Michael Greve’s post on the troubling allegations about Secretary Geithner’s alleged threats against S & P underscore a very serious structural problem in modern democracy. Careful evaluation of the solvency of democracies is essential to protecting the property and prosperity of citizens. It is particularly important because these governments are structurally prone to overspend and run up debts. Adjusting the credit ratings of sovereigns is not simply commercial speech but the political speech of the highest order. The credibility of government finances goes to the heart of politics.
The difficulty is that those companies who can monitor these finances are themselves involved in the financial services industry. Given that this industry is massively regulated by government, they are subject to potential retaliation, not only through litigation, but probably more importantly through the regulatory discretion of the modern administrative state. Thus, even without explicit threats, rating agencies may pull their punches.
The danger is not a problem unique to the United States. The European Commission has recently forced rating agencies to jump through hoops if they want to rate the sovereign debt of European nations. These rules followed the massive outcry by government officials when rating agencies downgraded debt of many European nations—some toward junk status.
The problem is serious enough that it requires a legislative solution. First, the House Government Affairs Committee should immediately hold a hearing about the allegations that S & P was threatened after downgrading the debt of the United States. Former Secretary Geithner should be put under oath and forced to tell us exactly what he said his phone call to S & P’s chief executive. At the very least, such a hearing will discourage similar conduct to that alleged about the former Secretary. Second, Congress should enact a special whistleblower statute that should reward government employees for reporting threats made against those who report on government’s finances.
The complexity of modern government means that it easier for its leaders to hide the true state of the nation’s finances. The power of modern government also makes it easier for them to punish those who can deliver the message that the emperor has no clothes. We need to put into constrain such unjustified threats and punishments. By assuring a free flow of information such constraints would in turn make government finances more credible, because government would be acting under the scrutiny of watchdogs with teeth.