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US credit downgrade

The 'downgrade of the US credit rating is part of the forward planning by the top capitalists to guarantee the political and military hegemony of the richest one per cent of the US population,’ writes Horace Campbell.

On Friday 5 August 2011, one of the world’s leading credit rating agencies, Standard & Poor’s (S&P), downgraded the United States’ top-notch AAA rating for the first time ever in the United States’ history. S&P cut the long-term US rating down to AA+ with a negative outlook, citing concerns about budget deficits and political gridlock. In their statement justifying the downgrade S&P stated that:

‘The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.

‘More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.’

Additionally, Standard &Poor’s indicated that it might further lower the US long-term credit rating to AA within the next two years if the United States’ deficit reduction measures were deemed inadequate. These are strong statements from a private agency bent on disciplining the government of the United States with the threat of a further downgrade. What gives this agency such power? In answering this question, we would seek to understand what is a credit rating agency; the source of a credit rating agency’s power; what is S&P’s track record and what implications do its decisions have for the international political system, especially for humanity.

In all major capitalist countries, the power of the dominant faction is hidden behind ideology (free market), law (protection of private property), propaganda (corporate-controlled media), the coercive organs of the state (military, police and prison) and the power of finance capital (banks, insurance and financial instruments). Credit rating agencies represent the power of financial capitalists and are usually held in the background to discipline corporations and governments. In moments of crisis these agencies show their hand.

These agencies along with the International Monetary Fund (IMF) and the US military have been the weapons against the true self-determination of humanity. United States citizens are now beginning to pay attention to the power that the IMF, credit rating agencies and the military wielded over most countries in the world. US Treasuries (or T-bills) are traditionally considered to be a risk-free investment precisely because in the country’s 200+ year history, its rating has never been downgraded and the securities are backed by the government.

The downgrade of the credit rating of the United States by Standard & Poor’s is much more than a psychological blow to the prestige of the imperial overlords in the United States. This is a sign of a power shift and another blow to the position of the US as the sole superpower. The most oppressed must organise to break the power of capital and the imperial overlords or humanity will pay a high price.


Credit rating agencies provide information on issuers of securities whether the issuers are corporations or countries. A credit rating agency informs investors whether issuers of securities (such as debt obligations, fixed income securities) can meet their obligations to those securities. The top three credit rating agencies with international influence are Standard & Poor’s, Fitch Ratings, and Moody’s Investor Services. The job of these agencies is to provide an analysis of the risk posed to investors by bonds, companies and countries. The risk analysis provided to investors by the credit rating agencies is supposed to be objective. However, the credit rating agencies are private entities owned by profit-making companies performing what is essentially a regulatory role. Thus, the credit rating agencies cannot truly serve the investing public because they have a fiduciary obligation to their shareholders to maximise profit.

The rating agencies achieved their influence over time since the capitalist depression of the 1930s but have become more important to the US economy in the era of financialisation, commencing on 15 August 1971. It was from this date that the US gave unlimited rights to the currency speculators after it reneged on the Articles of Agreement of the IMF that had placed the convertibility of the dollar on par with US$35 for one ounce of gold. This departure from the gold standard, called the ‘Nixon Shock’ after the president who authorised it now backed the US dollar with the military might of the United States. During the Cold War, international capitalists were willing to shelter under the US military umbrella and one price for this shelter was to accept the political power of US credit rating agencies.

These private corporations were issued permits to be credit rating agencies by the United States Securities and Exchange Commission through the Nationally Recognized Statistical Rating Organization (NRSRO) therefore turning rating agencies from solely private entities into regulating bodies.

In the past 20 years, the business of credit rating followed the path of centralisation and concentration of capital so that the rating business fell in the lap of the three big firms, affording these organisations the power to make life and death decisions about corporations and countries.

