The credit rating agency Standard and Poor’s downgraded the United States government’s credit worthiness last week to much consternation. But they were right to do so, if for the wrong reasons. In the face of complete intransigence on the part of Republicans, can Barack Obama and Congressional Democrats do anything about it? Would they even if they could?
Have you heard the news? It was in all the papers. On every news website and every TV news program from the Atlantic to the Pacific, the Canadian border to the Gulf of Mexico. The credit rating agency Standard and Poor’s, the best known of all of the rating agencies, took the bold and curious step of downgrading the credit rating of the United States Government from the platinum plated AAA down to AA+ last Friday. It’s the first time in this nation’s history that anyone anywhere has ever considered the creditworthiness of the United States anything less than iron clad.
The move was rather controversial to say the least. Not that the nation hadn’t been warned. But it was assumed that by avoiding defaulting on the government’s debt obligations that all would be forgiven and the ratings agencies would back off despite the dire threats. The argument goes that the country—despite its obvious problems and weak economy that doesn’t seem to have much hope of getting a whole lot better anytime soon—is on solid financial footing and in no danger of not being able to pay its bills. Apparently not everyone sees it that way.
Meanwhile, the White House has viciously pushed back against the S&P move, and Treasury Secretary Tim Geithner said that the ratings agency showed “really terrible judgment,” especially in the wake of the AAA ratings the agencies all gave to the essentially worthless mortgage backed securities in the years leading up to the 2008 economic collapse, S&P included.
And they have a point. S&P, Treasury Department officials pointed out, had miscalculated the U.S. future deficit projections by $2 trillion. Then there’s the fact that sales of U.S. Treasury Bonds skyrocketed on Monday and prices rose as the stock market saw its largest decline since the 2008 crash, indicating that investors have very little worry about the reliability of the U.S. Government as an investment. There was no shortage of investors practically begging to buy up U.S. Treasury Bonds—or “T-Bills” as they are colloquially called in the finance trade. So on the one hand it seems that S&P has got this all wrong, and the U.S. is still as sound an investment as ever.
But then again, S&P has a point, too. Their analysis was not strictly based on the purely financial elements of our economy: Their decision to downgrade the U.S. credit rating came down to politics. More specifically, Tea Party politics.
From the S&P release:
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade. (emphasis added)
The 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. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. 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. (again, emphasis added)
Essentially what they’re saying is that our politics are so screwed up and Congress as a whole so dysfunctional that instead of solving problems like they’re supposed to do, they’re actually causing the problem. Congress is so gridlocked that nothing serious can even be discussed, let alone accomplished. And when one side willingly—even eagerly—seeks to push the United States government into default, actively using that threat as a means to deliberately further destroy an already bloodied economy, well, it’s tough to argue with them. And to make matters worse, Mitch McConnell, the Republican leader in the Senate, happily admitted that what we just saw over the last few weeks is going to be the way business is conducted from here on out when it comes to the full faith and credit of the United States.
“In the future, any president, this one or another one, when they request us to raise the debt ceiling, it will not be clean anymore. This is just the first step. This, we anticipate, will take us into 2013. Whoever the new president is, is probably going to be asking us to raise the debt ceiling again. Then we will go through the process again and see what we can continue to achieve in connection with these debt ceiling requests of presidents to get our financial house in order,” McConnell said to a CNBC audience after the debt deal was signed last week. McConnell delighted at the fact that the Republican hostage taking tactic has turned out to be such a magnificently successful bargaining method; one in which Republicans actively use the threat of collapsing the U.S. economy in order to get what they want. And he promised that it will happen again.
If that’s the new norm, it’s no wonder the ratings agencies have their doubts about U.S. financial stability.
The fact that President Barack Obama refuses to take a stand—or at least a stand he’s willing to stick with—surely hasn’t helped matters. In fact, all he’s done with the soaring rhetoric and artificial lines in the sand is to perpetuate the notion that Democrats are weak and can easily be pushed around. It should also be noted that he’s been aided and abetted by Democrats in Congress—both houses—that collectively refuse to stand and fight for anything. There’s the congressional Progressive Caucus that’s made a lot of noise and put up a whimper of a fight, but unfortunately they don’t brandish the kind of clout their Tea Party counterparts have, primarily because they’re sane and aren’t willing to push the entire country into ruin so that they’ll get their way. The laws of mathematics actually mean something to these folks, and they understood that a default carried real consequences for real people. Still, that didn’t stop them from voting en masse against the debt ceiling bill that is being so highly criticized now, including by S&P.
Even Standard and Poor’s acknowledges that revenues must be a part of the equation. And revenues mean taxes. But when one side refuses to even consider that possibility—when they, in fact, insist on even further cuts to already historically low tax rates—well, that’s a problem. When the other party lacks the fortitude to fight for what’s right that’s an even bigger problem. And the really sad part in all of this is that no one is standing on the side of average everyday citizens of this country. After all, they’re the ones who are hurt the most, but heard the least. And unless that changes, don’t expect this country’s prospects to change anytime soon……..unless it’s for the worse.
Standard and Poor’s didn’t downgrade the United States’ financial system, it downgraded the United States’ political system. And they were right to do so.