California State University East Bay

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California State University East Bay

The Pioneer

California State University East Bay

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S&P Downgrade Creates Mixed Reactions at CSUEB

CSU East Bay students and professors in relevant fields have expressed mixed perspectives on the economy and the relative importance of recent headlines about it as the nationwide economic outlook remains uncertain.

The official unemployment rate as of July was 9.1 percent, a number that has changed very little since April, according to the U.S. Department of Labor.

In California, the rate remains significantly higher at 12 percent, the second highest in the country behind Nevada.

Still, some feel the situation isn’t as dire as those numbers might lead you to believe.

“Right now it is definitely more difficult to find a job than it was maybe ten years ago, but there are ways,” said Erica Graziosa, who graduated with a degree in biology and chemistry and now works for a biotechnology company.

“I don’t think you can really use the economy as an excuse,” concluded Graziosa.

Others said they remain hopeful but expressed frustration about economic pressures.

“I’m optimistic, but it’s a little tough to find a job right now, even for college graduates, and if you don’t have a degree it’s even harder,” said recreation therapy major James Thomas.

“Things are probably going pretty well for the top five percent,” he added jokingly.

Still others do not expect any kind of economic turnaround in the near future.

“I’m not optimistic at all,” said psychology major Suraj Sen. “It’s going to be all bad, especially now that Standard & Poor’s downgraded us to double-A-plus.”

S&P downgraded the U.S. long-term credit rating from AAA to AA+ on August 5 following the passage of the Budget Control Act that raised the debt ceiling.

CSUEB economics professor David Murray is personally familiar with Standard & Poor’s procedures, having had his agency assessed by the rating agency when he was Chief Financial Officer of the Contra Costa Transportation Authority.

According to Murray, economists have seen a possible downgrade coming for some time, and the evaluation process in this case was fairly typical.

But he also pointed to issues such as the $2 trillion mathematical error in the S&P calculations alleged by the Treasury Department, saying that while deadlines can be tight when evaluating these ratings, it is very unusual for such a large discrepancy to be overlooked.

S&P has denied that there was any math error.

While the downgrade may have been fairly consistent with ratings agency procedure, it seems investors did not take the warning of lowered confidence in U.S. debt very seriously.

“There were a number of analysts who expected the yield on long-term bonds to go up slightly as a result of the S&P downgrade,” Murray said, because this would be the expected market reaction to investor demands, as their investment in U.S. debt supposedly becomes less secure.

But that didn’t happen. Instead, investors rushed to buy the freshly downgraded bonds, causing an inverse effect.

“The rating process here seemed similar to what I’ve seen in my experience,” Murray said, “but the market reaction was not what many analysts expected.”

Indeed, confusion as to what the real long-term effects of the downgrade will be, along with criticism of the decision, has been widespread in recent weeks.

Jeffrey Newcomb, CSUEB professor in the Department of Marketing and Entrepreneurship, said that because of the market reaction to the downgrade, “some are calling into question the impact or importance of any one rating agency.”

This would not be the first time the credibility of the rating agencies, and S&P in particular, have come under fire.

In April of this year, a senate report was released which concluded that “the most immediate cause of the financial crisis was the July 2007 mass ratings downgrades by Moody’s and Standard & Poor’s that exposed the risky nature of mortgage-related investments that, just months before, the same firms had deemed to be as safe as Treasury Bills. The result was a collapse in the value of mortgage related securities that devastated investors.”

The report goes on to clarify how, specifically, the agencies neglected to do their jobs, saying that “when sound credit ratings conflicted with collecting profitable fees, credit rating agencies chose the fees.”

Last week, in the midst of ongoing criticism, S&P announced that its president, Deven Sharma, will step down by the end of the year, but the decision was reportedly unrelated to the downgrade, according to S&P.

According to The New York Times, Douglas Peterson, a Citigroup executive who will be leaving his current position to take charge of S&P, will replace Sharma.

In other big banking management shake-up news, some are speculating that Goldman Sachs CEO Lloyd Blankfein may soon be out of a job, after he reportedly hired a prominent criminal defense lawyer last week.

Goldman Sachs, Standard & Poor’s, and Citigroup are all reportedly under investigation by various subdivisions of the Justice Department.

It is too early to see what the long-term effect of the Standard & Poor’s downgrade will be, but Newcomb said that at this stage the effect is mostly psychological.

“It’s all about how we’re motivated or not motivated to think positively about the market,” he said.

There may be lasting negative ramifications for business and the economy, but by itself, the downgrade isn’t the end of the world, he said.

“It’s OK to go out and buy a new pair of shoes,” said Newcomb. “Things are going to be fine.”

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California State University East Bay
S&P Downgrade Creates Mixed Reactions at CSUEB