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Chriss Street

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Is America on the Verge of Another Credit Crisis?

Posted: 06/03/11 05:01 PM ET

Late yesterday afternoon the highly respected credit rating firm, Moody's Investor Services, officially warned that if there is no imminent progress in Congress on the debt ceiling fight, the United States of America's Aaa credit rating would be cut. Understanding that such a draconian event as a U.S. credit downgrade would infuriate voters, it should not come as any surprise that the media was distracted today over news that The Manhattan Attorney's office happened to issue a subpoena to Goldman Sachs in regards to its role in the financial crisis.

Goldman Sachs is the perfect scapegoat to blame for America's credit woes. The firm is the largest investment bank in the world and its history of ethics violations are legendary. Goldman agreed to pay $550 million to settle Federal claims that it misled investors in a subprime mortgage product just as the housing market began to collapse. It was alleged that the company recommended to its individual, hedge funds, banks, and money manager clients that they make investments in sub-prime mortgages loans Goldman Sachs was betting were already failing. The settlement was among the largest in the 76-year history of the Securities and Exchange Commission, but it represented only a small financial hiccup for Goldman, which reported a profit of $13.39 billion for 2009, the worst period of the credit crisis.

As the charts here show, Goldman Sachs has shown its appreciation to each of America's political parties by donating handsomely to their elections success.

As a show of appreciation, U.S. taxpayers have been very good to Goldman Sachs. When the credit crisis broke out in September 2008, the firm was allowed to borrow 84 times and at an interest rate of one hundredth of one percent for a total of over $18 billion dollars from the U.S. Federal Reserve in the first month of the crisis. Over the 18 months of crisis, Goldman Sachs was able to borrow an astounding total of $590 billion. Friends in high places are usually good to have, but with America's credit rating going over the falls, operatives in both of our political parties are now busy tearing up Goldman business cards and will be soon returning some of those political contributions.

Moody's was very emphatic today that only a credible agreement on a substantial deficit reduction would support the United States maintaining the premier credit rating in the world. Although Moody's stated that they had fully expected political wrangling prior to an increase in the statutory debt limit, "the degree of entrenchment into conflicting positions has exceeded expectations." They went on to say that the "heightened polarization over the debt limit has increased the odds of a short-lived default." Moody's had previously indicated that its stable outlook on the triple A rating was based on the assumption that meaningful progress would be made within the next eighteen months in adopting measures to reverse the U.S. upward debt trajectory. Moody's had assumed that the likelihood that significant progress would be achieved prior to the start of the 2012 election cycle. Moody's is now unsure that "significant progress is possible in today's political environment.

The credit crisis of 2008 became visible with the bankruptcy filing of Lehman Brothers, but the mentality of crony companies being able to take outrageous risk with the confidence their friends in government will bail them out is a sad story that has been repeated for centuries. The problem is that eventually too much risk is taken and the taxpayers end up suffering extreme pain. Hopefully America will listen to Moody's and make meaningful changes before having to suffer meaningful pain.