On Downgrades and Grades; or, Dude, Score Thyself

Yesterday, in a post on her New Yorker blog, Close Read, titled “Rioting Markets,” Amy Davidson, commenting on a surreal week in our markets and cities, a week when one wondered, like Yeats wondered, if the center can hold, said, “We lost our credit rating, after all, in large part because of a riot by ostensible grownups in Congress.” What Amy is saying is that the reason for the downgrade was S&P’s feeling that Congress was unable to lower debt by increasing revenue (i.e. raising taxes), and based on what S&P’s David Beers said following, that the Bush tax-cuts should be repealed, we agree with Amy’s comment, but, and while Yeats could not afford to quibble, the gyre widening as he wrote, quibble we must with Amy’s saying “we lost our credit rating,” for we did not lose our credit rating. We were “downgraded” from AAA to AA+. And even to call this change a downgrade, while accurate, misses an opportunity to talk about the incredible and arcane chicanery of the rating system. It’s like school grades, only worse.

Here are the possible ratings that Standard & Poor’s might assign to an organization: AAA, AA+, AA, AA-, A+, AA-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC to C. Was there ever a school report card this complicated?

In the recent S&P downgrade, the US was rescored from a grade of AAA to a grade of AA+. For comparison, think of student grades, think A-. Still a good score, excellent, in fact, right? But the general reaction to the S&P downgrade bears some similarity to the grade inflation in US schools, for an A-, as Louis Menand has pointed out, means failure where “American colleges notoriously inflate grades, but they can never inflate them enough, because education in the United States has become hypercompetitive and every little difference matters.” Thus, students who receive a grade of A- may react as if they’ve just been given an F.

But what does AA+ mean in S&P’s widening gyre? Basically, the score is a stress test. The scores indicate what economic stress level an organization ought to be able to bear and still withstand default. So what is economic stress, and how is that measured? S&P’s explanation for a score of AA includes the ability to withstand a 70% decline in the stock market. That’s like saying you ought to be able to chugalug a 5th of Southern Comfort and still sing the alphabet song backwards.

Switch to an imagined conversation between Bill and Ted. “What’d you get on the big math test, Dude?” “BB, Dude.” “Most excellent, Dude! Rock on!” An S&P score of BB indicates the ability to withstand a 25% drop in the stock market. Dude, score thyself.

Back to “The One to One Future”: Permission Marketing and the 2011 S&P Market Coup

Peppers and Rogers (1993), in The One to One Future: Building Relationships One Customer at a Time, argued that some customers were more valuable than others, and that all customers should be individually marketed to, and that share of wallet was more important than market share. This meant differentiating customers, not products, and selling multiple products to the same customer over the customer’s life. Their argument was based, in part, on media-tech changes that would alter the work and advertising consumption habits of customers. Seth Godin (1999), in Permission Marketing: Turning Strangers into Friends, and Friends into Customers, followed suit, recognizing that the old ad platform, television, had now multiplied like mosquitoes on a humid summer night in Minnesota, for the Web had created “[millions of] TV networks instead of ten” (p. 145). It might seem counter-intuitive at first, marketing to the new hatch 1:1, but getting their attention, Godin argued, means first getting their permission, and permissions are only granted one at a time.

One of the changes Peppers and Rogers imagined was a work-from-home, flex-hour (over a 7×24 work-week), consumer whose purchasing habits would be revealed and predicted over time via Web host systems. This is why the individual information Facebook most covets is a real name and a real date of birth. What Peppers and Rogers did not predict in the heady start to the Roaring 90’s was a stay-at-home work force at home because it was unemployed (see September, 2011 The Atlantic magazine’s “Can The Middle Class Be Saved?”, taken from Don Peck’s new book PINCHED: How the Great Recession Has Narrowed Our Futures and What We Can Do About It, to be published tomorrow).

Peck sees what Congress apparently cannot, that control of the future is about getting permission today, and that permission requires a one to one lifetime marketing commitment. This is why S&P’s David Beers in a video interview this morning with Reuters strongly suggests that a necessary step toward solving the US debt crisis is ending the Bush tax-cuts for upper income citizens. And to accomplish that task, Congress should start contacting their most valuable customers one to one and getting their permission (and we might point out what should be obvious but apparently is not to Congress, that their most important customers are not members of the so-called Tea Party, whose behavior mimes characters in Alice’s Wonderland).

The coup d’état is not a military coup, but a market coup. The market, led by S&P’s downgrade, has usurped Congress in taking action to solve the debt crisis and save the middle class. As Beers says in his interview “…get some buy in” to spending and revenue decisions. In spite of the anti-S&P sentiment, largely the result of misunderstanding of the rating agency’s scoring system, the S&P decision (and in spite of their lack of credibility resulting from their pre-crash decisions), should lead to repeal of the Bush tax-cuts, and that’s good news for the middle class, which in turn should be good news for the market.