Obama Not to Blame for Bond Rating Downgrade
Rob Horowitz, GoLocalProv MINDSETTER™
Obama Not to Blame for Bond Rating Downgrade
Standard & Poor’s first-ever downgrade of the United States' AAA credit rating and the Republican Presidential candidates’ reactions to their decision put a surreal coda on the end of the protracted debt ceiling fight.
Whether or not Standard & Poor’s action was justified, it is hard to overlook the fact that their routine conferring of AAA ratings on Mortgage Backed Securities and other shaky financial instruments was a major cause of our financial crisis and subsequent Great Recession. Their failure, along with the other credit rating agencies, to do basic due diligence is one of the main reasons we have the large debt problem Standard & Poor’s now decries. As a Congressional Committee that investigated the causes of the financial crisis stated, “(t)he rating agencies were essential cogs in the wheel of financial destruction.”
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTAt this point, the two other major credit rating agencies, Moody’s and Fitch, have maintained our AAA rating. As a result, the economic impact of the downgrade may be limited. Still, the downgrade is important politically and symbolically and it does reinforce growing doubts about whether the polarized and sharply partisan political environment has made Washington so dysfunctional that it puts in jeopardy the United States’ ability to solve its long-term debt problem.
A main reason for the downgrade, according to Standard & Poor’s, was the debt ceiling fight itself. "The political brinksmanship of recent months highlights what we see as American governance and policymaking becoming less stable, less effective and less predictable than what we previously believed," the Standard & Poor's report stated. "The statutory debt ceiling and the threat of default have become bargaining chips in this debate over fiscal policy.”
Over the weekend, it was hard not to shake one's head as Republican Presidential candidates ignored this and continued to blame it on the President. In a clear illustration of someone "not getting the memo" -- or in this case not reading the eight-page report -- Rep. Michele Bachmann (R-MN) proclaimed that “President Obama has destroyed the credit rating of the United States through his failed economic policies and his inability to control government spending by raising the debt ceiling.” Never mind that Standard & Poor’s, in its report and reinforced by its representatives on the weekend talking head shows, stated time and again that a main cause of downgrade was that elected officials were threatening not to raise the debt ceiling—the exact opposite of what Bachmann said and of her position that one should never vote for a debt ceiling increase.
Further, Bachmann and others harshly criticized the $4 trillion “grand bargain” between President Obama and Speaker Boehner, causing the Speaker to back away from the agreement. This "grand bargain," which closed tax loopholes and contained real action on entitlement reform, hit the debt reduction target that Standard & Poor’s had outlined. Had it been adopted, there would not have been a downgrade.
Some good may come out of the Standard & Poor’s action. It will create more political pressure on the 12-member Super Committee designated by the Congressional Leadership to reach agreement on the second phase of debt reduction. And it could even put closing tax loopholes and entitlement reform back on the table in order to take a bigger bite out of our debt problem.
However, for this to be accomplished, other House Republican Tea Party supporters will need to demonstrate that they have learned more than Michelle Bachmann from the near debacle of the past few weeks and are willing to back a principled compromise.
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