Did S&P Engage in Motivated Reasoning to Justify Its U.S. Downgrade?

By Chris Mooney | August 7, 2011 4:03 pm

Like many, many others, I’m pretty worried right now about the economic future of the United States. I’m not concerned with our fundamentals–I’m concerned with our political insanity and our apparent capacity for self-destruction…the Tea Party’s absolute intransigence, and the President’s amazing weakness in the face of the former.

That said, the basis for S&P’s ratings downgrade is called into serious question by this statement from the Treasury Department, which suggests the ratings agency was starting with the answer, and then looking for a rationale–a classic motivated reasoning behavior:

In a document provided to Treasury on Friday afternoon, Standard and Poor’s (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one….

…Independent of this error, there is no justifiable rationale for downgrading the debt of the United States. There are millions of investors around the globe that trade Treasury securities. They assess our creditworthiness every minute of every day, and their collective judgment is that the U.S. has the means and political will to make good on its obligations. The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.

What do you think? Could motivated reasoning upend world markets? I myself have little doubt that this is possible. After all, if you were informed of a $ 2 trillion error in your calculations, wouldn’t you want step back and wait, and collect your thoughts, rather than stampeding ahead with a previously agreed-upon action….especially with the stakes so high?

CATEGORIZED UNDER: Economy, Motivated Reasoning

Comments (17)

  1. Lindsay

    I don’t know. It seems like both were valid reasons, and after the mistake was revealed, the political reason *still* was plenty valid. Maybe we should stop providing them with so many choices on which to base a credit downgrade. :-P

  2. Chris, the answer is both yes and no. Reportedly, S&P has other reasons for doing this. One is that, in light of Eurozone problems, and stricter Eurozone regs on ratings agencies, it felt it had to prove it was tough on the U.S., too. (Which itself could be motivated reasoning, as could other things involved.) But, it had warned about this in advance, as well as indicating it would take a look at other AAA countries.

    More on my blog:
    http://socraticgadfly.blogspot.com/2011/08/with-s-aaa-decision-whats-next-and-whos.html

  3. Sean McCorkle

    Is it motivated reasoning in this case, or is it saving face? Once the firm commits to a decision, to have to backpedal because of a mistake risks undermining trust of their decision-making; admitting to an error which doesn’t affect the final call is easier to do. Robert Cialdini has a lot to say about the powerful influences of commitment and social pressure to be consistent.

  4. Chris Mooney

    Sean–
    I don’t think the two are different in this case…

  5. Sean McCorkle

    God only knows what the markets will do, but this strikes me as having the potential to lessen S&P’s standing, if Paul Krugman’s view takes hold.

  6. Gaythia

    I think that the motivations lie deeper. In the words of Robert Reich:

    “Had S&P done its job and warned investors how much risk Wall Street was taking on, the housing and debt bubbles wouldn’t have become so large – and their bursts wouldn’t have brought down much of the economy. You and I and other taxpayers wouldn’t have had to bail out Wall Street; millions of Americans would now be working now instead of collecting unemployment insurance; the government wouldn’t have had to inject the economy with a massive stimulus to save millions of other jobs; and far more tax revenue would now be pouring into the Treasury from individuals and businesses doing better than they are now.

    In other words, had Standard & Poor’s done its job over the last decade, today’s budget deficit would be far smaller and the nation’s future debt wouldn’t look so menacing. ”

    Read more: http://www.businessinsider.com/why-sp-has-no-business-downgrading-the-us-2011-8#ixzz1UNWj9Ceg

  7. Somite

    Not to mention that “Republicans in Congress continue to resist any measure that would raise revenues” – S&P statement complete text http://bit.ly/oOHWuB

  8. oldtaku

    I imagine the figures they gave were just justification for their evaluation that the USA is no longer a AAA country with zero chance of defaulting on those bonds. It obviously is not. Nor does it have any interest in tacking its serious spending/income problems (or any others).

    So yeah, I think they wanted to downgrade the AAA, and the numbers they provided were just support for it – so if the numbers weren’t exactly right it didn’t really matter to them. This is slightly different from your motivated reasoning if they never really attached weight to those figures in their reasoning – though it sure looks bad when they turn out to be wrong.

    On the other hand, are they wrong to downgrade? I don’t think so. The other ratings firms are the ones artificially keeping the rating at AAA because that makes everyone happy. Cart before the horse. This may have something to do with S&P’s embarrassment of rating all those subprime bundles as AAA.

