Michele's Blog

Contrary Voices- expert commentary from Bill Fisher

June 6th, 2011 11:30 AM by Michele Morse Reen

Moody’s has been warning that it may have to set America’s credit rating slightly lower than it now is if we can’t create a deal soon to raise the nation’s debt ceiling. I’m curious.

Rejiggering the credit rating is tantamount to messing with economic policy, and I assume we don’t want Moody’s or S&P to have much authority over our nation’s economic policy. But the very likely fact is that, should Moody’s lower our credit rating—even very slightly—our interest rates will suffer as a result. (European countries have given us lessons in how lowered ratings mean a country’s debt is less attractive to investors and therefore interest rates must climb a bit higher to attract more of those investors.)

American debt, as you know, is traditionally thought of as the safest investment play in the world—outside of, perhaps, gold. So a downgrade of our credit rating wouldn’t just affect our nation, it would cast a dizzying light on sovereign interest rates all over the world. If the safest bet is called into question, after all, where do we turn for the level of safety it used to provide?

I don’t know exactly how seriously to take all of this. It’s untried terrain. I don’t ever remember a threat to the reputation of U.S. Treasury securities in my conscious lifetime. So I suspect that I, and many like me, just watch this story unfold with a certain bemusement, not ready to get worked up by it. The fact remains, however, that there are forces out there that are very ready to push America’s interest rates higher.

This would hurt our economic recovery in outsized ways. (It would also likely push the price of gold still higher.) In short, we cannot afford to find out what would happen.

And yet, many in Congress are acting as if letting the deadline pass for raising our debt level is just the thing we need. There’s a sort of “that’ll-show-them” attitude evident in many politicians. Indeed, it may; it may show us all.

One of the most trenchant observations I’ve read recently was that our economy could slip back into recession—a double-dip—for precisely the same reasons that it went there the first time. Because we are keeping those reasons alive rather than solving the problems that still beset our economy, our financial system, and our real estate financing system.

In real estate and beyond, it feels as if most of the reform is aimed at keeping alive the investment games—the MBSs, CDOs, and credit default swaps—that plunged us into fiscal whirlpools. There is nothing inherently wrong with MBSs, of course. We just need policies that make them safe and sturdy; we need laws and regulations that allow us to prosecute those who hurt borrowers and the entire economy by turning the MBS market into a thoroughly dangerous casino.

This past weekend, as if to play Contrarian with the week’s economic indicators, the Wall Street Journal ran a lengthy article titled “Why It’s Time to Buy,” in which veteran economic reporter Ruth Simon (with Jessica Silver-Greenberg) detail the reasons it is becoming a superb time to buy a personal residence.

We’ve seen the reasons before—many of them for years. It’s rather like watching a heavy tree branch that’s bound to fall at last. What strikes me, though, is how out of place the article seems to be in a week full of weak economic data. But that, one suspects, is the point. The market will turn. Not tomorrow, probably, but reasonably soon. At which point today’s bargain prices and rates will have vanished. This is difficult for your clients to see, but you owe it to them to point it out.

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Posted by Michele Morse Reen on June 6th, 2011 11:30 AM

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