By Michael M. Gleeson - 12/16/10 12:49 PM EST
Rep. Barney Frank (D-Mass.) on Wednesday lambasted Moody's Investors Service for suggesting the nation's credit rating will be hurt if Congress passes President Obama's tax-cut proposal.
“The notion that the U.S. would default [if the tax-cut plan passes] is crazy. Absolutely crazy,” Frank said.
“If the tax and unemployment-benefit package agreed to on [Dec. 6] by President Obama and congressional Republican leaders becomes law, it will boost economic growth in the next two years, but adversely affect the federal government budget deficit and debt level,” Moody's analyst Steven Hess stated in a report. “Unless there are offsetting measures, the package will be credit negative for the U.S. and increase the likelihood of a negative outlook on the U.S. government’s AAA rating during the next two years.”
Frank, who opposes the president's tax plan, said pondering a downgrade in a credit rating is equal to questioning whether an institution will default.
“What is a credit rating? A credit rating is: Are you going to default or not?” he told The Hill. “That is what it means.”
If Moody’s doesn’t believe the U.S. will default if the bill passes, then “why else would the crediting rating go down?” Frank said.
Frank called the report by Moody’s "absolutely nonsense."
“The notion that this in any way threatens credit rating is nonsense, and I am against the tax bill,” he said.
Moody's declined to comment for this article about Frank's statements.
The outgoing chairman of the House Financial Services Committee questioned the rating agency's competency, stating that Moody's and other rating agencies blessed mortgage-backed bonds, some of which ended up as toxic assets, with AAA ratings.
“The rating of the rating agencies has been downgraded more than anyone they have downgraded,” he said. “Personally, if I were Moody's, I would be careful, given their lousy record.”
A downgrade by Moody's could lead investors to re-evaluate their positions in U.S. treasuries, which rank among the world's safest investments.
One key question is what effect a downgrade would have on the investment decisions of countries such as China, the largest foreign holder of U.S. treasuries, with $900 billion.
Frank dismissed the notion that China is closely monitoring what Moody's says.
“Do you think China pays attention to Moody's or to China?” he said. “I am not sure who is going to pay attention to it. The rating agencies have lost a lot of their power to influence because of the mistakes they made in 2008, and 2007, and 2006, and 2000. They have a terrible record.”
Frank pointed out that there are few other more secure assets than U.S. treasuries.
He added, “Where are the Chinese going to put their extra money? If China was going to stop buying American bonds, whose would they buy? Saudi Arabia, Dubai, Germany?”