By Igor Volsky – TheProgressReport.org
On Friday night, Standard & Poor’s took the unprecedented step of downgrading the nation’s long-term sovereign credit rating to AA+ from AAA, claiming that “the fiscal consolidation plan that Congress and the Administration recently agreed to falls short” of what is “necessary to stabilize the government’s medium-term debt dynamics.” In explaining its decision, the rating agency argued that the Budget Control Act Amendment of 2011 did not do enough to slow down government spending and specifically condemned Republicans for turning the debt ceiling into a political football and refusing to consider increasing taxes or allowing the Bush tax cuts to expire. But the Obama administration also raised questions about the agency’s ruling, pointing out that it had made an astounding $2.1 trillion error by projecting “the nation’s debt as a share of gross domestic product to reach 93 percent by 2021,” fully 8 “percentage points higher than the figure administration officials believed the rating agency should have used.” S&P — admittedly no oracle, given its negligence in failing to identify “the risks of subprime mortgages during the housing bubble” — conceded the mistake, but concluded that the revisions didn’t “meaningfully affect” the conclusion. Since two other ratings agencies have thus far maintained United States’ AAA rating, however, “many analysts say it’s not so clear that it will deliver any immediate shock to financial markets or to consumers.”
THE TEA PARTY DOWNGRADE: “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy,” S&P wrote in a press release announcing the downgrade. Referring specifically to the GOP’s rejection of a balanced spending package that included both revenue increases and spending cuts, the agency said, “It appears that for now, new revenues have dropped down on the menu of policy options” and stressed that the final deal only reinforced its belief that the Bush tax cuts would not expire at the end of 2012, “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.” Indeed, as Edmund Andrews concludes in the National Journal, “it’s hard to read the S&P analysis as anything other than a blast at Republicans.” The agency “was saying that the GOP strategy had shaken its confidence” and “must have been unnerved by the number of Republicans who insisted that it would be fine to blow through the debt ceiling and provoke a default.” During the crisis, Sen. Roy Blunt (R-MO) and other Republicans maintained that it would be worse to raise the limit without significant spending cuts than to not raise the limit at all and even claimed — falsely — that S&P agreed. As Sen. John Kerry (D-MA) noted yesterday on Meet The Press, the S&P’s downgrade of U.S. debt could be aptly described as a “Tea Party downgrade.”
GOP (MOSTLY) DIGS IN: During negotiations over raising the debt ceiling, President Obama proposed several comprehensive plans that would have reduced government spending by up to $4 trillion and instituted modest revenue increases. Republicans turned down every offer. For instance, when Speaker John Boehner (R-OH) abandoned negotiations on July 22, he said the deal presented by Obama “was going to be nothing more than a tax hike on the American people,” even though the proposal contained $3.5 trillion in spending cuts and about $1 trillion in revenue increases. Now, Beohner is attributing the S&P downgrade to “the out-of-control spending that has taken place in Washington” while ignoring the agency’s call for new revenues. Mitt Romney has similarly responded by blaming the decision on “President Obama’s failed record of leadership on the economy,” while Michele Bachmann is arguing that the downgrade is an indictment of Obama’s “inability to control government spending” and is calling on Treasury Secretary Timothy Geithner to resign. So far, only one Republican has indicated a willingness to heed S&G’s warnings and consider revenue increases: House Budget Committee Chairman Paul Ryan (R-WI). During an appearance on Fox News Sunday yesterday, Ryan saidhe would be open to a deal that contains $3 or $4 in spending cuts for every $1 in revenue increases if it came through a major reform of the tax code and was large enough. Host Chris Wallace asked if Ryan would consider such hypothetical deal if he were sitting on the joint super committee created by the deal to raise the debt ceiling. Ryan responded, “yes.” Even a deal with a 4:1 ratio of spending cuts to revenues, however, would still be to the right of the Simpson-Bowles proposal and would be unlikely to satisfy S&P.
S&P’S QUESTIONABLE DECISION: While the report should serve as a wake-up call to the dangers of avoiding revenue increases, administration officials blasted S&P for its $2 trillion accounting error. Gene Sperling, the director of the White House national economic council, characterized the agency’s brisk dismissal of $2 trillion mistake as “breathtaking,” and said “the amateurism it displayed” suggested “an institution starting with a conclusion and shaping any arguments to fit it.” Others noted that the nation’s rating agencies have previously failed to identify economic risks and “only lightly or ineffectively regulated” the sub prime loans that contributed to the recession. S&P was particularly aggressive in undermining state efforts to control such practices. For instance, as Josh Rosner and Gretchen Morgenson explained in Reckless Endangerment, in 2003, the agency announced that it would “no longer allowmortgage loans [that] originated in Georgia to be placed in mortgage securities that it rated” after the state passed a law to rein in the predatory mortgage lending wave. That decisioneffectively killed the legislation and other similar state efforts as “lenders would have no access to the securitization money machine…[and] there would be fewer mortgages funded, dashing ‘the dream’ of homeownership.”
Evening Brief: Important Stories That You May Have Missed
In the “most deadly incident” for U.S. forces in Afghanistan, nearly 22 members of the Navy’s SEAL Team 6 died when the Taliban shot down a helicopter Saturday, killing 30 Americans.
The Obama administration says it will grant states waivers to liberate them from the dysfunctional No Child Left Behind law signed by President George W. Bush.
The U.S.’s credit downgrade and fears of a “double-dip” recession spooked global markets, pushing Asian and European markets down 2 to 4 percent. Finance ministers and central bankers from the G-20 nations issued a joint statement promising to “cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets.”
Represented by the Communications Workers of America, 45,000 Verizon workers are striking following the rejection of over 100 concessions demanded by the company as talks taking place in Philadelphia and New York broke down.
Ending speculation that Timothy Geithner would soon leave the administration, a Treasury Department spokeswoman said in a written statement, “Secretary Geithner has let the president know that he plans to stay on in his position at Treasury.”
The “American International Group is planning to sue Bank of America over hundreds of mortgage-backed securities, to the surge of investors seeking compensation for the troubled mortgages that led to the financial crisis.”
The European Central Bank intervened in bond markets Monday to support fledgling economies in Spain and Italy and avoid a financial meltdown in the euro zone.
And finally: Missouri Lt. Gov. Peter Kinders (R) got caught with pants down (almost literally) last week when the Riverfront Times posted a picture of the gubernatorial candidate posing with a former porn star at a bar that boasts nightly “pantless parties.”