Last summer, August 5 to be exact, Standard & Poor's dropped the rating of United States debt below AAA for the first time in history. This year, with our flippers and masks barely out of the pool equipment room, Moody's downgraded the ratings of fifteen mega banks, including major American institutions such as Goldman Sachs and J.P. Morgan Chase. Bank of America and Citigroup were downgraded to Baa2, just two ticks above "junk" status.
S&P cited as one of the major reasons for last summer's historic downgrade the "Bedtime for Bonzo" antics that went on in Congress in connection with, among other things, the once perfunctory act of raising the national debt limit. If you were otherwise engaged and missed the circus, don't worry, it will be coming back to town near election time this year.
Moody's, on the other hand, did not have to make reference to our political paralysis (yet), they simply underscored our "globalized" exposure to the financial chaos in the Eurozone, describing its actions as follows: "Moody's downgrades firms with global capital markets operations;" which, among other things was a not-so-subtle reference to the recent revelation that J.P. Morgan Chase had casually dropped another $2-3 billion in a "whaling adventure" that went awry, a fact that produced a flurry of congressional posturing — filled with sound and fury — that seemed to signify very little. Meanwhile a host of Washington conservatives are continuing their efforts to undermine Dodd-Frank by introducing a series of nine bills in the House and the Senate and launching litigation (with a willing co-conspirator — a bank in Texas) against the Consumer Financial Protection Bureau and select provisions of the law.
Looking at these two downgrades, both of which were telegraphed well in advance by the rating agencies, I suppose one can't blame Washington for everything… Scratch that — yeah, we pretty much can.
The S&P downgrade was a direct response to Congressional debt devilry, while the Moody's downgrade was considered by many to be an unspoken but pointed commentary on both globalization and the dismal performance of federal regulation of the banking industry as a whole. There are those who argue that that the banking industry is overregulated while others opine that it is under-regulated. However, it's very difficult to argue that given the history of financial events in the last few years, the banking industry is effectively regulated.
I recently read "Why Nations Fail" by Daron Acemoglu and James A. Robinson. The authors are Harvard professors and widely respected scholars on the subject of economic development. They argue that relative prosperity among nations is largely dependent on the nature of the institutions that have developed in a given society. Those Institutions can be either "inclusive" — prioritizing things like productivity, justice, education and technology for the benefit of the nation as a whole; or "extractive" — intent upon directing wealth and resources away from some elements of society to benefit others.