Live by the sword of the state…

18 08 2011

When ratings agency S&P downgraded America’s credit rating on August 5, they were merely confirming what was readily apparent: the U.S. is drowning in debt with no relief in sight.

Unsurprisingly, the emperor does not like to be told he is wearing no clothes. The Obama Administration lashed out at S&P for “incorrectly” issuing an unflattering opinion. Treasury Secretary Tim Geithner threw a tantrum. And now, in completely unrelated news, S&P is under investigation for improperly assessing subprime mortgage risk during the housing bubble. Though it must be noted that this investigation was launched before the downgrade, S&P has just given the government an excellent reason to not simply look the other way.

Call the Obama Administration’s response to S&P’s downgrade perfunctory political blustering; call it naked thuggery. Call it what you will – in reality, S&P is merely experiencing the downside risk of doing business with the government. In 1975, a select group of ratings agencies – including Moodys, Fitch’s, and S&P – were granted special government recognition.

Today, there are other ratings agencies (some of whom beat S&P to the downgrade punch), but because they do not enjoy the same federal stamp of approval as the Big Three, they often suffer from a perceived lack of legitimacy. A series mergers and consolidations coupled with their elevated status led to the Big Three growing to dominate roughly 95% of the ratings market.

Of course, this cushy position comes with a few strings attached, as S&P is now coming to realize. But these pockets of government privilege exist in every sector of the economy – and they rarely end well for industries in question.

We need not leave Detroit to witness the pitfalls of this private-public dynamic; the saga of post-bailout General Motors is an excellent case in point. Recall the firing of Rick Wagoner, the redistribution of GM assets to the UAW, and now, the revelation that yes, the Obama Administration did decide what type of vehicles a nominally private corporation was to produce. GM may have survived by the grace of the government, but it didn’t survive with its autonomy intact.

And that, ultimately, is the lesson private industry must take to heart: those who live by the sword of the state and enjoy its associated privileges should not be shocked to die by that sword when the fickle political winds shift.

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