"Downgrade pain" courtesy of our political class

August 8, 2011 5:05 PM

If you're depressed over the debt downgrade from Standard & Poor's, relax.

America needn't act like an Asian American student who got her first B in math.

You still got into Brown, right?  See, it's not even that bad.  And you're still great in violin AND piano.

Time for a little perspective.

Keep in mind that markets generally react irrationally based on uncertainty and fear (that's what you're seeing now). It's all about confidence. When your leaders don't inspire it, the uncertainty and fear set in.

It also doesn't help that there's a fair amount of ignorance mixed in to boot.
Most people don't even know what an S&P downgrade to U.S. debt really means.
The downgrade has nothing to do with individual companies. (Many of them are flush with cash and very profitable these days). While S&P said the downgrade was also concerned by the politics of debt reduction, a rating really shouldn't be about how the political system played out. It wasn't graceful, but debt reduction isn't about style points. The downgrade is supposed to be primarily concerned with the U.S. government's credit and its ability to pay off debt.
Last I checked, the U.S. can still print all the money in the world it wants and has never not paid off on a loan. The practical odds of a U.S. default? Zero.

In the S&P realm, the downgrade puts the U.S. below Luxembourg, which retains its triple-A rating. But remember, Luxembourg is tied to the EU (a continuing source of real concern), and the country on its own has no ability to print money like the U.S.
So what's a triple-A rating really worth? You won't see China suddenly selling U.S. bonds to get into Luxembourg. (Today, in fact, U.S. Treasurys were up.)

Consider also that the drop from triple-A to double-A-plus is rather miniscule. It has nothing to do with being closer to impending doom. The other big ratings company (Moody's) did nothing to change the U.S.'s high rating.

All you are seeing is the judgment of S&P, the company that couldn't rate financial companies correctly during the mortgage crisis.

In other words, you can't exactly bet the house on its opinion.

When the president came out this afternoon, he sounded more like the guy we should've heard from during the whole debt debate. Not perfect, and maybe could have used a little more of a New Deal touch, but at least he had a plan.

He talked about tax reform (raising taxes) and a "modest adjustment" to programs like Medicare.

He brought up extending the payroll tax cut (which would hurt Social Security), but he mentioned extending unemployment benefits in order to put "more money into people's pockets."

He also talked more spiritedly about what has always been the focus of government's ability to help in a crisis: rebuilding our roads, bridges, and airports, so that our unemployed construction workers can get back to work.

During the Clinton years, Congressman Norm Mineta was head of what was then the House Public Works and Transportation Committee, and infrastructure spending was considered the cornerstone of a stimulus plan that actually worked and got this country out of debt.

As the president pointed out, the ideas mentioned aren't "Democratic" or "big government." In fact, they're all things Republicans have already agreed to.

In other words, we didn't really have to experience any of what we've experienced these last few weeks and today. None of it had to happen, if only our politicians had "put what's best for the country ahead of self-interest or party or ideology."
The president used those words forcefully on Monday.
He's a week late and a few trillion short.

Democrats have been out calling the crisis the "Tea Party Downgrade." Yes, that's true. But just partially. The entire political class deserves some share of the blame.

Until we see otherwise, the deficit to be concerned about most in Washington has nothing to do with budgets and everything to do with leadership.

Posted by:Emil Guillermo

The views expressed in this blog do not necessarily represent the views or policies of AALDEF.


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