Karl Smith, blogging over at Modeled Behavior, put himself and his readers through some mental gymnastics yesterday as he tried to push back against Paul Krugman's (and others') statement that the market completely disregarded S&P's downgrade. Smith does his level best to make an argument that the ratings agency's actions weren't completely ignored. But, as I said, he goes through some mental gymnastics to do it.
The only real argument Smith could make that S&P's downgrade had an effect on the market in any tangible way is to first proclaim that what we're seeing is the the downgrade's baseline scenario. Yesterday was the baseline scenario for reaction to a downgrade. Therefore the ex-downgrade scenario is that in the absence of any downgrade, treasuries yields would have been pushed even lower.
If you want to claim that S&P's downgrade had any effect at all, that's the only argument you can make -- that US debt would have been even more purchased yesterday than it was.
You can't argue anything else. For the downgrade to really have an effect we would have seen a selloff in the stock market accompanied by a selloff of US treasuries (and a flight to substitute AAA-rated assets like other sovereigns, or perhaps even AAA-rated domestic corporates). But the treasury selloff never happened. So S&P was basically ignored.
The only real argument Smith could make that S&P's downgrade had an effect on the market in any tangible way is to first proclaim that what we're seeing is the the downgrade's baseline scenario. Yesterday was the baseline scenario for reaction to a downgrade. Therefore the ex-downgrade scenario is that in the absence of any downgrade, treasuries yields would have been pushed even lower.
If you want to claim that S&P's downgrade had any effect at all, that's the only argument you can make -- that US debt would have been even more purchased yesterday than it was.
You can't argue anything else. For the downgrade to really have an effect we would have seen a selloff in the stock market accompanied by a selloff of US treasuries (and a flight to substitute AAA-rated assets like other sovereigns, or perhaps even AAA-rated domestic corporates). But the treasury selloff never happened. So S&P was basically ignored.
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