The subjective nature of their ratings will be brought out later but in the aftermath of the clear theft and fraud of the capitalist organization called Enron, the rating agencies in public hearings held by the SEC in 2002 insisted that credit ratings were only opinions and should have a limited role which is to assess the creditworthiness of issuers on an ongoing basis, and the ‘likelihood’ that debt will be repaid in a timely manner. The fact that ratings are ‘opinions’ is important in the US legal context in that these big three capitalist corporations seek to be protected by the First Amendment and from civil and criminal liability.


These credit rating agencies earn their power from the fact that they are owned by the top financial institutions on Wall Street. For example, S&P is owned by McGraw Hill Companies, one of the United States’ big media and publishing conglomerates. The board of directors is comprised of the top individuals of finance capital with a few academics thrown in. The shareholders of McGraw Hill are from the top financial houses. McGraw Hill owns ‘Aviation Week’, which is one of the prime advocates for a section of the US military. Though S&P is a wholly owned subsidiary of McGraw Hill, Moody's, on the other hand, is a publicly-traded corporation. Its largest single shareholder, with 12 per cent of the company's shares, is Berkshire Hathaway, Warren Buffett's company. Fitch is more transnational with roots in French finance capital.

Thus, we know that the shareholders of McGraw Hill can ensure that their ratings are sanctified by governmental authorities and most importantly, by the IMF. The power of these credit rating agencies has accumulated over time and has been consolidated within the context of the power of finance capital over the international capitalist economy. By seizing a regulatory role while eschewing clear liability, these agencies gained the political power to be whatever they wanted to be.

Since the Depression of the 1930s, statutes and rules required that mutual fund and money managers of almost every stripe buy only those bonds that have been given high grades by a Nationally Recognized Statistical Rating Organization. The effect was to make the three certified rating agencies an oligopoly. It was this power that these agencies used against Asia by providing cover for US companies to buy up assets cheaply in the aftermath of the Asian financial crisis (1997-98). This power also played a role in the recent intimidation of European countries, including Greece, Portugal, Ireland, and Iceland, to launch austerity measures against workers by downgrading the ratings of these countries.


There are numerous commentaries on the downgrade of the US but the one commentary that caught my attention was that of Paul Craig Roberts, former assistant secretary of the Treasury in the Reagan administration and associate editor and columnist at the Wall Street Journal. This is a civil libertarian who was arguing that there is a struggle between the military and Wall Street for power in the USA. In an article published on, after quoting from the statements of Dwight Eisenhower on the rise of the military industrial complex, Roberts opined that from the time of Dwight Eisenhower till today, the United States has been dominated by the military security complex. According to this analysis of the downgrade, the only challenge to the military was Wall Street and Wall Street was using this downgrade as its leverage to fortify its challenge:

‘The main power rival was Wall Street, which controls finance and money and is skilled at advancing its interests through economic policy arguments. With the financial deregulation that began during the Clinton presidency, Wall Street became all powerful. Wall Street controls the Treasury and the Federal Reserve, and the levers of money are more powerful than the levers of armaments. Moreover, Wall Street is better at intrigue than the CIA. The behind the scenes fight for power is between these two powerful interest groups. America’s hegemony over the world is financial, not military. The military/security complex’s attempt to catch up is endangering the dollar and US financial hegemony.’

Roberts explained that the security establishment has been trying to catch up with the power of the lords of finance by launching wars to enrich themselves and to gain more power in the society:

‘The country has been at war for a decade, running up enormous bills that have enriched the military/security complex. Wall Street’s profits ran even higher. However, by achieving what economist Michael Hudson calls the ‘Financialization of the economy,’ the financial sector over-reached. The enormous sums represented by financial instruments are many times larger than the real economy on which they are based. When financial claims dwarf the size of the underlying real economy, massive instability is present.

‘Aware of its predicament, Wall Street has sent a shot across the bow with the S&P’s downgrade of the US credit rating. Spending must be reined in, and the only obvious chunk of spending that can be cut without throwing millions of Americans into the streets is the wars.’

