One of the on-going arguments across the blogosphere and even the entire world is whether the economic problems of the last ten years are more related to incompetence or basic corruption. I must say, just the last week has offered plenty of evidence for both views. For example, we had this article from Bloomberg yesterday (Tuesday, November 29) about how then Treasury Secretary Hank Paulson met with his hedge fund buddies and gave them the first class insider information on his plans to place Fannie Mae and Freddie Mac into “conservatorship.”

Leaks from the Super Committee show how Democrats and Republicans are proposing to meet their debt reduction goals. The Republicans propose a minimum of tax increases versus spending cuts, and even those increases are misleading, since they’re using different baselines.

Sit down for this one. Because you’re just not going to believe it. It seems that the more credit rating agencies are paid by corporations and banks to rate their debt, the more favorable ratings they hand out! This goes against everything I know about the untainted, incorruptible hand of the free market, and comes very close to shaking my faith in the credibility of the rating agencies.

It turns out that the Justice Department is not only concerned with Standard and Poor’s but the entire credit rating agency industry, it appears. The reported investigation into the ratings of mortgage backed securities during the housing bubble is centered on S&P, but not limited to them.

The Senate Banking Committee claims to be gathering information on S&P, but as Manns says this is an industry-wide phenomenon. Long ago, the government gave the rating agencies a good deal of power, and now they’re using it to protect their core business. I’d love to see Congress defy the rating agencies and reduce their role in bond deals (through mandating AAA securities in them), but I don’t see it happening.

If the rating agency’s entire argument was that the political system showed itself to be “less stable, less effective, and less predictable” during the debt limit debate, and that this failure of policymaking and institutional capability increases the chances of default, I don’t have much to argue about that. But, there’s a policy response for that. S&P could do exactly what Moody’s did and call for the debt limit to be extinguished, on the grounds that the legislative branch shouldn’t get to vote twice on funding, once when they appropriate it and another time when they decide whether or not the bill should be paid. If they really wanted to exert some influence on behalf of bondholders, they could have said that they would downgrade US debt further if the debt limit isn’t abolished within 90 days. Since the brinksmanship over the debt limit constitutes the biggest – perhaps the only – threat to paying off US sovereign debt, then the appropriate action for entities judging creditworthiness is to ask that the country in question eliminate the arcane and also dangerous practice.

But that’s not S&P’s only rationale.

To the extent that there’s any fallout from the political gridlock in Washington, it’s that the country cannot execute the simple, fundamental steps to improve economic performance. Contractionary fiscal policy gets combined with an anti-expansionary debt limit deal to magnify the effects of the end of the stimulus.

After the short White House meeting today, Congressional leaders of both parties met on Capitol Hill to work out an agreement to increase the debt limit. Earlier, House Speaker John Boehner held a conference call with his caucus, where he said he wanted a debt limit plan in place by tomorrow to avoid causing a drop in the Asian markets.

This concern about the markets has happened very suddenly. All of a sudden there’s a belief that a clean increase or a small debt deal with a minor amount of spending cuts would not be enough to avoid a downgrade. Standard and Poor’s basically forced this by saying that they would downgrade if there wasn’t a $4 trillion deficit deal in the next 90 days.

The aide who leaked that President Obama and John Boehner were close to finishing a deal with $3 trillion in defined cuts and $1 trillion in aspirational revenue worked for the Senate Democrats. Practically every media outlet in the nation is reporting on their anger. Harry Reid, who learned about the all-cuts deal in the press, reportedly told Budget Director Jack Lew in a closed-door caucus meeting “I’m the Senate majority leader — why don’t I know about this deal?” A senior Senate Democrat told The Hill, “There’s a basic lack of trust with the President.”

As near as I can tell, the only thing the Gang of Six has made more likely is default. It’s essentially the same deal that Eric Cantor and John Boehner rejected because it included tax increases. Maybe the increases are so vague and the abolition of the alternative minimum tax so attractive that this changes the perception among House Republicans, but I’m not sure why we should believe that. This is the group that passed the Cut, Cap and Balance Act yesterday, for a frame of reference. Indeed, John Boehner’s office said the plan “appears to fall short” of House goals.