On April 25th of this year, our ever-so-competent Treasury Secretary Timothy Geithner was asked on Fox News whether U.S. treasuries could ever lose their AAA rating.
Geithner’s response: “No risk of that.”
Less than four months later and he’s made a Ben Bernanke of himself. Here’s the full inteview:
Watch the latest video at <a href=”http://video.foxbusiness.com”>video.foxbusiness.com</a>
Nice call Tim. Indeed, S&P wasn’t even the first rating agency to downgrade U.S. debt. Less than a month ago, Egan-Jones downgraded U.S. debt to AA+ as well. Egan-Jones is a smaller firm that was just recently recognized by the SEC. Before it was recognized, Egan-Jones was used by investors to gain insight into the market. And those investors were the one’s who actually funded the agency, in contrast to being funded by the firms that sell securities (like the big three credit rating agencies do). Isn’t that a novel concept? Having rating agencies without a massive conflict of interest. How surprising that the government created this conflict of interest in the first place. Furthermore it’s no surprise that Egan-Jones predicted the housing crisis while the big three did not.
Regarding U.S. debt, Egan-Jones described the situation as follows in their press release:
Real GDP increased at an annualized rate of 4.0% in Q1 2011, following an increase of 3.5% rise in the prior quarter. Personal consumption expenditures, exports, and nonresidential fixed investment contributed positively to growth during the quarter. Meanwhile, imports rose sharply. In the March 2011 quarter, trade in goods and services resulted in a deficit of $562B, many because of the high price of petroleum. However, the major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada’s 35%. Nonetheless, since the US’s debt is denominated in dollars, a hard default is unlikely.
And now S&P finally came around to see the light. Or perhaps, given that they have an inherent conflict of interest and have been wrong about just about everything else, this means U.S. debt is a bit better than we thought.
Regardless, Tim Geithner, like usual, was wrong. Why anyone takes the likes of him, Ben Bernanke, Barack Obama or anyone from the old Bush cabinet seriously anymore is simply beyond me. Perhaps we should just listen to what they say, and expect the opposite. Someone should run an empirical study to see how accurate that type of approach would be. I bet it would be stunningly prescient.
Furthermore, on one final note; one has to wonder what Obama and your standard MSNBC media pundit would be saying if we hadn’t raised the debt ceiling and then, all of a sudden, the Dow Jones dropped 700 points and U.S. debt was downgraded. Gee, I wonder…