While notable, what this analysis by Paul Craig Roberts fails to recognise is the rapid integration between finance capital and the military, as manifest by the fact that companies that profit greatly from militarisation, such as Boeing has an established financial arm called Boeing Capital Corporation. Most of the big investment and derivatives firms have established links with the private military industry. All the top private military companies and the military hardware manufacturers that are woven into the military-industrial complex are traded on Wall Street. Many of the top private military companies are subsidiaries of Fortune 500 companies that are also traded on Wall Street. In fact, the intricate web of alliance between finance capital, the military and the corporate media/information mind control is now so dominant that we can talk of the finance-military-information complex, instead of the military-industrial complex. McGraw Hill is a poster child of the relationship between the military, finance and information/media. McGraw Hill is the owner of Standard and Poor’s, and it is directly owned by some of the biggest bankers of Wall Street. McGraw Hill is also in the TV and media business, with stations across the country. It owns ‘Aviation Week’ and ‘Space Technology’. The latter has been the publication that has been the mouthpiece for the US Air Force, and has been an advocate for high military spending and the acquisition of expensive military aircrafts.

As promoters of the ideology of free market and deregulation (even in the military), the McGraw Hill Companies is also a cheerleader for private military corporations. These private military corporations are involved in protecting international capital in all parts of the world The New York Times reported as far back as 2002 that one such private contracting firm ‘boasts of having “more generals per square foot than in the Pentagon.”’ As a militarist state where all is subordinated to the needs of the financial/military interests, there is no contradiction between the two as Roberts claims.

As international capitalists with no cut-in-stone loyalty to the US state, the financial-military complex is now ready to do to the US what it had been doing to the rest of the world since 1945, intervening to discipline governments to do the bidding of big capital. Temporarily, these financial and military oligarchs need to work through the US government because it is the government that carries the authority to print dollars as long as the dollar remains the reserve currency of the world. This downgrade of the US credit rating is part of the forward planning by the top capitalists to guarantee the political and military hegemony of the richest one per cent of the US population. As the dollar loses its status there will be consequences for the global position of American capitalism. The moguls of Wall Street want to ensure that the political leadership in the United States is sufficiently intimidated so that as the position of the dollar deteriorates and there are deepening crisis for capitalism inside the US, the government will take measures to continue to ensure that wealth is transferred from the working peoples to the capitalist class. Hence this downgrade is part of a long term plan to discipline the working class and the politicians within the United States, just as how the IMF has been used in the past against the rest of the world.


It is now known that Enron was one of the most corrupt capitalist corporations in the US. Yet, Enron had a triple AAA rating by these credit rating agencies until four days before the company went bankrupt. When the full extent of the fraudulent activities of Enron were revealed, President George W. Bush claimed that this was one ‘bad apple’, implying that Enron was an aberration. But soon thereafter the duplicitous dealings and accounting practices of WorldCom and Global Crossing were revealed – WorldCom fudged accounts to show inflated profits. Up to the day that Enron sought bankruptcy protection, none of the three rating agencies caught the fraud and corruption of Enron.

Throughout the period of the power of the financial houses, the blatant conflict of interest was too hard to ignore so in the aftermath of Enron and WorldCom, there has been some regulatory response. Congress passed the Credit Rating Agency Reform Act of 2006, ending a century of industry self-regulation. The purpose of this law was to promote competition in the rating industry by establishing a transparent and rational registration system for rating agencies seeking NRSRO status. It was also designed to enhance industry transparency, address conflicts of interest, and prohibit abusive practices.

But the Securities and Exchange Commission (SEC) was itself impotent as the world saw from the financial crisis of the collapse of the investment banks in 2008. Bear Stearns and Lehman Brothers had enjoyed top ratings from these agencies and the sub-prime products called Credit Default Obligations (CDOs) were given triple AAA ratings, even when these products turned out to be garbage. Of course, this garbage was held by the same bankers who own the rating agencies.

In the aftermath of the fall of Lehman Brothers and the fact that the sub-prime mortgage crisis exposed the securities fraud by the financial houses, for a short time Wall Street was on the defensive. There were dozens of lawsuits filed against the credit rating agencies. Citizens were calling for the fraudsters to be incarcerated but the rating agencies went back to their old line that their ratings are merely opinions and are protected by the First Amendment.

