U.S. Credit Rating Downgrade: Political Class Has Failed Us

Writing last December, I argued that the United States’ Triple-A sovereign credit rating was at risk of a downgrade.  Now, less than eight months later, that prediction has come true, with Standard & Poor’s (owned by McGraw Hill (MHP)) downgrading the U.S. credit rating from Triple-A to AA+.

I can remember writing the post and asking myself if I really believed that a U.S. downgrade could happen.  I wished that I didn’t, but I did, so I published the article.

As an American, I wish I hadn’t been right, but I was.  Now it’s time to assess what happened.

The rational was largely qualitative

While there was reportedly a last minute skirmish while administration officials tried to forestall the downgrade by pointing out a purported trillion dollar mathematical error,[i] a significant portion of Standard and Poor’s (S&P) stated rational was qualitative. In its announcement, S&P stated:

  • More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
  • Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.[ii]

Fault lies all round

  • Tea Party adherents stubbornly declared their platitude of not raising taxes at all, seemingly unaware of the consequences of their position (i.e. that higher interest rates from a credit downgrade would increase government costs anyway).
  • Some established congressional Republicans stubbornly opposed defense cuts, recklessly avoiding the reality that higher interest rates for the government to borrow after a credit downgrade could sting national security by diluting the ability to finance future defense needs.
  • Congressional Democrats were equally stubborn, and in fact more Democrats (95) voted against the House bill that raised the debt ceiling than Republicans (66).
  • President Obama insisted on a long-term deal to avoid the debt-ceiling coming up again before the 2012 election.  While based on the theory that it would hurt the country to have these debt-ceiling debates during the pre-election “silly season,” historical precedent was not on the President’s side.  Ronald Reagan signed five bills increasing the debt ceiling in the 18 months before he was reelected in November 1984.[iii]

What’s the good news?

The other two major credit agencies – Moody’s (MCO) and Fitch (majority-owned by Fimalac SA (FMLCF)) – have been more forgiving, holding the U.S. at Triple-A.

What to watch for?

Good – Key players in the U.S. political leadership actually accepting responsibility for what happened.

Bad – Politicians blaming each other and Standard and Poor’s.

What to ask for if things don’t get better?

Elections structured to ensure against disadvantaging centrists.  I believe that the President is an exceptionally talented individual, with immense powers of intellect, persuasion, and consensus building.  He also responded effectively to save an economy in the depths of collapse when he took office.  But his inability to bring the players together to raise the debt ceiling in a responsible timeframe raises the question of whether anyone with a long-established partisan pedigree can bring these quarrelling sides together quickly enough for the U.S. to make the timely decisions expected of a leading economy in today’s world.

If you share my concern, see my post on California’s Proposition 14.

– Thoughtsworththinking.net

[i] See “S&P Downgrades US Credit Rating to AA-Plus,” Aug. 5, 2011, at http://www.cnbc.com/id/44039103.

[ii] See “United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative,” Aug. 5, 2011, at http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245316529563

[iii] See Dave Manuel’s outstanding compilation in “US Debt Ceiling Was Raised 18 Times While Ronald Reagan Was in Office,” Jul. 27, 2011 at http://www.davemanuel.com/how-many-times-was-the-debt-ceiling-raised-under-ronald-reagan-110/.

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