How the Ratings Agencies Complicit in the Housing Collapse Are Actually Saving the World

by Darwin on January 16, 2012

This is not a theme you’ll see in the mainstream press, but it’s the truth.  Unfortunately, you can’t prove what “might have been” if it doesn’t come to be, but read on and tell me where I’m wrong.  The same ratings agencies that are fodder for everyone from Obama to European leaders for their utter incompetence and complicity in rating garbage subprime loans AAA while profiting handsomely from burying their heads in the sand will actually end up saving western society as we know it for future generations.  Here is the premise at a high level:

  • The United States, old Europe and Japan are completely drowning in debt – not just current debt, but future debt obligations.  Deficits have been allowed to go unchecked for decades until very recently when ratings agencies finally took the unprecedented step of downgrading these nations that have largely set the tone for how humans want to live.  You know, those things like freedom, democracy, capitalism, a high standard of living.  If the alternative is an “Arab Spring”-like influence spreading throughout the world where we see Islamic law enacted or the anarchy and socialism much of the Occupy Wall Street movement is calling for, I’ll take what we have now.
  • The fastest growing nations are not what most western inhabitants would aspire to.  Unfortunately, China’s economy is set to eclipse that of the US in our lifetime and their ownership of US debt went from a mere 6% ten years ago to around 30% today and that ratio is accelerating.  That is absolutely pathetic.  As China’s ownership of our debt increases, so does their influence.  Do you want China influencing our future?  They are.  China owns us.  As they steal our intellectual property and dance around currency, military and political issues dangerously close to the precipice, the US stands idly by…acknowledging that in fact, we are increasingly at their mercy.


(click to enlarge)

China owns us


  • Nothing, and I mean nothing, will stop western societies from spending more than they can afford other than a crisis.  And a crisis is what they got.  Confronted with skyrocketing interest rates, most European nations have finally embarked on austerity measures to reign in their debt obligations.  But it’s too little too late.  See, the US and Europe have had years of false prosperity by basically artificially inflating GDP (and hence, standard of living) by borrowing money from future generations.  So, when the binge ends and in fact, starts to reverse, the net effect is economic contraction.  It’s like withdrawal for a common drug addict.  Going cold turkey is painful.  Well, we’re seeing that in Europe now and America is getting a pass for now since there’s no other “stable” economy to rely on as a reserve currency.
  • So, we see multiple regimes overthrown in the Middle East with probably even more chaos and uncertainty in the regions than under the prior despots, we see Europe in decline and America stands at a cross-roads.  Mend its mess or kick the can.  Our current leaders are completely content with kicking the can down the road.  After all, doing something bold, brave and painful with no immediate payoff to voters doesn’t get you reelected.  So, barring any superhuman influence otherwise, western societies are doomed to collapse.
  • But wait!  There is an influence that can force change.  Since politicians won’t change, and those who elect them focus on abortion, gun control and religion as key voting criteria instead of fiscal prudence, Americans and Europeans certainly aren’t voting in politicians with a laser focus on debt.  They tend to vote for whoever promises them the most or takes a stand on something they find dear – social issues.  In the face of collapse of humanity as we know it if western societies fall, social issues don’t matter.  But we continue to vote with our hearts instead of our heads.  What can save us?  The credit ratings agencies.
  • As absurd as it may sound, the agencies may well save the world.  By downgrading debt on the US and as recently as this weekend, 9 European nations, it forces a wakeup call – and ACTION. (more on the pressure created by the downgrade in Europe).  See, as these downgrades continue, it will force interest rates up even further and the only way to assuage the agencies into restoring AAA (which will take years, but look how long we all acted like B+ borrowers) will be to demonstrate the fiscal prudence commensurate with a top rating.  We need to see deficits DECREASING, not considering a 3% deficit as “painful cuts” and “balancing the budget on the backs of working class Americans”.  The time to cut the BS is now.  No more sacred cows and special interests on either side.  Everyone benefited from years of false prosperity and hence, everyone needs to sacrifice now to get us back on track.
  • The argument that the ratings agencies have no legitimacy because they got the housing crisis wrong is absurd.  If that were the case, then WHO will keep these economies in check?  The agencies seek to be ahead of the bond market.  They warn, they issue reports and when countries ignore them (as the US, Japan and Europe have), they get the downgrade they deserve.  There is no other force for fiscal responsibility besides the ratings agencies and the bond markets.  And by the time the bond markets have spoken, it’s too late, like it is in Italy, Greece and more.
  • I applaud the debt downgrades in Europe, the US and Japan.  I believe this will force the change needed to right the ship.  Because democratic voters aren’t.  And leaders aren’t.  The ratings agencies are humanity’s last hope.


What Are Your Thoughts?

Should We Care About Debt, Ratings and Interest Rates?


