US credit rating downgraded

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Tonight, after the markets closed, Standard and Poor’s downgraded the credit rating of the United States for the first time in history. Now with an AA+ status, some are predicting catastrophic market losses, spikes in interest rates and more apocalyptic occurrences. However, others are saying that the anticipation of such a downgrade spurred market losses this week, thereby blunting the effect and still others are calling it a needed wake-up call.

Back in April, S&P had warned that they were putting the US on “CreditWatch with negative implications” as partisan bickering continued. Today, as they issued their report, they noted that:

Political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently…. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden.

Therein lies the crux of the problem. Immediately after S&P released their report, the White House attacked their credibility, while those on the right went after Obama. Michele Bachmann said “We were warned … that a failure to deal with our debt would lead to a downgrade in our credit rating….President Obama is destroying the foundations of the US economy one beam at a time.” Mitt Rommey said “America’s creditworthiness just became the latest casualty in President Obama’s failed record of leadership on the economy…Today, President Obama promised that “things will get better.” But it has become increasingly clear that the only way things will get better is with new leadership in the White House.” Newt Gingrich weighed in via Twitter, while Jon Huntsman released a statement on the “cancerous debt” and the lack of leadership in DC. Ron Paul said in part: “The ratings agencies had been warning us for some time that it is imperative upon the U.S. government to get its fiscal house in order and tackle its debt and deficit problem by taking serious steps. Unfortunately, the game in Washington has been one of partisan blaming and bipartisan out-of-control spending.”   Herman Cain referenced Treasury Secretary Timothy Geithner who promised in April that America faced “no risk” of a credit downgrade. Oops. Santorum weighed in as well, saying ““If this downgrade holds, then it’s another example in a long line of examples of the President’s failure of leadership. Is anyone surprised at this point? There are 14 million people out of work and looking to the White House for answers – but they are receiving nothing but a blank stare. The markets are scared and the credit downgrade has happened because the President and this Congress continue to address the symptoms and not the disease.”

In addition to each Presidential hopeful weighing in, Utah’s own Congressman Chaffetz took to Twitter to call for Geitner’s immediate resignation, “by the time Monday’s markets open.”

The Wall Street Journal expounded on the “debt ceiling brawl” that influenced today’s downgrade.  According to the WSJ, John Chambers, the chairman of S&P’s sovereign rating committee said

“The political “settings” of a country are a key factor in S&P decisions, and the messy fight over the debt ceiling could not be ignored. He said it made company officials question whether the U.S. government will be able to seriously tackle its long-term fiscal challenges. “The kind of debate we’ve seen over the debt ceiling has made us think the United States is no longer in the top echelon on its political settings.”

Many experts have warned for years that the spending trajectory we are on is simply unsustainable.  S&P warned again in July that the US could be facing a downgrade if a deficit-reducing plan fell short of at least $4 trillion in cuts. This week’s debt ceiling deal was about half of that.  It should be noted that once the AAA status is lost, it can be a long and difficult process to regain it.  To date, 5 governments have been downgraded and were able to earn back their AAA status.  The length of time it to restore? Between 9 and 18 years. Ouch.

As we head into the 2012 election cycle, make no mistake that this will be a key campaign platform.  Those on the right will point to the Cut, Cap and Balance bill that passed the House and was immediately tabled in the Senate while those on the left will point to the Republicans refusal to raise taxes (a point brought up by S&P). Utah Senator Steve Urquhart blogged about the downgrade and said it comes down to two options – raise revenues or decrease spending.  Pretty sure you won’t be hearing Utah politicians talk about tax increases – unless it’s to blast them.  Don’t we commonly hear that DC doesn’t have a revenue problem? They have a spending problem – and it’s been a bipartisan one.

Friday’s Washington Post carried an article by Ezra Klein who asserted that  “A dramatic gap has opened between the economy as Washington sees it — and wants to intervene in it — and the economy that exists.”  He also says:

Washington likes to talk about the economy in terms of things it can control. Spending and deficits. Stimulus. Policy uncertainty.

But the Dow Jones industrial average isn’t diving because spending has risen, deficits have grown or stimulus policy has changed. It’s diving because of forces Washington can’t control, and in many cases, doesn’t understand very well. How many members of Congress do you think could give a coherent account of what has happened to oil or steel prices over the past three years? Or what’s happening in the euro zone? Or to the yuan?

It’s time we sent people to DC who understand those economic forces and who have the know-how, the skill and the determination to get to REAL solutions.  Our nation depends on it.

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6 Responses to “US credit rating downgraded”

  1. Downgrade. | After the Bar Says:

    […] the S&P report (via HollyontheHill): Political brinksmanship of recent months highlights what we see as America’s governance and […]

  2. Daniel B. Says:

    I agree: we do need Congressmen that understand economic forces. However, I also do not believe that there are many such people.

    Two quotes come to mind on this topic:

    “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

    John Maynard Keynes

    and

    “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

    Friedrich von Hayek

    Even those who think they understand what is going on will, I fear, be subject to laws beyond their control and beyond the abilities, and pay grade, of the US Congress.

    I believe in the market as smarter than any particular individual, and economist for decades have known the power of the market to increase prosperity., and still we have economic protectionism, tariffs, subsidies, and, always always always…a “make work” bias, as if jobs alone were the best measure of prosperity. It’s not. And, both parties seem stuck on “saving jobs” that the market is ready to adjust. But I digress…

  3. Ronald D. Hunt Says:

    Also in that report,

    or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.

    Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

    The downgrade is as much about fixing the revenue problem as it is about spending. We can’t pretend that GE not only paying 0% but receiving a $1.5 billion dollar refund isn’t a giant problem, and this is an issue across the wide base of large corporations especially ones that operate in more then one country.

    Either way, the real best and likely only way to improve the economy is to create jobs, the options for this are rather limited. We can’t hide the failure in a credit bubble like Reagan, and Bush jr, the banking system won’t support that anymore. Pro-business reforms that hurt labor won’t help as its labors lack of wages that is preventing new investment and job creation as middle class Americans simply are not making the wages to buy things from those who would invest to make them.

    The best way to get out of our current problem is to pass policy that lowers the burden on middle class families, The cost of health care is idiotic single payer(medicare for all) or all payer health care or at the very least allowing drug re-importation would help immensely, private retirement accounts have been trashed finding some new revenue for social security and increasing its payouts would help a lot as would temporary lowering the retirement age to 55 or 60.

    One other reform I would suggest as well,

    We could simply allow the Social Security Administration to convert the trust fund it into a bank that can leverage it through the Fed Discount Window and hold the entirety of out debt ourselves.

    Social Security holding the trust fund like a savings account and using the fractional reserve system could turn their $2.7 trillion dollar trust fund into a $27 trillion dollar fed loan at 0-3% interest and purchase government bonds at 1-4% interest. The SSA could keep the 0.5%-1.0% difference. We could use for portion of the difference from the Fed’s debt to the leverage limit to provide states low interest rate infrastructure bonds, helping them to balance their budgets as well.

    This would also allow the payroll taxes to be temporary lowered when the debt is high, as social security would have more interest revenue to work with.

  4. rmwarnick Says:

    #HECKUVAJOBTEAPARTY

  5. rmwarnick Says:

    Standard & Poors indicates that they could improve their rating for the U.S. if “the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.”

  6. Daniel B. Says:

    RMWARNICK: out of the whole report, that’s all you took away?

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