  9. ThomasL

    Um, Yea,

    I don’t think the inability to ever pay what’s on loan back has anything to do with it… The insurence spreads have been pricing it *way* less than AAA for a while now… As I said in a previous statement, the monaotists and Keysians never understand why the bond holders think they ought to get fully paid…

    http://www.zerohedge.com/news/qbamcos-take-us-downgrade:

    “It is still not too late to submit one’s thoughts of what the US downgrade means for various asset classes and for the economy, and world, in general. Here is one of the few worth reading, courtesy of QBAMCO’s Paul Brodsky and Lee Quaintance. Their conclusion: “the downgrade is effectively a currency downgrade, which seems very reasonable, overdue and, in real terms, insufficient. We would argue that in real terms, US Treasury obligations are non investment-grade. We think Treasury obligations today and always will be money-good, but principal and interest will be repaid with bad money.”"

  10. Incredulous

    I don’t really believe that it is Motivated Reasoning as much as it is them trying to decide financial policy for the country in general. I believe that they planned to do it regardless of any justification or excuse.

    I think Gaythia hit it the head regarding their track record.

  11. Emily

    And, more importantly, why is an organization with no public accountability so influential in deciding economic decisions that affect the world?

  12. Nullius in Verba

    I think the problem is they know they should have downgraded the US debt long ago, but were holding off because of the problems it would cause. They thought if they left it a bit until the debt-ceiling deal was done, they could avoid the issue. Unfortunately, the deal was a political fudge that didn’t fully resolve the problem (the bill that would have got killed by Obama), so they were left with little choice. To some degree, it is indeed a post hoc rationalisation of a decision come to long ago – current events are not themselves the real reason. But there are reasons. And compared to what the US actually owes, 2 trillion is small change.

    The bursting of the housing/debt bubbles is another reason for their concern – although it was not entirely Wall Street’s fault. They’re trying to do a better job now.

  13. ThomasL

    Some of those in here really do crack me up in this area… They seem to have forgotten just who, exactly, our creditors are…

    http://www.zerohedge.com/news/china-isnt-exactly-floating-yuan

    “Earlier we speculated that the one thing that could throw this whole fiasco into a complete tailspin is for China to float the renminbi, which would catch an already frazzled America unawares, as China submits a formal bid for its currency to become the de facto global reserve. Well, that didn’t quite happen. However, at a massive 0.23% change in the fixed overnight rate, a move that very much hurts China, it is about as symbolic of an intraday change as can be. The PBoC set the Monday USDCNY fixing at a record high of 6.4305, up from 6.4451. While it is unknown whether this near record rate of FX change will be sustained, China just sent a very clear message to the US, following the previously noted opeds in both Xinhua and FT, in which various Chinese individuals blasted the current situation America finds itself in. The only question now is whether China will proceed with a very demonstrative dump of US bonds tomorrow to reinforce the purely political statement it just made in FX.”

    You really need to look outside our boundries…

  14. ThomasL

    Might want to want this section from “Meet The Press” as well…

    http://www.msnbc.msn.com/id/21134540/vp/44052331#44050320

    Notice Greenspan pointing out the EU going up in flames is going to not exactly be benificial to our exporting (and you know, maybe notice what he say’s about just printing it away, because us investor types realise such could happen, and want it priced in…)

  15. TerryEmberson

    @11. Emily Says:

    And, more importantly, why is an organization with no public accountability so influential in deciding economic decisions that affect the world?

    Because, in this case, an organization with public accountability would be subject to political pressures. Theoretically, they are accountable to their reputation. That reputation has been deeply weakened by their recent ratings, but many things remained tied to that rating in many companies. The U.S. government generally bases its economic decisions off of the CBO estimates rather than those from Moody’s and S&P, but many companies, including trust funds, use S&P’s assessments for now.

    You must remember that economic systems consist of a vast number of independent free actors, regardless of how much regulation you put on those actors. They will ALWAYS be influenced by things outside of the control of the government.

  16. Johnny

    S&P are fools.

    American won’t run out of money unless it runs out of paper and green ink.

    Yet S&P still give Coke and Microsoft AAA ratings? Last I checked, Coke and Microsoft can’t print their own dollars.

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About Chris Mooney

Chris is a science and political journalist and commentator and the author of three books, including the New York Times bestselling The Republican War on Science--dubbed "a landmark in contemporary political reporting" by Salon.com and a "well-researched, closely argued and amply referenced indictment of the right wing's assault on science and scientists" by Scientific American--Storm World, and Unscientific America: How Scientific Illiteracy Threatens Our Future, co-authored by Sheril Kirshenbaum. They also write "The Intersection" blog together for Discover blogs. For a longer bio and contact information, see here.

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