The Cost of Bitter Disagreements: Standard and Poor’s Downgrading of US Credit Rating

      On Friday, August 5th 2011 Standard and Poor’s reduced their AAA credit rating of America to AA+.  The triple A credit rating was originally awarded to the U.S. by Moody’s in 1917 and the S&P rating of triple A awarded in 1941. Who exactly are Moody’s and Standard and Poor’s?

Standard and Poor’s (S&P) is one of three credit rating agencies called the Big Three, the other two are Moody’s and Fitch Group. S&P is a U.S. based financial services company and is a division of the McGraw-Hill Companies which publishes financial research and analysis on stocks and bonds.

S&P itself has come under debate because of its sub-prime ratings in 2008 and the two trillion dollar mistake in it’s original copy of the downgrade statement.

According to the New York Times a treasury staff member noticed a two trillion dollar mistake in the S&P’s copy of the downgrade announcement. The treasury staff member notified S&P to explain the problem. About an hour later S&P conceded the problem and revised their numbers but retained the same conclusion, a downgrade to AA+.

In a week of debt ceiling debate described as  “political-gridlock,” John Nichol’s of The Nation describes the agreement reached between Democrats and Republicans  to read as if, “it was written with the goal of stalling out whatever fragile recovery might have been taking place.”

Vermont Senator Bernie Saunders said, “I find it interesting to see S&P so vigilant now in downgrading the US credit rating. Where were they four years ago when they, and other credit rating agencies, helped cause this horrendous recession by providing AAA ratings to worthless sub-prime mortgage securities on behalf of Wall Street investment firms? Where were they last December when Congress and the White House drove up the national debt by $700 billion by extending Bush’s tax breaks for the rich?”

According to John Nichols of The Nation, S&P is “part of the problem.” Nichol’s in an article in The Nation describes S&P’s as,  “an unelected and unaccountable international agency that has made so many mistakes.” Bruce Bittles, chief investment strategist for Robert W. Baird & Co. is quoted in Nichol’s article as saying, “The ratings agencies don’t carry the clout today that they did in 2008. They made so many mistakes in that period that I think they lost a lot of credibility.”

In the S&P statement released to explain the downgrade of the US credit rating from AAA to AA+, Standard and Poor’s said,

“The political brinkmanship of recent months highlights what we see as America’s governance and policy making becoming less stable, less effective and less predictable than what we previously believed.” The statement continued on to say, “The statutory debt ceiling and 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.”

David Beers, S&P’s global head of sovereign ratings, in an email to the New York Times several days before the debt ceiling agreement was reached said, “What’s changed is the political gridlock,” and continued on to say that Congress and the Administration’s ability to agree on “fiscal measures that will stabilize the upward trajectory of the U.S. government debt burden,” was an open question.

Liberal Economist Paul Krugman in an New York Times article said, ” It is the madness of the right: if not for the extremism of anti-tax Republican’s we would have no trouble reaching an agreement that would ensure long term solvency.” Krugman continues on to say, “The people who rated sub-prime-backed securities are now declaring that they are the judges of fiscal policy? Really?”

“It’s hard to think of anyone less qualified to pass judgment on America than the credit rating agencies,” Krugman said.

The downgrading of America’s credit rating to AA+ has provided the Republican’s with an opportunity to blame the Obama administration for the recession.

Tim Pawlenty, Governor of Minnesota said, “today is far from the hope that Obama promised during his presidential campaign,” and added, “(Obama) is driving our country into decline.”

Senator Jim Demint, a Republican, said Obama should demand the resignation of Treasury secretary Timothy Geitner.

Not surprisingly, Republican House Speaker John Boehner called the S&P’s decision to downgrade, “the latest consequence of the out of control spending that has taken place in Washington for decades.” The previous administration was a two term Republican house majority under George W. Bush. Yes, the same Bush that provided the 2001 and 2003 tax breaks for the rich.

Boehner continued on to say, “Though we (Republican’s) are outnumbered in Washington, we will continue to press Democrats to join us in taking meaningful steps to rein in our debt and deficits.”

By the time the Presidential election of 2012 arrives the American people will have totally forgotten that the Republican’s stonewalled the debate to raise the debt ceiling and thereby contributed to the S&P’s downgrading of the U.S. credit rating. The story we will hear in the run up to the 2012 campaign will be, Democrats have landed us in debt by overspending, they caused a downgrade of the U.S. credit rating and brought America to the brink of defaulting on it’s debt payments. Let’s not forget that President Reagan raised the debt ceiling eighteen times and George W. Bush raised the debt ceiling seven times, according to  Politifact.com . The website also states that Obama himself opposed the raising of the debt ceiling under the Bush administration and criticized Bush for a lack of leadership. This is the “political brinkmanship” that rewarded us with a AA+ from S & P’s.

The only country that seemingly could gain out of the downgrade is China, America’s largest debtor. Xinhua, China’s official news agency stated, “International supervision over the issue of the US dollar should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single currency.” I wonder if they will suggest using the Yen instead?

Articles cited from;

The Global Times (China)

Standard and Poor’s Statement on US Downgrade Aug 5 2011

The Nation: Downgrading Democracy

Reuters; World Leaders to Confer on debt crisis this weekend Aug 6 2011

New York Times S&P’s Downgrades US Credit Rating Sat Aug 6th

The Guardian (UK) Sat Aug 6th

 The Sydney Morning Herald Aug 7th 2011

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2 thoughts on “The Cost of Bitter Disagreements: Standard and Poor’s Downgrading of US Credit Rating

  1. Yeah, this is the crap that has made the last two weeks rather difficult for me. Moody’s decided that whatever they were doing to the US Gov’t, they were going to do to a bunch of local communities. Darien is caught in that trap. So now, some of the folks who helped get us into this economic mess are making it worse. After the Aaa ratings they handed out to dubious credits in the past (asset backed securities being one), how much credibility do they have now? And yet, they still get to run the game we must play.

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