Yesterday, I talked briefly about the debt ceiling deal. Today, let’s talk about the downgrade that followed shortly thereafter.
S&P downgraded the US Friday night. It’s troubling that this downgrade came only a few days after the deal was approved. Personally, I was expecting that, if a downgrade was coming, it wouldn’t come until several months from now and in the event the supercongress failed.
I read the full report. It is located here. It’s a very quick read at only eight pages and it’s pretty easy to follow, so I highly recommend you have a look. One point I found particularly interesting is that S&P revised their baseline assumption regarding the Bush tax rates. They now assume the rates will NOT expire at the end of 2012 as scheduled. S&P also has upside and downside scenarios in addition to the baseline scenario. They’ve also accounted for the significant negative revisions to GDP in all scenarios in their conclusion that the recently passed deal will be inadequate.
To be honest, I think S&P made the right call downgrading the US. When they put us on negative watch, they laid out exactly what they wanted to see to prevent a downgrade and our government failed to deliver. S&P had no choice but to follow through on its word, lest they lose their credibility (a statement that I make only half-heartedly because S&P lost much of their credibility during the mortgage-backed securities calamity a couple years back).
I’ve laid out the consequences of a downgrade previously, and we’ll know soon enough whether I was correct to be concerned or whether I was being a worrywart. The global stock markets have fallen pretty much in a straight line for the past few weeks due to the debt ceiling wrangling, with a particularly nasty day Thursday. I expect we’ll see some market carnage on Monday, but the weekend may buffer it a little bit. I put a small amount of cash to work in my 401k on Friday because a lot of bargains have emerged, but I have a lot of cash on the sidelines (and maybe I should resurrect my stock blog).
This is a first for the US. Dagong downgraded us, as well, but they’re Chinese and they don’t hold the same clout that S&P, Moody’s, and Fitch hold (not that those three are entirely reputable because, after all, they completely missed the mortgage-backed security debacle and our more recent sovereign debt disasters in Europe). Whether he likes it or not, Barack Obama will go down in history as the man in charge when the US got its first downgrade. Obama will surely try to blame it on every president before him, especially George W. Bush. The Democrats and the liberal media will certainly try to pin it on the GOP, particularly the Tea Party. On the flip side, the GOP and conservative media will put it on Obama and the Democrats.
I think it’s very fair to blame Obama first and foremost for the downgrade, to be honest. It’d be different if he was only a year or so into his presidency, but he’s over halfway through his first term. He can only blame the previous administration for so long before it turns into Obama making excuses and complaining. I see this downgrade is a damning indictment on Obama’s leadership and should be added to the list of things that make voters ask themselves whether they truly believe Obama should be leading the USA. That said, there aren’t many worse birthday presents a president can get than the first credit downgrade in the nation’s history. I wonder if that was intentional on S&P’s part.
The rest of the Democrats also deserve a lot of blame for this downgrade because they’re the ones who continue to stick their heads in the sand regarding entitlement reform. They foolishly refuse to acknowledge that Social Security, Medicare, and Medicaid are unsustainable in their current forms and have America set on a path to insolvency. They don’t even think there’s a problem, and any effort to pull in these programs even slightly is met with extreme resistance (look back a few years ago when Bush Jr. tried to reform Social Security to see what I mean). The Democrats have collectively refused this reality and inserted their own. It’s a travesty.
Don’t worry – the GOP doesn’t get off scot-free, either. Their refusal to even entertain the notion of tax increases is specifically mentioned in S&P’s downgrade. However, I will say that they could be worse in that they could be advocating for not just avoiding tax increases, but actual tax cuts. Also, I did not approve of how they tried to downplay the risks of default and/or downgrade because they’re simply wrong about that, as I’ve outlined previously.
As I said with the debt ceiling deal itself, everybody’s a loser (especially the American people) and there are no winners. The downgrade is the same way. I’m just hoping this is finally the wake-up call we need to get our fiscal house in order.
Links:
http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8
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