{ 16 comments… read them below or add one }

PK January 16, 2012 at 10:58 am

Darwin, I hope you’re right. In Democracies, the other side of the coin would be to ‘shoot the messenger’, in this case finding a way to sanction the ratings agencies for having the gall to cut a country’s debt. The same thing happens with stocks – a rater will find their access diminish when they stick a bad rating on a stock.

From a country? It’s even worse since a country can pass laws that affect the ratings agency. Anyway… I hope the messengers can stay un-shot, because they are really just reflecting reality after bond yields have already soared…


Darwin January 16, 2012 at 11:06 pm

I’ve been amused and frustrated by the outrage of politicians in both the US and now, Europe for the cuts. All of the sudden, they’re now questioning ulterior motives, the legitimacy of the agencies and whatnot. Of course, nobody had shit to say before housing collapsed. But now that their own dirty laundry is being aired, they in fact, do want to shoot the messenger.


MoneyCone January 16, 2012 at 1:49 pm

What the credit rating agencies did (or not do) with sub-prime lenders is just criminal. But the subsequent fallout was also a wake-up call for rating agencies and I’m glad they cut the rating for nations that deserved a cut.

You can postpone bad news only for so long.


Darwin January 16, 2012 at 11:08 pm

Yeah, plenty of blame to go around and not a single prosecution. No word yet from the democrats that pushed loosening lending standards to satisfy their social experiment to get everyone a home, regardless of whether they could pay for it or not. It was a long series of screwups and involved numerous politicians, regulatory agencies, companies and individuals. Total mess. But at the moment, these agencies are the only one keepin’ the sovereigns honest. The politicians won’t. And the constituents surely won’t (to wit, mass protests over austerity in UK, Greece, Italy and soon…. France).


Andy Hough January 16, 2012 at 2:12 pm

Maybe they learned from the housing crisis. I do agree that it is good that they are downgrading nations’ credit now. I hope it leads to a wake up call.


Darwin January 16, 2012 at 11:09 pm

Europe closed up today, the first trading day after the announcements. Interesting.


AverageJoe January 16, 2012 at 5:06 pm

I didn’t know where you were headed at first, but I completely agree. I think they were WAY WAY late to the party, though. Should have downgraded the debt much sooner than they did (and had the data to do it….just didn’t pull the trigger, IMO).


Darwin January 16, 2012 at 11:10 pm

I agree with the timing (shoulda been sooner). They warn, warn, warn, leaders balk, and finally they downgrade. I hope they downgrade each country (including the US) that doesn’t put in place a legitimate deficit reduction plan once per year. After another 4-5 years of this, they’ll all be junk.


101 Centavos January 17, 2012 at 8:12 am

Anyone dealing with debt-based currencies (err, that would be the whole world population) should care about the debt situation. Not in a burning, I-must-take-action-now! fashion, but rather in a mindful, protect-your-assets and wait to see what happens.

Good article. About time the ratings agencies did what they’re supposed to do.

[ The Chinese are using their surplus dollars to finance their deficits. Neat! ]


Darwin January 17, 2012 at 10:48 pm

It was interesting to hear all the talk about a hard landing in China because their GDP came in at “only 9%”. WTF is that. People call that a deceleration and warning? Imagine if the US was growing at half that rate?


Jeff @ Sustainable Life Blog January 17, 2012 at 5:36 pm

Interesting take on this. I think that because the governments deal with larger amounts of cash and more borrowing power, they can paper over deficits longer than the average family can. Eventually though, someone has got to pay the piper – you cant continually transfer something to the next generation


Darwin January 17, 2012 at 10:48 pm

That’s their goal. Punt to the next generation since the next election is only a year away.


Martin January 17, 2012 at 6:34 pm

Absolutely correct Darwin. I recall the huss and fuss when the government shutdown was imminent. I just kept thinking to myself, “This would actually be a good thing in the long run…”

I hope to see an article regarding the soon to expire Payroll Tax Cut as well.


Darwin January 17, 2012 at 10:49 pm

Well, they went and extended the payroll tax cut again. here’s the scoop:

But we do have the debt limit hitting the ceiling again (haha; months ahead of when Obama had projected last go-around). Always the circus…


Martin January 18, 2012 at 7:34 pm

Oh yeah, thats the exact date I was referring to. It didn’t make much sense that it was for two months extra…I guess that’s the peddling and compromise we don’t always hear about.


JT January 18, 2012 at 2:15 pm

I do think it’s funny to see the candidates elected as part of the so-called “Tea Party” have turned to social issues. You know, because things like gay marriage, abortion, and Rick Perry’s make-believe “war on religion” are by far the biggest problems we have right now.

I really don’t care about those issues until we can pay the bills. They’re very obvious distractions used to rally a voting bloc that would have voted for the GOP anyway. I should be fair in saying that the debate does go both ways. Pro-choice people are just as likely to put social issues over the fiscal issues; I just think they’re quieter about it.


Leave a Comment

{ 1 trackback }

Previous post:

Next post: