This is true on a country by country case. What is most insidious about the credit agency warnings is the “fallacy of composition” follies it provokes. If collectively countries and investors follow their advice and governments – especially in the largest countries – fail to engage in large enough fiscal expansions – then the prospects for widespread payment problems of sovereign debt surely will occur. A widespread heeding of Standard & Poor’s information will almost certainly lead to massive losses for investors.

So what is to be done?

In the short run, prominent policymakers in national as well as international forums should collectively discredit the credit rating agencies. The IMF, the BIS, the European Union and business leaders around the world should denounce this wrong and destructive advice. Second, the rules governing pension funds and other investment funds should be immediately changed – at least for the duration of the crisis – to allow them to discount the weight they give to the agencies’ ratings of sovereign debt. In the medium term, substitutes must be found for these agencies’ ratings, which by now should have lost all credibility. The creation of a global nonprofit agency, funded with an endowment to protect its political independence, yet one that is transparent and broadly open to scrutiny – should be strongly considered.

Finally, and of fundamental importance, efforts to take more internationally coordinated action to achieve massive fiscal stimulus – supported by central banks – must be taken immediately. This credit ratings fiasco – which picks off the weakest countries one by one and sends warnings to the stronger ones – an anti-Keynesian divide-and-conquer strategy – could not occur if governments coordinated and unified their actions to turn this crisis around.

Gerald Epstein is Professor of Economics and co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst, and Visiting Scholar, Université, Paris NORD (Paris XIII). gepstein@econs.umass.e

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