Downgrading the U.S. Credit Rating

On Friday, August 5th, after the close of the U.S. securities markets, Standard & Poor’s (S&P) reduced its rating of the U.S. Government’s debt from S&P’s highest rating of “AAA” to its second highest rating of “AA+.” [1]

S&P’s announcement of this action was headlined: “United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative.” The key reasons for this downgrade were the following:

  • “The 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 government’s medium-term debt dynamics.”
  • “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.” [2]

In short, this objective outsider concluded, properly I think, that the U.S. “policymaking and political institutions” are not working. As S&P further stated, the U.S. recently has seen “political brinksmanship,” and “the statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.” In addition, S&P noted that “new revenues have dropped down on the menu of policy options.”[3]

While these observations are appropriately phrased in terms of the “U.S. policymaking and political institutions,” they really are a negative assessment of the political objectives, strategy and tactics of the Tea Party contingent of the Republicans in the House of Representatives and to a lesser extent in the Senate.[4]

Moreover, according to S&P, “the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging.”[5] This comment raises the important need for the U.S. to reduce unemployment and achieve higher economic growth, which is made more difficult by the austerity measures promised in the debt ceiling compromise that became law on Tuesday, August 2nd.[6]

If the above were not enough criticism of the U.S. federal government, S&P made the following two ominous statements about its future actions:

  • First, S&P signaled that on Monday, August 8th, it will be downgrading its credit ratings of “the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.”
  • Second, S&P said, “The outlook on the long-term rating [of the U.S.] 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.”[7] This warning stemmed from S&P’s “downward scenario.” There were two key facts for this scenario. The “recent [U.S.] recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher.” The U.S. is experiencing “sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions.”[8]

Although two other independent credit-rating entities did not change their top ratings of the U.S. government, S&P’s downgrade, the rationale for its downgrade and its ominous warnings of further negative assessments of the U.S. undoubtedly will create next week another turbulent period in U.S. and world security markets.


[1] S&P, United States of America Long-Term Debt Rating Lowered to ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative (Aug. 5, 2011), http://www.standardandpoors.com.

[2]  Id.

[3]  Id.

[4]  See Post: Disgusting U.S. Political Scene (July 23, 2011); Post: The Founder of Modern Conservatism’s Perspective on the Current U.S. Political Turmoil (July 28, 2011); Post: A Message for Speaker Boehner (July 29, 2011); Post: Dysfunctional U.S. Congress Careens Toward U.S. Default (July 30, 2011); Post: Dysfunctional U.S. Congress Averts Default (Aug. 2, 2011); Editorial, Political Roots in U.S. Economic Crisis, N.Y. Times (Aug. 5, 2011).

[5]  See n.1 supra.

[6]  See n.3 supra.

[7]  See n.1 supra.

[8]  Id.

 

Dysfunctional U.S. Congress Careens Towards U.S. Default

Yesterday’s actions in the U.S. House of Representatives and Senate regarding the U.S. debt ceiling were depressing signs of the dysfunctionality of our system of government.[1]

In the House Speaker Boehner rejected my advice to craft a truly bipartisan bill to increase our debt ceiling.[2] Instead he added another provision to his bill to gain additional support from the Tea Party members for passage of the Republican measure to increase the debt ceiling. That new provision would require Senate and House approval of a balanced budget amendment to our Constitution before there could be a second increase in the debt ceiling, presumably next year. Even with that provision, the bill was only approved 218 to 210. (In the House, a simple majority is necessary; that currently is 217.)[3]

This is not any way to go about amending our Constitution, in my opinion. Such action should be done calmly and cautiously, as suggested by the constitutional requirement for a two-thirds vote in each house for such amendments.[4] There should be fair and open hearings in both houses of the Congress for careful consideration of the pros and cons of any proposed amendment, including this one. Such has not happened on this proposal. Although I have not studied this particular proposed amendment, I am very skeptical of the merits of the idea for two main reasons. First, I believe it would be difficult to run the federal government under such a system. Second, Keynesian economics suggests the need for the federal government to run deficits during economic recessions.

Now attention turns to the U.S. Senate which yesterday immediately tabled this House bill, 59-41.

Thus, we now enter the world governed by the abominable Senate Rules.[5] Yesterday Majority Leader Reid made a motion to limit debate, and under Senate Rules the earliest that motion can be voted upon is tomorrow (Sunday) at 1:00 a.m. Passage of that motion requires 60 votes, meaning that if all 53 Democratic and Independent Senators support the motion, seven Republican votes are needed for that motion to be adopted. Yesterday Senator Reid said he did not yet have the 60 votes needed for cloture. If the cloture motion is adopted, then under the Senate Rules there has to be 30 hours available for debate, meaning that the earliest the Senate could vote on the merits of the Reid debt-ceiling bill would be 7:30 a.m. on Monday (August 1). (In the unlikely event of unanimous consent, the measure could be voted on before then.)[6]

If somehow the Senate actually adopts a debt-ceiling bill, then it has to go back to the House for its approval by 217 votes. If all the 193 Democratic representatives supported such a bill, then at least 24 Republican representatives would have to join them in order for it to pass the House. Is that possible? (I shudder to think that the House would pass a slightly different bill that would require a conference committee and subsequent votes by the two houses.)[7]

World financial markets already are signaling the adverse impact of an U.S. failure to increase the debt ceiling and an U.S. default on its obligations.

I pray that my analysis is wrong and that somehow by next Tuesday both houses of Congress can pass a debt-ceiling bill that President Obama can sign into law.


[1] See Post: Disgusting U.S. Political Scene (July 23, 2011).

[2] See Post: A Message for Speaker Boehner (July 29, 2011).

[3] Hulse & Pear, Senate Quickly Kills Boehner Debt Bill, N.Y. Times (July 29, 2011).

[4]  U.S. Const., Art. V. Actually such action by the two houses of Congress would result in a proposed amendment that would have to be approved by three-fourths (or 38) of the states in order for the constitutional  amendment to be adopted. (Id.)

[5] See Post: The Abominable Rules of the U.S. Senate (April 6, 2011).

[6] Helderman, Senate headed for critical vote Sunday, Washington Post (July 30, 2011).

[7] Yesterday, the House Republicans said that they would have a symbolic vote today to show that the Reid approach to debt ceiling cannot pass the House. (Hulse & Pear, Senate Quickly Kills Boehner Debt Bill, N.Y. Times (July 29, 2011).)

A Message for Speaker Boehner

Time is running out on increasing the U.S. debt ceiling by our Congress. The latest spectacle of the increasingly dysfunctional Congress is the inability of John Boehner, the Speaker of the House of Representatives, to muster a majority vote by his fellow Republicans for his plan to raise the debt ceiling.

As a result, last night I sent the following email message to the Speaker:

  • In your recent speech to the nation, you said that you were Speaker of the House, not of the Republican Party or its Tea Party component.
  • The time has come for you to rise to the occasion, to in fact be the Speaker of the entire House.
  • You need to craft a truly bipartisan bill on the debt ceiling and budget that garners the support of responsible members of the Republican Party and of the Democratic Party. Immediately!
  • I obviously am not in your District, and I am not a Republican. But our country needs to avoid a default on its debt. I think you know that such a default would have catastrophic consequences for the U.S. and global economy and financial markets.
  • Do the right thing.