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A Downgrade’s GOP Fingerprints

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Posted on Aug 8, 2011
Julien GONG Min (CC-BY)

By Eugene Robinson

The so-called analysts at Standard & Poor’s may not be the most reliable bunch, but there was one very good reason for them to downgrade U.S. debt: Republicans in Congress made a credible threat to force a default on our obligations.

This isn’t the rationale that S&P gave, but it’s the only one that makes sense. Like a lucky college student who partied the night before an exam, the ratings agency used flawed logic and faulty arithmetic to somehow come up with the right answer. No, life isn’t always fair.

And no, I can’t join the “we’re all at fault” chorus. Absent the threat of willful default, a downgrade would be unjustified and absurd. And history will note that it was House Republicans who issued that threat.

There is no plausible scenario under which the United States would be unable to service its debt. If political gridlock were to persist, our government would be able to pay bondholders with a combination of tax revenues and funds raised by selling more Treasury bills. And in the final analysis, as Alan Greenspan noted Sunday on “Meet the Press,” the United States “can pay any debt it has because we can always print money to do that.”

I know this kind of talk is horrifying to Ron Paul and others who believe we should be walking around with our pockets full of doubloons, but most of us find paper money more convenient.

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What happened this summer is that Republicans in the House, using the tea party freshmen as a battering ram, threatened to compel a default. More accurately, they demanded big budget cuts as the price of raising the debt ceiling. If the Senate and President Obama did not comply, the Treasury’s access to capital through borrowing would have been cut off.

The government’s cash flow would have been slashed by 40 percent, leaving not nearly enough to fund essential operations, pay entitlements and also service the debt. Somebody was going to get stiffed. Paying interest to bondholders could have been given priority over competing obligations such as salaries for our people in the service and Social Security checks for retirees. But for how long?

Ultimately, the GOP got its spending cuts—some of them, at least—and the debt ceiling was raised. But the possibility of default, never before more than a fantasy, had been made real. There’s no way to un-ring that bell. This new uncertainty, it seems to me, is enough to justify lowering the credit rating of our long-term debt from AAA to AA-plus.

S&P, however, gave a host of largely bogus reasons for its action. Why am I not surprised? This is a firm that aided and abetted the subprime crisis—and the devastating financial meltdown that ensued—by giving no-risk ratings to dodgy securities based on mortgages that should never have been written. The firm’s credibility is spent, as is that of the other ratings agencies, Moody’s and Fitch.

Initially, S&P pinned the downgrade on the sheer size and weight of the mounting federal debt. Treasury officials noticed that S&P had made an error in its calculations, overstating the debt burden by a whopping $2 trillion. This discovery negated the ratings firm’s rationale—so it simply invented another.

Instead of basing its argument on economics, S&P made an ill-advised foray into political analysis. In its “revised base case scenario,” the firm assumed that all the Bush tax cuts will remain in place past their scheduled expiration at the end of next year—even for households making more than $250,000 a year. But Obama vows not to let this happen, and S&P apparently fails to understand that after the election he will be in the strongest possible position to stand firm.

“A new political consensus might (or might not) emerge after the 2012 elections,” S&P noted. Gee, that’s helpful.

The ratings agency should have focused instead on the one development that has direct bearing on our creditworthiness: the GOP threat to force a default. House Majority Leader Eric Cantor should never have planned to use the debt ceiling vote as “leverage.” Obama should have made clear from the start that if necessary he would take unilateral action, based on the 14th Amendment, to ensure there could never be a default. And yes, progressive Democrats who voted against the final debt-ceiling bill should be ashamed.

It’s pretty simple: If you threaten not to pay your bills, people will—and should—take you seriously.

Eugene Robinson’s e-mail address is eugenerobinson(at)washpost.com.
   
© 2011, Washington Post Writers Group


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By Inherit The Wind, August 13, 2011 at 7:44 am Link to this comment

OM:
You are watching the economy collapse. Don’t you see it? Or are you so enamored of “tax cuts” and spending cuts that you cannot see that it’s as if it starting raining on a dying campfire?

Decelerating money through an economy by pulling more and more money out of it doesn’t speed the economic engine, it slows it down.  I know a SHITLOAD more about economics than most of the journalistic knuckleheads now vying for ratings in the MSM. (“Who is going to win on ‘Dancing With The Stars’?  Stay with us!”) I actually spent a little time studying it at the graduate level.

I’ll bet you still buy into that mantra that “Keynes has been proven wrong”

Actually, if you READ Milton Friedman and the better economists from the Chicago School, you’ll see nothing of the sort.  They don’t dispute Keynes’ assertions of what tools government has at its disposal.  They merely assert that the use of fiscal policy to try to make short-term changes in the economy will backfire, which even liberal economists tend to agree with.

Where the liberals and Friedmanites disagreed was Friedman argued that monetary policy was the thing that should be used: Don’t alter the fiscal structure (Taxes and expenditures) to attempt to counter-act cyclical economic downturns, but use monetary stimulus as well.

IOW, Friedman thought economic policy should come from the Fed.

He also liked to use the model of Hong Kong as a microcosm of our economy.  He made one major, colossal mistake in that analogy: Redistribution of resources.  In Hong Kong, if the jobs move to another part of the island, or to Kow-Loon, you don’t have to sell your house and move halfway across the country for the new job.  You just take a different subway and/or ferry.  Distance creates real friction in the economy. So if you are an out of work auto worker in Lansing, it’s pretty damn hard to get to South Carolina for a job.

BTW, I don’t consider Nobel-Laureate economists to be simply part of the MSM.  Guys like Krugman, and even Friedman before him, actually do know a little something about economics.

