Following the demise of Lehman Brothers almost three years ago, the then UK government, being committed free market idealists and N word phobic, pumped trillions of taxpayers’ money into the economy to keep it buoyant. But it did so by funding banks which would otherwise have collapsed, and then trying lamely to persuade them to pass it on to real economy businesses so as to maintain employment. But the banks were reluctant to pass the money on because they needed to rebuild their own balance sheets, having themselves made such a mess of them. The phrase ‘quantitative easing’ was really bank balance sheet easing, and had limited impact on real business and real jobs beyond the financial sector.
Now we are back in the same mess and the talk is again of quantitative easing for the same purpose. The insanity of persisting with the same dysfunctional strategy is the result of the apparently unshakeable belief in free trade, open markets, with minimised government, taxes and public spending. But quantitative easing won’t stimulate the economy and create jobs any more than it did the last time. The only difference between now and then is that instead of the banks being in greatest need, it is now nation states which are seen as the key problems and the focus of the credit rating agencies.
The agencies, such as S&P and Moodies, used to base their assessment of credit-worthiness on in-depth analyses. Companies were jealous of their credit status as the ultimate sign of their fitness for trading, with AAA ratings awarded for firms with no real risk of default. But financial deregulation changed the basis of credit rating. It encouraged the development of derivative financial products, as well as purely imaginary ones, which were made deliberately opaque and thus beyond the reach of any proper analysis. The agencies nevertheless continued to bestow their ratings as before, thus encouraging high risk investments in such as the sub-prime mortgage markets, with the inevitable result. Now S&P says its withdrawal of its AAA rating for the US was done on political grounds, rather than in-depth analysis. It seems credit rating is no longer a high skill technical process, but simply one of opinion.
That may save the agencies a lot of money, but how much is their opinion really worth? According to Michael Lewis in The Big Short, the calibre of people employed by the ratings agencies is not high. ‘People on Wall Street knew that the people who ran the models were ripe for exploitation. “Guys who can’t get a job on Wall Street get a job at Moody’s,” as one Goldman Sachs trader-turned-hedge fund manager put it.’ Lewis quoted a Morgan Stanley employee as describing the ratings people who dealt with the sub-prime mortgage markets as simply “brain-dead”. The opinions of brain-dead Wall Street failures might not be thought worth a great deal. In today’s deregulated world, the credit rating agencies are surely no longer fit for purpose.
The key to reducing US debt, as elsewhere, is to revive the real economy to reduce unemployment. Quantitative easing won’t do that. It will merely encourage the financial sector to invest in speculative financial products to create further bubbles. The problem is with demand not supply. No business will expand its operations if it doesn’t expect to sell more product. Galbraith described attempts to stimulate the supply side where there is no demand, as trying to push the economy with a piece of string.