Many have asked recently whether ratings agencies like Moody’s, Fitch, or Standard & Poor’s really are the neutral commentators they claim to be. Do they provide advice to investors without fear or favour, merely giving their assessment in a disinterested way? Or are they out to get us?
To think the latter would seem just downright paranoid. And yet… This post on well-respected politics blog Crooked Timber suggests that there is something rather difficult to explain going on with the agencies’ assessments of the Irish economy. Every time Ireland complies with the conditions of the EU-IMF deal by cutting spending, the agencies downgrade it further. This downgrade means that the goal of raising money on the markets moves still further away.
Let’s just repeat that – the more we cut our budget spending, the less likely it is we’ll be able to borrow the money we need to pay for our budget.
It really does seem they’re out to get us.
Why would they be? They’re not there to frustrate our economic recovery or undermine the EU’s plan. They’re there to give the best advice to investors. That’s how they make their living.
But wait – Can’t it be both? The thing is, the ratings agencies do not – cannot – issue predictions while pretending the prediction itself is not going to influence the market. If they did, the predictions would be wrong. They must have long accepted that they help shape the market they pronounce on. Yes, they are there to give good advice to their clients. But that can mean giving advice that is good for their clients.
They also know that when a currency collapses, there’s a killing to be made. The Euro’s fall could be the biggest free money explosion in history, and what easier way to cause that fall than to bring down one of its more vulnerable economies?
I hate the silly term double-dip recession. It makes it sound like there is some sort of mathematical explanation for this graph, a predictability about it. What we have is false recovery, the kind that only happens because markets work on the assumption that recessions will come to an end out of some sort of natural pattern. Would-be investors wait for the whole boom-bust cycle to start all over again so they can get in at the bottom. The brief spurts of growth we see are like sprinters waiting too long for a race to start. They dash off alone, only slowing to a halt when they realise no one’s joining in.
We are not recovering yet because, simplistically put, we have not yet reached the bottom. More accurately though, we can’t rebuild an economy when there is so much non-existent money in the way.
We need to face up to the fact that the western economy is still stuffed to the ears with bad debt. We are treating bad investments that will never yield a damn thing as real money that somehow must be paid back to the investor – even if the taxpayer has to be made to do it. But it’s not real money. These are failed investments. The money has been lost. It no longer exists.
This blog post is highly speculative, but it argues that the sudden willingness of European banks to take a loss on Greece is because they foresee things getting much worse, soon. One of Italy’s largest banks is stuffed with bad debt, and it seems more than likely that if it goes, the Italian economy will go with it. The Eurozone cannot afford to bail out a country that large.
But this is actually a good thing. We will finally have to stop pretending this can be fixed with bandages, and do the major surgery necessary. It will hurt, but not as much as treating innocent taxpayers like reckless debtors hurts.