Downgrade, Shmowngrade

August 5th, 2011 at 11:55 pm

So Standard and Poor’s went ahead and downgraded US debt from the highest rating of AAA down a notch to AA+.

I was on Rachel Maddow’s show tonight, as one of a series of guests denouncing the downgrade.

When it comes to anger regarding the self-inflicted damage this debt ceiling debacle has caused, I yield to no one.  Still, I believe we’ll be able to reliably service our public debt as we always have, and that is what the rating should reflect (as I stressed weeks ago when I first heard about this).

Then there’s the point that S&P, who gave top grades to toxic mortgages in the bubble days, is not a credible source to decide the question anyway, even before their apparent $2 trillion mistake in arithmetic (news accounts say the White House found that S&P’s initial estimates of our long term debt were inflated by that amount).

All that said, if you read the press release, their critique of our dysfunctional politics and inability to get revenues in deficit reduction deal makes a lot of sense.  Especially with prominent R’s arguing that the debt ceiling debate should be a template for every increase in the ceiling.

“…the downgrade reflects our view that the effectiveness, stability, and predictability of American policy making 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…”

As noted, they also said they were motivated by the belief that we can’t reliably achieve budget sustainability without revenues, i.e., they correctly recognized that spending cuts only won’t do it.

All of which sounds like it comes right out of recent blogs from this site, and I can even see how, if the debt ceiling and budget process continue along this path, lenders could demand a risk premium added to the interest rate when they lend to us.

But that’s to be seen.  The question for S&P and the other raters is how confident should lenders be that the borrower will honor the terms of the loan.  And in the case of US debt, that answer hasn’t changed yet.

Perhaps S&P should get out of the rating business and start blogging instead.  The world might benefit from the change.


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13 comments in reply to "Downgrade, Shmowngrade"

  1. critical tinkerer says:

    Should ask Obama: So how is going with your “Look forward, not backward”, letting criminals to roam free and repeat what they have done before. As political criminals and financial criminals keep doing the same thing they did before. they even have more power and more cash now.

  2. C Heinz says:

    Could S&P be sending a message to the ‘super congress’ to stop playing games? Could S&P be telling them to ditch the Bush tax cuts? Could S&P be sending a message to the GOP to start acting like law makers and not anarchists? Could S&P be telling them, “We have this club and I’m not afraid to use it? Stay Tuned.

    • Jeff says:

      I agree with your sentiments, but I also have to ask if S&P really knows what it is talking about this time?! They were so right on with their predictions prior to the market crash!

      Support Fairness and the Common Good in Government. Follow One Man Roaring on Twitter:

  3. Geoffrey Freedman says:

    What isn’t stated is that NONE of the credit agencies, nor other soveriegn nations are comfortable with the way we are doing our business.

    And our politics is the way we do business as a country right now. Its irrational, chaotic, gridlock pierced by momments of not well planned or thight through activity.

    Not a good way to do business. And I see nothing to make me believe this is going to change. The same Republicans who said that we shouldn’t raise the debt limit and drive the plane into the mountain and scared the bejesus out of the world are now blaming Obama for this mess.

    If this continues, and I think it will, I would expect the other ratings agencies to downgrade us within 6-9 months.

    We have met the enemy and he is us.

  4. Wil Twiner says:

    Jared, just a quick question. My understanding is that we still certify these ratings agencies. What is that certification process, and how would the US go about de-certifying based on this $2T error business? If something liek that happened, would it more harm or more good?

    • Jeff says:

      Even if they could do that, I don’t think it would be the right thing to do. It is too much like the “spoiled brat” syndrome and I think it would cast even more doubt on the US.

      The best thing we can do is to start getting our economic house in order.

      Support Fairness and the Common Good in Government. Follow One Man Roaring on Twitter:

  5. AndrewBW says:

    This from the S&P press release: “We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.”

  6. perplexed says:

    Forget their subjective rationalizations for what they are doing – make them provide the numbers! Just what are their estimates of default probabilities, before and after their “downgrade,” and what evidence is behind these probabilities? Stop letting these guys hide behind their curtain pulling levers! Based on their complicity in the mortgage fraud scandal they should be publishing these downgrades from a jail cell!

  7. Jim Gonyea says:

    The Republicans and Tea Partiers in Congress are not interested in doing what reality requires. Someone needed to rap them on the knuckles and it couldn’t wait for 2012 when God knows what will happen. The downside is that the Republicans and Tea Party sound machine will turn up the volume and spin what this means. It’s a vote of lack of confidence by the S&P in the US Congress and right now the US Congress is controlled by the Tea Party. This is for all intents and purposes a vote of no confidence in the Republicans and Tea Party even if they are incapable of understanding that.

  8. Robert says:


    Why does the US unnecessarily constrains itself by issuing public debt on a dollar-for-dollar basis to match its budget deficit spending. The illusion of “financing” the deficit by treasury bond issues needs to be fixed once and for all. In the future, only high-powered money (Fed credits the Treasury’s account at the Fed with sufficient funds) should be used to pay for the deficits. So if bond issuance is a problem, let’s just zero out Bond issuance from the government budget constraint equation accordingly:

    Government spending + Government interest payments – Tax receipts = High-powered money + zero*Bonds.

    I believe at one time, Treasury debt played a vital role in enabling the Fed to maintain its target interest (Fed Funds) rate by being used to drain excess reserves from the system. However, now that a modest interest rate is paid on reserves, bonds are no longer needed for the Fed’s liquidity management purposes. Henceforth, as notes mature, instead of rolling the debt over, the Treasury should just pay off the principal and retire the debt — problem solved.

    To perpetuate the myth that money isn’t being created out of thin air, Treasury can simply implement the coin seignorage concept (highly-denominated platinum coins authorizeded by Treasury) that has been discussed on the financial blogs and in the mainstream media. The coins would be minted and deposited in the US Mint’s account at the Fed, where they would be credited for their full legal tender face value by the Fed. The Treasury would then “sweep” the profits (the difference between the cost to the Mint of producing the coins and face value of the coins into Treasury’s general Account at the Federal Reserve.

  9. Sanchit Kumar says:

    There’s one paragraph from their summary which really annoys me:

    The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case. (If you spotted the typo there, it’s not mine, it’s from the report.)

    So much about this is questionable… the signs of higher interest rates (there hasn’t been a threat of this at all during the recession), their choice of a two year window to restore fiscal sustainability, the presence of fiscal pressures that will somehow make US debt insolvent….

  10. C Heinz says:

    If Boehner is correct that he and the GOP got 98% of what the wanted in the Debt Ceiling package, does that mean the GOP gets 98% of the downgrade?