What Really Caused the Downgrade

A couple of weeks ago Standard & Poors (S&P), one of the ratings agencies which measure the financial health of countries and companies, downgraded the credit rating of the United States. This has never happened before.

Photo courtesy of Trey Danger

There has since been plenty of finger pointing in political and financial circles. According to the Washington Post, Republican Presidential candidate Mitt Romney told reporters, “...the truth is, the buck does stop at the president’s desk and he needs to exert the leadership necessary to restore America’s financial foundation, the credibility of our fiscal capacity and restore once again the balance sheet upon which our economy rests.”

Sarah Palin reportedly wrote, “It is a disgraceful and embarrassing situation when the United States finds itself justifiably chastised in the same tone normally reserved for near-bankrupt economies.”

President Obama spoke a few days later saying that it wasn’t our inability to pay, but our rancorous politics which led to the downgrade.

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Democrats blamed Republicans. Republicans blamed Democrats. Columnists analyzed, TV bloviators opined and the American people felt discouraged and angry.

There is, however, no mystery as to why the US was downgraded from a AAA rating to an AA+. S&P explained it in clear language. It’s on their website, StandardandPoors.com.

These two bullet points show that the downgrade was largely because our politicians couldn’t cooperate to create a fiscal plan. The issue isn’t so much that we have a lot of debt, it’s that we couldn’t come up with a genuine compromise to pay it down:

  • 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.

Photo courtesy of Dyanna

There is plenty of blame to go around, but there are also a few passages in one of the S&P press releases worth noting:

“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.”

In short, it was unacceptable for some Republicans to suggest that not paying our creditors by defaulting on our debt was okay (it’s not a compromise to allow the country to pay its bills); Democrats will have to accept some restructuring of entitlement programs such as medicare (possibly by having younger generations retire later, etc); Raising taxes should be on the table for the Republicans (From S&P, “It appears that for now, new revenues have dropped down on the menu of policy options”).

With all that in mind, it is important also to remember that the other ratings agencies did not downgrade the U.S. Not to mention that S&P doesn’t have the best track record. As several pundits and analysts pointed out these are the same people who gave AAA to Lehman Brothers right before they collapsed. There’s no reason to freak out just yet, nor is there a single person or party in Washington to be blamed.

Photo courtesy of Kristin_a(Meringue Bake Shop)

As voters we also need to remember that it’s OUR country and, therefore, OUR government. We can demand that our lawmakers agree to play ball with each other on this issue. If they don’t - we should send them packing. I know “BE REASONABLE!” isn’t a very compelling rallying cry, but that’s what we need to demand. Everyone (including the electorate) needs to grow up a bit and accept that we may have to relinquish some entitlements AND tax revenue if we’re going save our country and some semblance of our way of life. In other words - compromise.