2014 downgrade could threaten US economy
The now-infamous rating agency announced Friday that if the American government does not control bipartisan division and rein in its fiscal strategy, the national credit ranking may drop again by 2014. Losing another rank will lead to even more tumult and confusion for the global market, a chilling fact that many Western countries have witnessed as their ratings decline.
Unfortunately, this threat is based in very real concerns. The friction between Democrats and Republicans has made issues like national debt, tax revenue or federal spending almost impossible to discuss — and even more impossible to resolve. Even as a few hopeful numbers indicate an economy ready to begin its recovery, the political future of this country remains bleak.
However, the precariousness of the situation cannot hide the fact that rating agencies like Standard & Poor's exercise an undue amount of influence over national economies.
It seems the real danger nowadays is not from extremists plotting in bunkers, but from accountants behind notepads.
What's so wrong with rating agencies? The primary problem is a lack of competition. About 95 percent of the market for rating agencies is controlled by the "Big Three" — Standard & Poor's, Moody's and Fitch Ratings. Without more companies and more diverse ratings, a great deal of power is held by a very small number of analysts.
Furthermore, the rating that an agency gives a business or a country can only be considered an opinion. It is therefore protected as a form of free speech, leaving rating agencies innocent of all the effects that may stem from that rating — like, say, a market scare. France learned this the hard way when, after Standard & Poor's accidentally downgraded the national credit ranking last fall due to a software error, it saw its market weakened by several points. Ministers called for action against the agency, but with no luck: Legally, the agency was not responsible.
The real icing on the cake, though, is the way in which rating agencies are compensated for their reports. Most of the larger agencies are paid by the very organizations they are ranking — a system that so blatantly corrupt it could cause vertigo. The type of influence this creates between a client and a rating agency has no doubt skewed the numbers before and will continue to do so without intervention.
Ultimately, the U.S. must do something to address the practices of rating agencies by opening the market to more competition and pulling its financial institutions away from their dependence on these ranks. By doing nothing, the country will leave itself open to painful market fluctuations based merely on offhanded threats and high-minded analyses that, in the end, accomplish very little — if anything.
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