Time: Standard & Poor’s Downgrades Itself

S&P’s downgrade of U.S. sovereign debt from AAA to AA+ though symbolically and politically powerful, was already destined to be met with skepticism in New York and DC. The fact that the beleaguered rating agency managed to make a $2 trillion error in calculating the size of the U.S. debt only made matters worse:

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Moreover, ratings agencies’ credibility stinks thanks to their shoddy assessments of mortgage backed securities that contributed to the 2008 crash. And S&P is an outlier, since Moody’s and Fitch aren’t downgrading the U.S. And most important, from the perspective of economic analysts who decide what price to pay for U.S. bonds in the open market, S&P’s rating’s downgrade doesn’t bring new information: the threat is based on a judgment based on public information about politics in Washington and not the kind of proprietary information S&P gets on businesses whose debt that rate.

The markets know all this, which is why investors have flocked to Treasuries during the recent market uncertainty, keeping rates unusually low.

Which means S&P’s credibility in downgrading the U.S. was already going to be fairly low. Their $2 trillion error means the most significant downgrade last night was the one S&P inflicted on itself.