It was then left to Congress to Act and after the public outrage, the financial regulatory reform law adopted in 2010, known as Dodd-Frank Law, directed the SEC and other agencies to undo that link between the ‘opinions’ of the credit rating agencies and the claim that they could regulate themselves.

The Dodd-Frank Wall Street Reform and Consumer Protection Act enhanced the SEC’s enforcement mechanisms, and added a number of requirements on NRSROs that are immediately effective (i.e. do not depend on SEC rulemaking). The Dodd-Frank Act also required the commission to adopt a number of new rules concerning conflict of interests.

According to the US government and their news sheet, ‘the Dodd-Frank Act requires every federal agency to review existing regulations that require the use of an assessment of the credit-worthiness of the security or money market instrument and any references to credit ratings in such regulations; to modify such regulations identified in the review to remove any reference to, or requirement of reliance on credit ratings; and substitute with a standard of credit worthiness as the agency shall determine as appropriate for such regulations.’

What this meant was that from June 2010, the SEC unanimously approved a plan to erase references to credit ratings from certain rulebooks. The agency also adopted a substitute to the ratings, the first of several such changes the commission had to enact. Dodd-Frank created a laundry list of new regulations for the industry, including proposals to make it easier for investors to sue the agencies. The SEC must also create its own Office of Credit Ratings to police the raters, though the agency has yet to open its doors as it struggles to scrape together the needed money.

Since the passing of the Dodd-Frank Act, Wall Street has been pushing back, spending millions of dollars to reverse Dodd-Frank and to ensure that the law is whittled away until it is meaningless. However, while the bankers were seeking to protect themselves, the fact that they were holding on to garbage since the financial crisis was becoming clearer. This is because the depth of the financial crisis was so much that the bail-out could barely touch the surface of the problem. In the past year, the vulnerability of the banks has been heightened by the capitalist crisis in Europe. As a means of pressuring the states of Greece, Portugal, Ireland, Iceland and others to implement austerity measures against workers, these rating agencies downgraded these countries’ ratings. These downgrades exacerbated the class struggles in Europe where the bankers and the bond-holders wanted to be paid. For the US capitalists, the crisis in Europe threatened the future of the Euro and the collapse of the Euro in the short term would serve the interests of the capitalists on Wall Street. This would ensure that there was no clear challenge to the dollar and the US could continue the military occupation of many countries in Europe, especially Germany.

However, some of these US capitalists were also exposed by the crisis in Europe and US banks wanted to ensure that the European Central Bank imposed austerity measures so that the full exposure of US banks would not be known. However, this crisis is not a simple one; it is structural and systemic and needs fundamental changes in how society is organised. This crisis has intensified in the past three months with the knowledge that states and societies such as Italy and Spain will also need the iron hand of international capital to impose harder burdens on the workers to transfer wealth from the majority to a minority. French banks are loaded up with the debts of Italy and Greece, and American banks are holding positions in these same French banks. Hence, US banks are not immune to the crisis in the Euro zone.


There are some who have stated that the downgrade is cosmetic because the other two rating agencies, Moody’s and Fitch, have retained the AAA rating of the USA. This may seem to be the case but those who have been following the troubles of the banks and the fake stress tests know better. The timing of the announcement of the downgrade has some significance in the sense that it followed the false debate and conclusion of the debt deal.

By coming out after hours on Friday night when they knew the state of the markets, the downgrade also provided a false ‘public’ cover for the well-publicised subsequent fall and rise in global stock markets. Political spinners were able to point to the downgrade as the ‘spark’ for the drop in stock prices (particularly for the banks). In reality, the true causes are the growing risk and troubles in Europe, the continued lack of growth in the US, and the fact that in spite of all the trillions in bailouts of the banks, accounting rule changes, and the fake stress test exams to show that the banks are doing well, the market participants who understand the true status of the banks revealed that the banks are still in danger of collapsing.

