Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The long buildup of Chinese claims on the US taxpayer had ended. But the portfolio stabilized at between $1.2 trillion and $1.3 trillion. Criticism from China was only to be expected. More surprising was the fallout at home. On August 5 the unthinkable happened. One of America’s own ratings agencies, Standard & Poor’s, downgraded the United States from AAA to AA+. S&P cited the “political brinkmanship of recent months” and the mounting evidence that “America’s governance and policymaking” was “becoming less stable, less effective, and less predictable.”76 It also pointed to the supposedly unsustainable level of US debt and the speed of its accumulation, which would take it well over 90 percent of GDP by 2021—the notorious Reinhart and Rogoff threshold. But when the US Treasury was handed the explanation for S&P’s decision, it became clear that the ratings agency had committed an elementary mistake. By applying the figures for debt growth to the wrong benchmark scenario, it had wildly overstated the deficit to be expected over the next ten years. Even more surprisingly, when this error was pointed out, S&P did not retreat. It left the downgrade in place as well as the explanatory text—minus the modeling error. This led the Treasury to fire off an official denunciation. “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. . . . The magnitude of this mistak...