When Standard & Poor's downgraded the U.S. credit rating earlier this month pundits and politicians claimed this would cause interest rates to spike and kill what little lending there was in the economy. However, the opposite has happened. Interest rates on Treasury bonds have actually fallen and T-bills continue to lead the flight to safety during the recent market turmoil.
What does it all mean?
"It just emphasizes the irrelevance of the ratings agencies," says Jesse Eisinger senior reporter at ProPublica and longtime critic of the ratings agencies. "I think this was a watershed moment for how unimportant the ratings agencies are."
As The Daily Ticker's Aaron Task and Eisinger note in the accompanying clip, the market's reaction to the America's loss of AAA rating is similar to the reaction when it happened to Japan earlier this decade - nothing. Japan, downgraded in 2002, still enjoys some of the lowest borrowing costs in the world. (Earlier this week, Moody's downgraded Japan's credit rating to Aa3 from Aa2, with little or no obvious market impact.)
The market's reaction to the S&P's downgrade of America is less shocking than the fact that anyone still pays attention to the ratings agencies, Eisinger says. "Even though markets panic, prices are a better reflection of what investors think the prospects are for a bond than an S&P opinion."
And, what's most shocking of all is that any of these ratings agencies are still in business despite totally bungling the ratings of mortgage securities at the heart of the financial crisis. Let's not forget S&P, Moody's and Fitch rated thousands of toxic subprime loans AAA when in fact they were more like junk.
"It's very shocking there's been so little reckoning for their disasters of the finical crisis," Eisinger says. "I think over time their franchise disappears but I've been predicting that for while and it's been totally wrong."
As the old saying goes the market can stay irrational far longer than you can stay solvent.