In her post last night, Jane Hamsher wonders how the economists at Moody’s explain their about face in first claiming the Obama-McConnell Tax Cuts for the Rich Act would not pose significant risk to America’s credit rating and then only a week later claiming the opposite. Let us count the ways.

First, let’s review the flip-flop from Moody’s economist, Steven Hess. Here’s Hess quoted by Bloomberg on December 7 [my bold]:

“The extension of the current tax rates is for a temporary period of two years and we think that if that’s all there is to it — it does not have ratings implications,” Steven Hess, senior credit officer at Moody’s in New York, said in an interview today. “We have a stable outlook. We don’t feel it will get changed downward in the next year or two.”
. . .
“We think it will be positive for economic growth in 2011 and 2012,” Hess said.

“That helps government revenue growth. However, it will not nearly offset the reduction in revenues coming from these measures and therefore it’s a negative for government finance if nothing else is done,” he said. “It would not be favorable for any effort to reduce the deficit and reverse the debt trajectory.”

And here’s Moody’s Steven Hess quoted by The Hill just a week later:

Moody’s Investors Service said in a Monday report that the tax-cut deal hammered out between President Obama and congressional Republicans jeopardizes the Aaa credit rating enjoyed by U.S. Treasury bonds. The package could add $900 billion to the national debt, if it is made permanent, and this increases the chances the U.S. would one day default on its debt.

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth. Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years,” Moody’s analyst Steven Hess writes.

So let’s get this straight. The US credit rating agencies — with Moody’s in the lead — are the guys who allowed themselves to become bought captives of the banking industy. To sustain the profitable ratings fees from the banks, they rated as AAA investments all of those mortgage based securities that were based on massive bank and lender fraud, and never said boo. While their function is to forsee risks, they said little about an implausible $8 trillion housing bubble whose risks they didn’t see Then they were surprised when the bubble burst and those assets plummeted to pennies on the dollar, taking the entire financial system with them. Yeah, those guys.

So now Moody’s Hess is telling us the risk of holding US debt will rise because of this deal, so Congress will assume if we don’t offset this by slashing spending, the US is more likely to default on its sovereign debt. It’s absolute gibberish.

For the umpteenth time, the US, unlike the suffering Ireland, Portugal, Spain, etc in the Euro zone, has its own currency and fiat money. It can’t be forced to default. Unless the people who run the country are complete idiots [insert news stories here], and refuse to use the tools and powers they have, the US is not at any risk of defaulting on its debt.

Moreover, the tax package is for two years. If one assumes that’s it, then there is no long-term structural deficit to cause us problems in the long run. But what happens if the tax cuts are extended?

What Hess should tell us is the truth: The problem the deal creates for US deficits is that the tax cuts are mostly a waste of hundreds of billions, because they’re the least effective way to boost the economy. That means we don’t get nearly the stimulus we could have gotten from intelligent deficit spending on things that actually boost demand and create jobs, and thus reduce government spending for safety-net programs and boost government revenues.

I know this will make Dana Milbank and Mark Penn cry, but the way to improve the picture is to fix the package in ways Obama’s liberal critics are demanding. And we should stop praising Obama for agreeing with people who insist hacking federal revenues by nearly a trillion dollars doesn’t impact the deficit. Every third grade math student knows this is nuts.

But let’s follow the logic of how Washington will interpret Hess: since the economy doesn’t pick up enough to increase tax revenues to offset the massive hit to deficits, we should offset the tax cuts with spending cuts. How convenient for the foolish proposals from the Deficit (aka Catfood) Commission.

The illogical message the Beltway Hacktopolis will take from this is that having failed to stimulate the economy via wasteful tax cuts, we should make the economy worse by slashing spending. It will never occur to them that slashing spending doesn’t “offset” terrible stimulus; it doubles down on the error.

So now expect to hear the White House and Obama’s new allies in Congress (including 83 foolish Senators yesterday) to really screw the economy. They’re about to waste over $800 billion in ineffective tax cuts, and set themselves up for extending the unconscionable tax cuts for the richest Americans by another trillion dollars or so, and to “offset” that madness, they’ll take meat axes to spending and really tank the economy.

Brilliant. Someone should pay Moody’s another nice fat fee for explaining how to destroy the economy, again, and putting millions of people out of work.

John Chandley

More from FinancialTimes blog, Tracy Alloway, Moody’s sees ‘definite negative’ for US rating. NOT.