So, Standard & Poor, one of the largest credit reference agencies in the world, has downgraded the US's credit rating. What does that mean?
Well, first off, every picture desk on every paper in the world has been raiding the excellent Brokers with hands on their faces blog for images, and every economics textbook in the world is going to have to be reprinted with a new way of exemplifying risk free rate.
In short, a private company, told the most powerful nation in the world to change its fiscal policy. I can guarantee that S&P making that statement will have more impact on US policy than any or all of the opposition to any US policy in the last 20 years.
Which must make it frustrating to be, for example, the Stop the War coalition.
The US isn't the first country to suffer from credit scrutiny. The Portuguese & Irish crises were exacerbated by ill-timed rating downgrades; the British government has been running scared from these agencies since 2007. Why are they so powerful? How many aircraft carriers do they have?
In 1996, Tom Friedman said "There are two superpowers in the world today in my opinion. There's the United States and there's Moody's Bond Rating Service. The United States can destroy you by dropping bombs, and Moody's can destroy you by downgrading your bonds. And believe me, it's not clear sometimes who's more powerful."
I'm sure plenty of angry Americans are wondering why the US are putting up with this; indeed, Italy's response to a recent threatened downgrade had the feel of "you don't mess with the family" about it.
Of course, that only exacerbates the problem. Strong-arming or colluding with the ratings agencies is what caused this problem in the first place. It's notable that the US went into negotiations with S&P to try to prevent the down grade. But that's part of the problem.
It wasn't always this way - back when the analysts were doing they're job properly. When the reference agancies were founded, analysts didn't enter dialogue with bankers or governments and certainly didn't return calls from the people they were analysing.
Of course, the agencies needed information; but the exchange of information gradually became a negotiation as the reference agencies went public in the 1990s and started to face real commercial pressure to issue more favorable ratings.
It became normal in structured finance deals for analysts to tell issuers what they needed to reach investment grade, and analysts grew accustomed to tweaking the requirements on a deal a little to keep a banker happy.
The banks began playing the rating agencies off one another and shopping around to see who would rate an issue more favourably. Former Moody's Asia structured finance chief Ann Rutledge told me in 2008: "An analyst would help the banker that was issuing the debt by relaxing the constraints on the deal a tiny bit. But the impact on the rating could be huge."
Here's a good example of how the process went wrong: in the late-90s a Miami-based company freight company sought to borrow $140 million against 14 aeroplanes. Unfortunately the numbers didn't work. The notes backed by the planes only rated as triple-C, or non-investment grade. This meant the deal could not fly.
To resurrect the transaction, the triple-C ratings would have to be raised to triple-B. "A leap, in order of magnitude, equivalent to turning a Robin Reliant into a BMW," recalls a former Moody's analyst who worked on the deal.
To get around the problem, Moody's extended the predicted useful life of the 14 planes from the normal 25 years to 100 years to generate more cash flow. Moody's simply redefined the longevity of an aeroplane to generate the right rating. I don't know about you, but I wouldn't fancy flying in a 100 year aeroplane (although the Vickers Vimy Alcock & Brown flew the atlantic in back in 1919 would probably be more comfortable than Ryan Air)
This shift in standards might have mattered little if it had only affected the shelf life of a few aeroplanes. But now we're into the world of them literally redefining the whole of economic theory by saying "The US treasury bond is not risk-free".
Exactly the same underlying conflicts of interest that damned the CDO market are present in their ratings of sovereign debt. The truth is, the global financial system hinges on the accuracy of the credit rating agencies. As a result, these bodies are, it seems, totally unaccountable. And that can't be good for anyone. Even the Stop the War coalition.