This week, both Moody’s Investor Services and S&P have published negative ratings that will have no other effect but to harm any recovery efforts being undertaken by government. Wise move or pure insanity?

The Ratings AgenciesMoody’s, for example, downgraded every municipal bond offering across the board, prompting Financial Services Chairman Barney Frank (D-MA) to plan May hearings on Moody’s actions.

But municipal bonds were not the only victims of Moody’s insane actions. They downgraded Berkshire Hathaway from AAA to AA2 even though Berkshire owns 20% of Moody’s.

S&P downgraded mortgage insurers, which will undoubtedly cause a tsunami of fear about mortgage protection on Wall Street later in the day, potentially putting the efforts of the U. S. Treasury and Federal Reserve to restore confidence in mortgage lending at grave jeopardy, not to mention putting home sales at risk.

At a point in time when the global economy, not particular sectors are downgrading, was this particularly wise of Moody’s or S&P?

We don’t think so. In fact, after our morning conference call today, nine economists and five finance experts were in unusual accord that these downgrades by the ratings agencies will have serious implications moving forward with recovery, potentially wiping out any chance government funded stimulus will be effective. One financial expert referring to the downgrades as “economic terrorism”. An economist called the actions “a wanton act of murder against recovery”.

Municipal bonds, backed by taxes, help fund many of the essential services municipalities around the United States provide. Downgrading them, unilaterally, means that investors will be wary of purchasing them, and forcing the municipalities to pay a higher interest rate. This effectively wipes out any funding provided by the Federal stimulus package.

It also forces municipalities to raise taxes and fees, prompting inflation on a local level and causing more individuals and businesses to vacate the more expensive communities for the less expensive ones. This of course, leads to increased bankruptcies and unemployment.

The decision to downgrade mortgage insurers places lenders at risk, and harms potential borrowers who may be required to take PMI (Private Mortgage Insurance). The cost of such insurance is now forced to rise, potentially making mortgages unaffordable, no matter how low the price of a home might have gone.

Worst, the downgrade may force some insurers to restrict regulations, making it more difficult for potential buyers to obtain a mortgage. The effect of this action will most assuredly constrain home sales and further limit mortgage lending.

Our opinion is that the Financial Services Committee meeting in May will probably result in the resignation of some of the decision makers at Moody’s and Standard & Poors who’ve done so much to damage the economy by their decisions.