Was S&P Downgrade a Preemptive Strike Against Prosecution?

13 Aug 2011

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On Monday this week the stock market melted in New York, as did markets around the world.

While most of the commentary is about Standard & Poor (S&P) downgrading US debt, most people realize that S&P's downgrading was meaningless. This was proven by the fact that when the stock market crashed, investors bought more American treasury bills.

Garry Epstein, Co-director of the PERI Institute, says S&P's downgrading is a factor to the extent that investors think that the government of the US is going to take it seriously. If the government takes it seriously, then it might lead the Obama administration to cut government spending even more, which would be a disaster, because, after all, what the markets are really concerned about is that the real economy is stagnating. It is not generating any jobs, investments or profits - if the recession continues.

The real danger is deeper recession. The markets understand this.

According to Epstein, S&P's downgrading of the US debt "is a political and strategic shot across the bow of the US government."

The reason underlying this, according to Epstein, is as follows: The head of the US Senate panel investigating the 2008 financial crisis, Carl Levin, said that S&P and Moody's were one of the major factors that caused the crisis. So the US Treasury could soon be investigating S&P for fraud because they raided toxic mortgages and then allowed banks like Lehman brothers, JP Morgan and Goldman Sachs to sell them.

According to Epstein, what S&P is doing here is sending a message to the US Treasury that "if you try to bring us to account for these fraudulent activities we were engaged in, we can hurt you by downgrading your debt."

Secondly, he contends that this is a pre-emptive strike because if the US Treasury does go after S&P for fraud, S&P can claim that it is just political payback.

Editor's Note: For more on what appears to be the unfolding of a second global financial crisis, you might be interested in another TRNN interview with Bill Black, associate professor of economics and law at the University of Missouri in Kansas City, where it is argued that Monday's stock market meltdown was to a large extent triggered by lack of confidence in the Eurozone crisis and not by a lack of confidence in the American Treasury.

You can find this page online at http://sacsis.org.za/site/article/411.19.

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