S&P Over the Top Downgrading U.S. Credit

by John M. Curtis
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Copyright August 6, 2011
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             When President Barack Obama signed the new debt-ceiling increase Aug. 2 into law it was after a bruising political battle with Republicans.  Obama begged the GOP to get off its “no tax pledge,” despite warnings from Standard & Poors and credit other rating agencies that without sufficient revenue the U.S. faced a credit downgrade.  With unemployment high, mushrooming budget deficits and record low tax rates, rating agencies wanted to see a combination of tax hikes and budget cuts.  Once the debt deal was reached Aug. 2, the government thought it placated the credit bureaus.  No one knows yet the repercussions of S&P’s Friday downgrade from AAA to AA+.  It could mean a quarter percent bump in long-term treasury rates to account for the risk of a downgrade.  Or, as many analysts expect, it could mean nothing.  Some economists question S&P’s political motives.

            In downgrading U.S. credit, S&P emphatically stated that Washington can’t come up with a fiscally responsible plan to deal with the government’s mushrooming debt.  Tea Party loyalists, sworn to a “no tax pledge,” coerced House Speaker John Boehner (R-Ohio) into a “compromise” deal that included no new taxes.  Former President Ronald Regan, the Tea Party’s No. 1 icon, once said “the government doesn’t make money, it just takes it, from the pockets of the people.”  Reagan’s famous line that “the government is too big and it spends to much,” has been the rally cry for Tea Party zealots wishing to slash the size and influence of the federal establishment.  They like to blame the government’s insatiable appetite for taxes on the Welfare State.  Yet Tea Party fanatics like House Minority Whip Rep. Eric Cantor (R-Vir.) advocated a government default over realistic compromise.

            Whatever the merits of S&P’s downgrade, the 150-year-old financial company, now a division of McGraw Hill publishing, reincorporated in 1941.  They boast over 2 billion in annual revenues with a staff of around 10,000 employees.  During the dot-com bubble of the late ‘90s, S&P frequently rated companies AAA when the companies made no profits, had shabby business models and eventually went belly up when the market sold off in early 2000.  When it comes to the “full faith and credit” of the U.S. government, it takes real nerve for S&P to downgrade U.S. credit.  Regardless of all Washington’s shenanigans, S&P knows that the U.S.-backed securities are the world’s gold standard.  It’s one thing to question the motives of the Tea Party trying to damage President Barack Obama politically, it’s another to downgrade U.S, credit and blame the Republican Party.

            While it’s true that Boehner could not get out from underneath the Tea Party’s “no tax pledge,” it’s also true that they subscribe to a failed “trickle-down” theory that blames high taxes on the nation’s deficits and anemic economic growth.  Individual and corporate tax rates are at historic lows, proving, if nothing else, that low taxes aren’t the only thing that stimulates the economy.  All prosperous nations have a balanced combination of taxes and budget restraints.  S&P correctly pointed out that the President’s six-member bipartisan Blue Ribbon panel must come up with the right balance between budget cuts and taxes to deal with today’s deficit spending.  While economists debate what can be done to fix the economy, the panel must deal with fiscal realities of today’s budget deficits and national debt.  It’s hard to get things done during an election year.

            Executives at S&P need to be called on the carpet for downgrading U.S. credit.  Obama needs to call executives from credit rating agencies together with key members of Congress to a White House summit to find out what went wrong.  Whatever S&P’s p;rocess, it doesn’t help stabilize the stock market or U.S. economy to be on the wrong side of a judgment call on downgrading U.S. credit.  With a history of making so many credit rating mistakes, S&P should have consulted with Congress and the White House before pulling the trigger.  No one should forget S&P’s AAA  ratings for such industrial giants as Enron, WorldCom, Global Crossing, etc, not long before the largest bankruptcies in U.S. history.  S&P rated Bear Stearns and American International Group [AIG] AAA only days before both companies went under.  Decisions to downgrade U.S. credit can’t be taken lightly.

            No U.S. credit agency, whether S&P, Fitch or Moodys, have the right to downgrade the U.S. government without careful consultation with the White House and Congress. There’s simply too much riding on the U.S. economy to accept an arbitrary downgrade, whether justified or not.   With all the mud slinging in Washington, S&P’s downgrade, together with their rationale, clearly blame the Republican Party for refusing to raise taxes.  Whether it’s justified or not, no U.S. credit agency should be allowed to downgrade the U.S. government without careful White House and Congressional consultation   No U.S. credit agency—no matter how well-intentioned or imperious— should hold the U.S. economy hostage with an arbitrary rating without extensive collaboration with the U.S. government.   Playing God is barely OK with Wall Street but not with the U.S. government.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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