USA’s Historic Downgrade

USA’s Historic Downgrade

For the first time since 1917 America has had its credit rating downgraded by a significant rating agency, Standard and Poor’s.  This credit downgrade is likely to affect many aspects of the American economy from adjustable home mortgages to student loans, car loans, and credit card rates.  Standard and Poor’s has officially downgraded the United States from its highest rating AAA to its second highest rating AA+.  However like everything else in this debt crisis, even Standard and Poor’s downgrade is not without a bit of controversy.  White House officials have claimed that Standard and Poor’s medium and long term economic projections of America’s debt are “way off”, claiming a 2 trillion dollar error.  In an interview on CNN’s Anderson Cooper 360^o Standard and Poor’s head of sovereign ratings John Chambers said the 2 trillion dollar error did not matter because it doesn’t change the debt-GDP ratio which will continue to rise over the next decade. 

Let’s take a look at that interview conducted by CNN’s Anderson Cooper with Standard and Poor’s head of sovereign ratings John Chambers.

http://www.cnn.com/2011/BUSINESS/08/06/global.economy.cnn/index.html?iref=BN1&hpt=hp_t1

John Chambers : “The political brinksmanship we saw over the debt ceiling was something really beyond our expectations; the US government getting the to the last day before they have cash management problems.  There are very few governments which separate the budget process from the debt authorization process.”

The inability of congress to put political ideology aside and compromise to reach a significant debt reduction plan WAS factored into this credit downgrade because it showed a fundamental failure of congress to compromise and govern as a divided legislative body. 

Cooper: Do you blame one political party more than the other?

Chambers: “No I believe there is plenty of blame to go around.  This is a problem that has been a long time in the making, well over this administration and the prior administration.  It’s a matter of the MEDIUM and LONG term budget position of the United States which needs to brought under control NOT THE IMMEDIATE fiscal position.  It’s one that centers on entitlements and its entitlement reform or having matching revenues to pay for those entitlements.”

So straight from the “horse’s mouth” we DO NOT have an immediate budget problem however for the United States entitlement reform and/or increased revenue is needed to fix our MEDIUM and LONG term budget problems.  Since we have divided government and one party cannot get EVERTHING they want (thats you House Republicans) everyone needs to compromise. 

When speaking to how the United States could have avoid this downgrade. 

Chambers: “It could have come up with a fiscal plan similar to something like Bowles/Simpson commission, which was bipartisan…and came up with sensible recommendations. “

President Obama and Speaker Boehner were getting close to a “grand bargain along the same lines as Simpson/Bowles and the “Gang of six”,  However media reports state that House “Tea Party” Republicans refused to compromise which forced Boehner to withdrawal from those negotiations.  President Obama pushed for a $4 Trillion bipartisan deal which would have put America’s credit rating safe from this downgrade.

Chambers: “I think a key debate coming up regarding the extension of the 2001 and 2003 tax cuts, because if you did let them lapse for the high income earners that could give you another $950 Billion.  I think the question there is:  A. will that be an top of what we have already achieved with the $2.1 Trillion or if that was agreeable you could in vision that being counted toward the 1.5 that the committee is hoping to achieve.”  

Chambers is providing an obvious suggestion to let the tax rates for “wealth/job creators” expire and use that money towards debt reduction.  Who else suggested that?  Right President Obama! It seems clear from this interview that President Obama was completely aware of the standards which this credit agency had laid out for America’s debt reduction agreement.  President Obama was fighting for a debt deal very similar to what is outlined here in this interview.  However Congress (House Republicans) was not willing to compromise and not willing to do what was necessary to avoid this credit downgrade. Now since the “grand bargain” was never achieved we cannot know whether President Obama would have actually been able to get the votes needed to pass entitlement reform but unfortunately we never got that far because of partisan politics in Congress.

This credit downgrade was predictable and avoidable however Congressional politics obstructed policy and once again the American people are left paying for it.  Ideological views stood in the way of practical solutions and on August 5, 2011 we saw historic consequences in the down grade of America’s credit rating. Will this serve as a wake up call for Congressional members?  I won’t hold my breath.  This down grade will likely lead to more of the “blame game” and finger pointing... (Sigh)


UPDATED: 8/8/2011

Markets responded to the S&P downgrade on Monday with even more massive sell offs, leading to a single day stock market drop of 632 points.  In the last two weeks markets have hit lows not seen since the economic collape in 2008.