A couple of weeks ago, during the Debt Ceiling Debate, the President and many others (including N&D) warned about the possibility of losing our Triple A credit rating as a result of the debt ceiling. Well, Standard and Poors did just that. This is far from good news. The bottom line is the Tea Party controlled Republican party not only held our credit rating for ransom, they killed the hostage.
It is important to put this development in context.First, we were expecting this as observed by MSN.
But others thought a downgrade was inevitable, particularly after S&P placed the country’s perfect AAA credit rating on “CreditWatch negative” on July 14. That status generally means the agency will make some ratings move within 90 days. The rumor was resonant enough that it helped punish stocks in early trading Friday.
And as reported by Reuters on June 21.
The risk of a downgrade to the credit rating of the United States has increased due to a lack of political consensus on how to employ the country’s balance sheet flexibility, Standard and Poors’ said on Tuesday.
Second, of the three credit rating Agencies, S&P is the only one that chose to down grade our credit rating. We still have a AAA rating with Moodys and Fitch By their own admission, S&P based it’s downgrade of our credit rating, in part, on a $2 trillion error. Of course, a 2 trillion dollar error is not only significant, it’s a fundamental error. S&P’s refusual to re-assess the downgrade, given this error begs the question: if S&P acknowledge they made a serious miscalculation, why wouldn’t they re-consider the decision to down-grade our credit rating?
The simple answer is stated by Jason Easley in the first sentence of his post, Republicans Kill The Hostage As S&P Downgrades US Debt
S&P downgraded America’s debt because the Republicans have made the process of governing so dysfunctional that Washington can no longer be trusted to agree to make even the most basic decisions.
In fact, that is exactly what Standard & Poor’s says in the Rationale section of it’s written explanation for the downgrade. Here is an excerpt:
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.
Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see “Sovereign Government Rating Methodology and Assumptions ,” June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.
We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government’s debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.
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.
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand (see “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even more Green, Now,” June 21, 2011).
Looking in retrospect, the President’s assessment of the economy and what needed to be done was spot on,
- 2010, The Tea Party opposes increases to the debt ceiling.
- After announcing his intention to establish a bi-partisan commission to make recommendations on our fiscal policy during his State of the Union Address, President Obama established the Simpson/Bowles Commission in February.
- The Republicans responded with a proposal that included Ryan care, and other savage cuts to spending, while preserving welfare for the rich and corporations.
- President Obama endorsed the Simpson/Bowles recommendations in April.
- During the early stages of the debt ceiling debate, the Tea Party controlled Republicans again advocated savage cuts to the social safety net, while protecting their own sacred cows included the Bush tax cuts and advocating more tax cuts for the rich and corporations.
- President Obama proposed negotiating a grand deal including revenue increases and $4 trillion in spending cuts over 10 years.
- On June 23, Eric Cantor walked out during the talks upon hearing the words: .
- July 10th, Speaker Boehner rejected Obama’s proposal to put the social safety net on the table, in exchange for tax increases of $10 billion over 10 years.
- July 28th, Tea Party Caucus leader, Michele Bachmann denies raising the debt ceiling is an emergency
- July 31, the President and Congressional leaders agree on a Debt Ceiling deal.
Congress passed the resulting bill and it was signed by the President. No one liked this deal, albeit for different reasons. There was also a lot of criticism of the recommendations by the Simpson/Bowles commission. I’ll admit there were elements of that proposal that I didn’t like and still don’t. However, the fact remains that the President endorsed a balanced approach to addressing our fiscal problems, but was receptive to negotiating with the GOP. The GOP were not negotiating a deal on raising the debt ceiling. They were negotiating the ransom for releasing their hostage: our willingness to pay our bills.
Speaker Boehner’s reaction to the downgrade suggests he still intends to play the partisan games that led to a debt ceiling crises and led S&P to down-grade our crediting rating. Boehner’s press release says, in part:
“Republicans have listened to the voices of the American people and worked to bring the spending binge to a halt. We are no longer debating how much to spend, but rather how much to cut. Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground.
“The Administration and Democrats in Congress had sought an increase in the debt limit without any spending cuts or reforms. Republicans made clear the American people would not tolerate that and fought for the largest spending cuts possible. With the Budget Control Act, we made a positive first step toward reducing the debt, but much more must be done.”
The statement in it’s entirety can be read here.
First of all,according to polling by Pew Research Center, Republicans have not listened to the American people. As reflected in the poll below, the majority of which wanted Congress to compromise. The notable exception is Tea Party Supporters. Second, the very Republicans who created the Debt Ceiling crisis were responsible for a good part of the reckless spending the Speaker talks about. Moreover, the President endorsed the Simpson/Bowles recommendations in April! Those recommendations called for substantial spending cuts, including cuts to the social safety net with comparatively small tax increases.
On Thursday, Senate Minority leader McConnell said the Tea Party controlled Republicans will continue to hold our credit rating and with it, our economy hostage.
“I think some of our members may have thought the default issue was a hostage you might take a chance at shooting,” he said. “Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming. And it focuses the Congress onsomething that must be done.”
McConnell also stated that he “could imagine doing this again.”
Given that S&P downgraded our credit rating even after acknowledging that its calculations were off, it is abundantly clear that the down grade was maintained because the sort of tactics McConnell imagines doing again. S&P didn’t down grade our ability to pay our bills, they downgraded a dysfunctional political system. This is explained very well by Ezra Klein in the video below. The bottom line is the Republicans should held accountable for holding our debt ceiling for ransom and subsequently killing the hostage. Aside from having no remorse, they have stated their intention to do it again.
Update: Thanks to James Parker for reminding me of the fact that pressure was on our credit rating in September 2008. That’s right guys. S&P began to have concerns about our spending habits during the Bush Administration as a result of the AIG bail=out:
The $85 billion bailout of AIG on Tuesday by the U.S. Federal Reserve “has weakened the fiscal profile of the United States,” S&P’s John Chambers told Reuters in an interview.
“Lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. triple-A rating,” Chambers said. “There’s no God-given gift of a ‘AAA’ rating, and the U.S. has to earn it like everyone else.”
The cost of insuring 10-year U.S. Treasury debt against default rose on Wednesday to a record high, a day after the government rescued insurer AIG with an $85 billion loan. At one time, AIG was the world’s largest insurer, ranked by market value. At midday on Wednesday, AIG’s stock was down 33 percent at $2.50 on the New York Stock Exchange.
The GOP owns this, literally from beginning to end.