The primary reason given was because of the inability of the political system to deal with the rapidly increasing federal deficit. Standard & Poor’s stated in part:
“the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finances:
“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 challenge”
The Administration and the Congress are deeply divided as reflected by the divide between the Democrats, Republicans and the President in Washington (no one seems pleased with the absence of Presidential leadership.) The downgrade action by S & P has done what no one else has been able to do and united the D C players in their demonizing of Standard & Poors. As so often happens – When you don’t like the message you shoot the messenger.
There is a lot of he said, she said going back and forth over the downgrade; A downgrade that has damaged American prestige and world economic leadership and certainly raises the cost of debt.
While we may surprised that the S & P downgrade actually happened, I don’t think there is much disagreement that the deficit ceiling increase deal put off fiscal decisions (actual cuts) or that S & P had not previously warned they were considering such action unless the Government got it’s fiscal house in order. In fact on April 18th S & P lowered its Outlook on U S debt from stable to negative.
A little Background – Standard and Poors is a credit rating agency that is a nationally recognized statistical rating organization (NRSRO) by the Securities and Exchange Commission. You do not have to go back very far to remember their work in giving high ratings to those many iterations of mortgage backed securities. Before the brickbats begin think about the fine job of regulation that the SEC, Federal Reserve, Comptroller of the Currency, FDIC, and Congress did in their regulatory oversight of that one. Whoops did I forget to mention those other innocents Fannie and Freddie?
S & P's Downgrade is not just about the U S Government’s ability to meet its obligations but perhaps S & P’s action as noted by the actual facts (not everyone’s political talkers) but as their statement says is about the failure of our political system (in its current configuration) to deal with deficits and spending. The President in recent remarks about a lowering of the credit rating said if that happens it would not be about our failure to pay our bills but the failure of our political system.
The deficit issue is not going away. A 2012 budget still has to be adopted by October 1 (won’t happen – can you say Continuing Resolution?) Putting on my GOP hat here once again, the GOP did pass the Ryan budget plan. Then we will have the report of the Committee of 12 that is due before Thanksgiving and must be resolved before Christmas or the trigger will be pulled. There is a lot of poison in the Trigger (Medicare changes and severe cuts for Defense spending) so I am undecided if it will be pulled.
For any hope of consensus we may have to until the 2012 general election to, as the President would say have any hope of real change.