I’m as worried about runaway government spending and debt as anyone. But I’ve got to wonder if there possibly could be a more incompetent and biased credit rater than Moody’s — the agency that just downgraded federal bonds from AAA rating.
For context, this is the agency that gave the highest credit ratings to the subprime mortgage-backed securities right of until the eve of the greatest financial crisis since the Great Depression, wiping out trillions of dollars of investor wealth.
The National Bureau of Economic Research issued this useful reminder of Moody’s complicity in the meltdown:
“The credit crisis of 2008-9 was in many ways a credit rating crisis. Structured finance products, such as mortgage-backed securities, accounted for over $11 trillion dollars of outstanding U.S. debt… More than half of the securities rated by Moody’s carried the highest possible credit rating that is typically reserved for securities deemed to be nearly riskless. In 2007 and 2008, the creditworthiness of structured finance securities deteriorated dramatically: 36,346 Moody’s rated tranches were downgraded, and nearly one third of the downgraded tranches bore the AAA rating.”
Ironically, this came after Moody’s agreed, in 2017, to pay a $864 million penalty for contributing to the crisis due to its flawed ratings. When exactly?
MOODY’S DOWNGRADES US CREDIT RATING OVER RISING DEBT
After the subprime mortgage debacle. So I hav to ask, how could Moody’s stand in judgment of anyone’s credit worthiness?
This would be like hiring Pee Wee Herman as your investment adviser.
The problem isn’t just Moody’s less-than-stellar track record. Moody’s is overtly politically biased. The biggest hole ever ripped into the budget was the $5 trillion President Joe Biden spending spree. With Bidenflation deflating the value of existing government bonds. But strangely, no credit downgrade was issued while Biden was in the White House.
Now that Donald Trump is president and the sky is apparently falling. The chief economist of Moody’s regularly trashes supply-side tax cuts, but believes government spending is a stimulus to the economy.
What Moody’s and other credit-rating agencies still can’t understand is that tax cuts like Ronald Reagan’s in 1981 and Trump’s 2017 bill grow the economy and over time lower the debt burden as a share of the nation’s wealth. More people working and less people on welfare is a great way to lower debt spending. If we can get the growth rate up to 3% — which President Trump is aiming for — the debt burden starts to shrink.
Remember, the full faith and credit of the U.S. government stands behind Treasury bonds. That’s pretty close to an ironclad guarantee of repayment. Yes, we have a spending problem in Washington for sure, but we aren’t Zimbabwe.
The timing of this downgrade is particularly suspicious. Is it coincidence that it comes just as Congress is voting on the Trump tax cut?
In just the past two months, President Trump has secured at least $1 trillion of new investment capital commitments to come to these shores. Why would this gold rush of investment flood into a nation at risk of default?
Maybe investors know what Moody’s doesn’t. Trumponomics is good for the U.S. economy — and for those who invest in America.
Stephen Moore is a co-founder of Unleash Prosperity and a former Trump senior economic advisor.
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