cities and states balance their budgets by spinning off public enterprises into new corporate entities issuing new bonds and stocks.
This business incentive gives the ratings
agencies an antipathy to governments that finance themselves on a
pay-as-you-go basis (as Adam Smith endorsed) by raising taxes on real estate
and other property, income or sales taxes instead of borrowing to cover
their spending. The effect of this inherent bias is not to give an opinion
about what is economically best for a locality, but rather what makes the
most profit for themselves.
Banks pull back their credit lines, and urge cities and states to pay down their debts by selling off their most viable public enterprises. Offering opinions on this practice has become a big business for the ratings agencies. So it is understandable why their business model opposes policies - and political candidates - that support the idea of basing public financing on taxation rather than by borrowing.
This self-interest colors their “opinions.”
The ratings agencies had been giving the city
good marks despite the fact that it had been using bond funds improperly for
general operating purposes to covered its budget shortfalls by borrowing,
leaving Cleveland with $14.5 million owed to the banks on open short-term
credit lines.
It provided the electricity to light Cleveland’s streets and other public uses, as well as providing power to private users. Meanwhile, banks and their leading local clients were heavily invested in Muni Light’s privately owned competitor, the Cleveland Electric Illuminating Company.
Members of the Cleveland Trust sat on CEI’s board and wielded a strong influence on the city council to try and take it over. In a series of moves that city officials, the U.S. Senate and regulatory agencies found to be improper (popular usage would say criminal),1 CEI caused a series of disruptions in service and worked with the banks and ratings agencies to try and force the city to sell it the utility.
Banks for
their part had their eye on financing a public buyout - and hoped to
pressure the city into selling, threatening to pull the plug on its credit
lines if it did not surrender Muni Light.
This threatened to slow borrowing from the banks
(thereby shrinking the business of ratings agencies as well), while freeing
Cleveland from the pressures that have risen across the United States for
cities to start selling off their public enterprises, especially since the
1980s as tax-cutting politicians have left them deeper in debt.
This threat was like a credit-card company
suddenly demanding payment of the full balance from a customer, saying that
if it were not paid, the sheriff would come in and seize property to sell
off (usually on credit extended to customers of the bankers).
They proceeded to pay down the city’s debt by raising its income-tax rate in order to avoid paying higher rates for privatized electricity. Their choice was thoroughly in line with Book V of Adam Smith’s Wealth of Nations provides a perspective on how borrowing ends up with a proliferation of taxes to pay the interest.
This makes the private sector pay higher prices
for its basic needs that Cleveland Mayor Tom Johnson and other Progressive
Era leaders a century ago sought to socialize in order to lower the cost of
living and doing business in the United States.
The banks helped fund Mayor Kucinich’s opponent
in the 1979 mayoral race.
As for Mini Light’s privately owned rival, the
Cleveland Electric Illuminating Company, it achieved notoriety for being
primarily responsible for the northeastern United States power blackout in
2003 that left 50 million people without electricity.
They were eager to upgrade Cleveland’s credit
ratings for doing something injurious - first, borrowing from the banks
rather than covering their budget by raising property and income taxes; and
second, raising the cost of doing business by selling Muni Light. They
threatened to downgrade the city for acting to protect its economic interest
and trying to keep its cost of living and doing business low.
The aim is to carve up national assets, by doing to Washington what they sought to do in Cleveland and other cities over the past generation. Similar pressure is being exerted on the international level on Greece and other countries.
Ratings agencies act as political “enforcers” to
knee-cap economies that refrain from privatization sell-offs to solve debt
problems recognized by the markets before the ratings agencies acknowledge
the bad financial mode that they endorse for self-serving business reasons.
Former Congressional staffer Matt Stoller cites an example provided by Josh Rosner and Gretchen Morgenson in Reckless Endangerment regarding their support of creditor rights to engage in predatory lending and outright fraud.2
On January 12, 2003, the state of Georgia passed strong anti-fraud laws drafted by consumer advocates.
Four days later, Standard & Poor announced that
if Georgia passed anti-fraud penalties for corrupt mortgage brokers and
lenders, packaging including such debts could not be given AAA ratings.
As Rosner and Morgenson summarize:
The ratings agencies’ logic is that bondholders will not be able to collect if public entities prosecute financial fraud involved in packaging deceptive mortgage packages and bonds.
It is a basic principle of law that receivers or other buyers of stolen property must forfeit it, and the asset returned to the victim. So prosecuting fraud is a threat to the buyer - much as an art collector who bought a stolen painting must give it back, regardless of how much money has been paid to the fence or intermediate art dealer.
