The theme running throughout S&P’s analysis is the breakdown in the ability of the Democratic and Republican parties to govern effectively.

The agency said that policymaking and political institutions had weakened in the past few months “to a degree more than we envisioned.” This has major implications for the nation’s budget and debt problems.

I`ve blogged about the companies that rate bonds before. I`ve questioned the credibility of their ratings as predictive devices and have suggested that the only reason people pay any attention to these ratings is that there are US laws that force them to do so.

I intend to write a longer post about this in the near future. Right now, I would like to share a few quick thoughts or questions.

1)      Will other ratings agencies follow the lead of S&P?

2)      How will China react to his downgrade? What does this mean for Niall Ferguson’s concept of “Chimerica”?

3)      Will the US government try to punish or at least spy on the personnel of S&P? I can imagine some sort of informal punishment being meted out for this. The Berlusconi government in Italy has used the police for the harrass the employees of S&P and Moody`s in Milan. The apparent goal here was to intimidate the firms into keeping Italy`s rating high.

4)      Who is David Beers, the individual mentioned above? Is he a US citizen, a Briton, or someone else? If he is American, did he vote for or against Obama on 2008? We do know that he lives in London and once attended the LSE, but aside from that the public knows little about him.

Bond rating agencies have great deal of mystique around them because we don’t know much about the handful of individuals who actually make up the ratings.  Moreover, the bond rating agencies express their opinions in the form of quantitative scores, which seem very objective and scientific.

I’m not saying that David Beers is any more or less fallible than the next guy, but it is important to keep in mind that he is just one human being. Like all of us, he can be subjective. Can an American really be objective in rating the bonds of his own country? And if Beers is British, is he really qualified to speak about American politcs ?

P.S.

Jack Goldstone of George Mason University recently posted an intriguing comparison of French public finances on the eve of the 1789 Revolution and American public finances today. What they have in common in the unwillingness of the top 1% of the population to make sacrifices. He points out some other interesting parallels as well.

When the world’s greatest power financed an overseas war with borrowed money, then  turned to its elites to approve tax increases that would fall mainly on the rich, they responded with a resounding “NO!”  The debt was not a reasonable result of government needs, the elites cried.  It was the result of waste and misguided government expenditures.  There was no way that the elites would consent to any increase in taxes without constitutional change; anything else would be a grievous assault on basic liberties.

That was in the summer of 1788.   The place was Paris, and after France’s successful intervention in the US Revolutionary War against Britain, it had debts to pay that required a boost in income. Although France was by a goodly margin the largest and richest country in Europe, and the most powerful military force in the world, its tax system was a twisted mess of special exemptions and loopholes.  Different regions of France paid different rates of taxes, and most elites were exempt from the basic tax of the country – the taille,
a land tax – on most of their income. The elites did have to pay an income tax of 5% — the vingtiéme – but that was due to expire, and the country could not pay its bills unless the tax was made permanent, and other taxes were made more consistent or increased.

To accomplish this, the French monarchy convened an Assembly of Notables, opened its books, and claimed that tax increases were essential to restore the finances of the nation, and prevent the country from being overwhelmed with debts.