Millions of persons around the world are paying attention and there are already signs that these foreign forces are losing confidence in the safety of US securities by the rise in the price of gold. The other point is that the political alliance that paved the way for this conjuncture is being strengthened by the power brokers in the Treasury/Wall Street/IMF relationship. It is this alliance that will work for the transfer of wealth to the top one per cent and will not countenance increased revenues from this small class.

As we have argued before, ultimately the question is not simply one of revenues and taxing the rich, but a fundamental restructuring of the system. However, in the short run, the call for more taxation and regulation of off shore accounts serve to expose the ways in which the capitalist class is above the law. Yet, these capitalist have to live somewhere and they do not want to live in the offshore sites of money laundering and lawlessness. Hence, they need laws to suppress workers, take away collective bargaining and the safety nets of social democracy.

The downgrade will raise the cost of borrowing; this in turn could trickle down to higher interest rates for local governments and individuals. The iterations of decline and deficits will increase the government debt and the deficit, and S&P has issued the clear threat that another downgrade will be coming after 18 months, if Congress does not follow its advice to impose austerity measures.


US government officials are calling the methodology of the rating agencies flawed and some are calling for nationalisation of the agencies and/or the establishment of an international rating agency under the United Nations. There was no such call when the same agencies were working with the IMF to impose hardships on the rest of the world. Now, we are told that the rating agencies cannot do maths. But the destructive structural adjustment maths that the IMF-rating agencies alliance have used to destroy economies and livelihoods in the global South over the past 30 years were never questioned by those now calling out the S&P for its US$2 trillion error in its computation used to justify the US downgrade. The complaint was that a treasury official had spotted a US$2 trillion mistake in the agency's analysis. Whether it was a mistake or not, a psychological barrier has been breached. The US is no longer beyond the sanction of agencies that it unleashed against other societies.

Since the fall of Lehman Brothers in September 2008, politicians have sought to cushion the blows to capital by making band-aid remedies. For some, the issue was one of regulation and more control over the financial institutions. There were hearings in the US Congress and the Dodd-Frank law came into being. Through the media, the financiers went on the offensive about a recovery, but there has been no recovery because there was no fundamental alteration in the way capitalist ensured that wealth was transferred from the poor to the rich.

More, importantly the limits of US military power has been put on full display in Iraq and Afghanistan. The center of the world economy shifted to Asia while the USA and Europe were fighting in the Middle East. The ten biggest economies in Asia ring-fenced themselves against the USA and the instability of the dollar. This downgrade will reinforce this need for protection against the dollar. From China there was the warning that:

‘International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.’

This call for international supervision did not include any statement on the conditions of working peoples who are suffering at present. Inside the USA, the political choices have been sharpened. It is either the articulation of democratic control by the people or oligarchic control by the banks and financial houses. The downgrade was not a challenge to the government but to the working peoples of the USA and the world.

Youths in the streets of Greece, London and Cairo are giving one response. The challenge is to coordinate these responses for a prolonged and sustained struggle to break the power of the financial-military-information complex. Those who have been following the gyrations of the capitalist debacle since 2007 will note that the events associated with the 2011 downgrade are simply precursors to what will continue to happen as the last 20 years of debt-driven growth in advanced capitalist nations unwinds. In the midst of this protracted crisis the rich will seek to transfer wealth from the poor as the only means of sustaining their accumulation of wealth as year 4 unfolds of what is likely to be a 7-10 year recession/depression. The financial-military-information complex will continue to ensure that austerity to manage government debt falls on the backs of working people. Corporations will continue to claim that the only way they will invest some of their trillions in cash to create jobs and lower unemployment is to reduce regulations, lower corporate tax rates and perhaps even lower minimum wages. The American people must realise that the chickens have just come home to roost. The people must organise more and more to link up with working people’s struggles around the world to break up the banks, IMF-rating agencies alliance and their military enterprise. Financial institutions should be made to serve the people, not vice-versa.


* Horace Campbell is professor of African-American studies and political science at Syracuse University. He is the author of ‘Barack Obama and 21st Century Politics: A Revolutionary Moment in the USA’. See
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