The ratings agencies are notoriously bad at judging risks and were heavily criticized after the 2008 financial crisis for slapping solid AAA ratings on debt that wound up in default. The agencies are paid by the bond issuers, so their incentives are not to be particularly harsh. They were late to discover the problems in Orange County, California, whose 1994 failure was, when it happened, described as the largest municipal bankruptcy in U.S. history.
Yet for all those limitations, the agencies—and the bond markets they communicate with—at least provide some constraints, a reality check on the impulse of the mayors to spend recklessly without sufficient tax revenue to pay for it.
The New York City comptroller, Mark Levine, called Moody’s decision “a sobering wake-up call.”
“The fact that this is happening at a time of relative health in our local economy is all the more remarkable. The underlying challenge is clear: New York City is currently spending more than it is bringing in,” Levine said.
Mamdani, meanwhile, attacked the rating agency. “I think that the decision to revise the outlook, frankly, is premature,” he said at a March 12 press conference.
The outlook will be fully mature soon enough.