The
ratings agencies do not want this principle to be followed in the financial
markets.
If honesty and viable credit were the objective
of ratings agencies, they would give AAA ratings only to states whose courts
deterred lenders from engaging in the kind of fraud that has ended up
destroying the securitized mortgage binge since September 2008. But
protecting the interests of savers or bank customers - and hence even the
viability of securitized mortgage packages - is not the task with which
ratings agencies are charged.
The basic conundrum is that anything that interferes with the arbitrary creditor power to make money by trickery, exploitation and outright fraud threatens the collectability of claims.
The banks and ratings agencies have wielded this power with such intransigence that they have corrupted the financial system into junk mortgage lending, junk bonds to finance corporate raiders, and computerized gambles in “casino capitalism.”
What then is the logic in giving these agencies
a public monopoly to impose their “opinions” on behalf of their paying
clients, blackballing policies that the financial sector opposes - rulings
that institutional investors are legally obliged to obey?
Plan B is to foreclose, taking possession of the property of debtors. In the case of public debt, governments are told to privatize the public domain - with banks creating the credit for their customers to buy these assets, typically under fire-sale distress conditions that leave room for capital gains and other financial rake-offs.
In cases where foreclosure and forced sell-offs
are not able to make creditors whole (as when the economy breaks down), Plan
C is for governments simply to bail out the banks, taking bad bank debts and
other obligations onto the public balance sheet for taxpayers to make good
on.
But on the Monday on August 8, following their Friday evening downgrade, Treasury borrowing rates fell, with short-term T-bills actually in negative territory.
That meant that investors had to lose a small
margin simply to keep their money safe. So S&P’s opinions are as ineffectual
as being a useful guide to markets as they are as a guide to promote good
economic policy.
Calling the S&P downgrade a “wake-up call” to deal with the budget deficit, he outlined the financial sector’s preferred solution:
Bank lobbyist Anders Aslund of the Peterson Institute for International Economics jumped onto the bandwagon by applauding Latvia’s economic disaster, a 20 percent plunge in GDP, 30 percent reduction of public-sector salaries and accelerating emigration as a success story for other European countries to follow.
As they say, one can’t make this up.
What else should someone call surging poverty, death rates and alcoholism while a few grow rich?
The ratings agencies today are like
the IMF in
the 1970s and ‘80s. Countries that do not agree sell off their public domain
(and give tax deductibility to the interest payments of buyers-on-credit,
providing multinationals with income-tax exemption on their takings from the
monopolies being privatized) are treated as outlaws and isolated Cuba- or
Iran-style.
Under World Bank coordination, a vast market in national infrastructure spending for creditor-nation bank debt, bonds and exports. The projects being financed on credit were mainly to facilitate exports and provide electric power for foreign investments.
After Mexico announced its insolvency in 1982
when it no longer could afford to service foreign-currency debt, where were
creditors to turn?
There is talk of the U.S. Government selling off
its national parks and other real estate, national highways and
infrastructure, perhaps the oil reserve, postal service and so forth.
Despite the fact that on page 4 of its 8-page explanation of why it downgraded Treasury bonds, S&P’s stated:
He chimed in to endorse the S&P action as a
helpful nudge for the country to deal with its “entitlements” program - as
if Social Security and FICA withholding were a kind of welfare, not actual
savings put in by labor, to be wiped out as the government empties its
coffers to bail out Wall Street’s high rollers.
As its financial editor Francesco Guerrera wrote quite eloquently in the aftermath of S&P’s bold threat to downgrade the U.S. Treasury’s credit rating:
The behavior of leading banks and ratings agencies Cleveland and other similar cases - of promising to give good ratings to states, counties and cities that agree to pay off short-term bank debt by selling off their crown jewels - is not ostensibly criminal under the law (except when their hit men actually succeed in assassination).
But the ratings agencies have made an compact
with crooks to endorse only public borrowers that agree to pursue such
policies and not to prosecute financial fraud.
Cutting federal taxes and Social Security
payments to obtain a more positive S&P “opinion” would give banks an ability
to “pull the plug” and force privatization and anti-labor austerity plans by
refraining from rolling over the U.S. debt - and cutting taxes Tea-Party
style rather than funding spending by taxation on a pay-as-you-go-basis.
Otherwise they would not have the political reliability demanded by the financial sector that has captured the central bank, Treasury and regulatory agencies to gain veto power over who is appointed. Given their preference for debt deflation of the “real” economy - while trying to inflate asset prices by promoting the banks’ product (debt creation) - central bank and Treasury solutions tend to aggravate economic downturns.
This is self-destructive because today’s major
problem blocking recovery is over-indebtedness.
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