Standard & Poor’s downgrade of America’s debt couldn’t come at a worse time. The result is likely to be higher borrowing costs for the government at all levels, and higher interest on your variable-rate mortgage, your auto loan, your credit card loans, and every other penny you borrow.
Why did S&P do it?
Not because America failed to pay its creditors on time. As you may have noticed, we avoided a default.
And not because we might fail to pay our bills at the end of 2012 if tea-party Republicans again hold the nation hostage when their votes will next be needed to raise the debt ceiling. This is a legitimate worry and might have been grounds for a downgrade, but itís not S&P’s rationale.
S&P has downgraded the U.S. because it doesnít think weíre on track to reduce the nationís debt enough to satisfy S&P ó and weíre not doing it in a way S&P prefers.
Hereís what S&P said: ìThe downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the governmentís medium-term debt dynamics.î S&P also blames what it considers to be weakened ìeffectiveness, stability, and predictabilityî of U.S. policy making and political institutions.
Pardon me for asking, but who gave Standard & Poorís the authority to tell America how much debt it has to shed, and how?
If we pay our bills, weíre a good credit risk. If we donít, or arenít likely to, weíre a bad credit risk. When, how, and by how much we bring down the long term debt ó or, more accurately, the ratio of debt to GDP ó is none of S&Pís business.
S&Pís intrusion into American politics is also ironic because, as I pointed out recently, much of our current debt is directly or indirectly due to S&Pís failures (along with the failures of the two other major credit-rating agencies ó Fitch and Moodyís) to do their jobs before the financial meltdown. Until the eve of the collapse S&P gave triple-A ratings to some of the Streetís riskiest packages of mortgage-backed securities and collateralized debt obligations.
Had S&P done its job and warned investors how much risk Wall Street was taking on, the housing and debt bubbles wouldnít have become so large ñ and their bursts wouldnít have brought down much of the economy. You and I and other taxpayers wouldnít have had to bail out Wall Street; millions of Americans would now be working now instead of collecting unemployment insurance; the government wouldnít have had to inject the economy with a massive stimulus to save millions of other jobs; and far more tax revenue would now be pouring into the Treasury from individuals and businesses doing better than they are now.
In other words, had Standard & Poorís done its job over the last decade, todayís budget deficit would be far smaller and the nationís future debt wouldnít look so menacing.
Weíd all be better off had S&P done the job it was supposed to do, then. Weíve paid a hefty price for its nonfeasance.
A pity S&P is not even doing its job now. Weíll be paying another hefty price for its malfeasance today.
Article by: Robert Reich | Sunday 7 August 2011