by James Watkins

Whether voiced by George Osborne at the dispatch box or by Andrew Neil on the This Week sofa, the message is the same: it is too late to change course on the massive deficit reduction plans, otherwise the markets would be spooked. This new line is a response to the growing success of the belated Labour campaign that the cuts go “too far, too fast”.

So how does Labour now move from the government’s line that the cuts are needed to tackle the “mess” of the Labour years to the fatalistic line that it is too late to change course. The heart of the counter attack is to expose the fallacy that the views of credit rating agencies should always be heeded.

Credit rating agencies are necessary. To oversee levels of debt and economic performance, independent and well run credit rating agencies have their place. The markets cannot function properly if risk is not independently checked. Otherwise business judgements would be made in the same way as playing poker in the dark.

But the credit rating agencies have not been as good at their job as they have at their PR. Between 2002 and 2007, an estimated $3.2 trillion in loans were made to US homeowners whose poor payment records were known. These loans were bundled up in securities – or investment packages – that were sold across the world. As the respected economist, Joseph Stiglitz, said

“I view the rating agencies as one of the key culprits. They were the party that performed the alchemy that converted the securities from F rated to A rated”. (more…)