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By OzarkMichael, August 10, 2011 at 6:31 pm Link to this comment

ITW says: “Your guys got their way.”

Its what the MSM and your buddy Gene tell you. You believe it? I am not surprised. After all, you are the guy who still blames the Tea Party for the shootings in Arizona. And you will “never forgive” us for it.

Ditto with the economy, ditto with all your accusations. 

Instead of defending your absurd, dangerous, yet oft-repeated 14th Amendment proposal you just keep grinding out more accusations as if that somehow justifies your proposal. Thats a bad habit.

I am floored that you cant think through the ethics, and especially have ignored the consequences of what you are proposing. All your accusations dont matter. Its your proposal… think it through. Think ahead. why dont you do that?

Just for the record, I never asked you to forgive about Giffords or any of the rest of it, nor will I ever ask. Instead, your baseless accusations serve as a warning to me and everyone like me. We must resist being placed in a position where people you can judge us, or have power over us.

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By who'syourdebs, August 10, 2011 at 12:40 pm Link to this comment

What a bunch of liars and thieves. Does anyone really think that the S&P higher-ups are not a solid cadre of Republican operatives? Is it surprising they don’t blame their cohorts on the Hill? It appears to be just another reckless plot to destroy Obama, one of many to cripple our black president. It surely must be his color, because it certainly can’t be his policies. What is truly a shame is that the President refuses to call them on it—but is it cowardice or collusion? Only the top one percent knows for sure. Once we’re all jobless and homeless, we can wander the dismal American landscape like Viggo Mortensen in “The Road”. Oh, joy!

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By Laura Nason, August 10, 2011 at 8:24 am Link to this comment
(Unregistered commenter)

Treasury officials noticed that S&P had made an error in its calculations, overstating the debt burden by a whopping $2 trillion. This discovery negated the ratings firm’s rationale—so it simply invented another.

I don’t think this was “just” a mistake and another invented rationale. I think this was the number provided BY the GOP and run with without any kind of fact checking. I FIRMLY believe the “leaders” of the GOP were in cahoots with S&Ps; decision.

Remember, SOMEONE made a $1BILLION DOLLAR bet that the rating would fall just a FEW DAYS before it did AND it has been widely reported that Eric Cantor had also bet that the rating would fall and stood to gain millions on that bet. Then the GOP, not just the teabaggers but the entire GOP in both the House AND the Senate, worked tirelessly to MAKE SURE IT DID.

On top of all that, part of S&P demands in order to get the AAA rating back is MORE CUTS TO SOCIAL SECURITY, MEDICARE AND MEDICAID, specifically.

NOW it turns out that 3 of the most adamant corpo robots in the Senate are chosen to be on the so-called SUPER COMMITTEE that will decide how much to cut those programs. Baucus personally had doctors and nurses arrested at the first health care hearing and personally eliminated any KIND of public option. And I wouldn’t be a bit surprised to see Cantor, Ryan, McConnell, Poe, and worse of the GOP choices and would not be surprised to see Hatch, the defender of embezzlers on that GOP list.

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By Marian Griffith, August 10, 2011 at 12:20 am Link to this comment
(Unregistered commenter)

@Ron Paul Guy
—-Ron Paul thinks we should have paper money. He just wants it backed by gold, you know, like it was for most of our history until Nixon took us off the gold standard.—-

When Nixon officially ended the right to exchange dollars for gold it already had been a theoretical right for decades. The problem was that the growth in economic production, and through that the amount of money in circulation, far outstripped the ability to collect more gold to keep in a hole in the ground somewhere. Other countries had already started abandoning that standard (for a while allowing the USA to buy more gold), but it became increasingly obvious that the whole excercise was pointless to begin with and Nixon merely put the system out of its misery.

It also is no reason to keep a pile of gold under guard somewhere to ‘back’ your money. ALL money is an anonymous IOU, and because it is anonymous there MUST be an amount of trust that what you barter for your gold can at a later date be bartered back for something of equal value. It does not matter if it is a bit of gold or a piece of paper or a rare shell or anything. Gold just happened to be ideal for coinage (easily struck into coins, hard to counterfeit with pre-industrial technology and not subject to rust and rare enough to avoid inflation). People wanted to be able to change money into gold because they did not at first those new fangled bits of paper to be real money (after millenia of knowing only gold). But gold in and of itself has no intrinsic value that makes it more ‘real’ money than anything else.

And if Ron Paul believes that returning to a gold standard will solve all the economic woes of the world then that is more proof that he (and his followers) should not be allowed any closer to anything economical or governmental than Ayn Rand and her followers. All it will do is collapse the economy as the amount of money out there can not remotely be ‘covered’ by gold.

Gold does not ‘back’ a currency. Trust does, and right now that trust is going because banks have been creating far too much money for the (world’s) economy.
What needs to be done is putting the banks back on a tight leash and drain that excess financial market money out of existence (through inflation or preferably by letting all those loans lapse. This will return economic growth back to the increase of productivity (ie. a fraction of a procent annually on average) instead of on the ability to push ever more phantom money around more quickly with the aid of computers).
Longing for the 1950s is not going to solve anything.

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By John M, August 9, 2011 at 1:13 pm Link to this comment

“@John M
“The ratings agency’s warned they needed to see
4 trillion in CUTS - it never happened.”

They were that specific? How do you know this?
Even if it were a fact - the fact that it was a
threat - based on which facts? More importantly on
what principles? Political ones, or actual financial
ones?”

But John Chambers, managing director and chairman of
S&P’s sovereign ratings committee, explained to Fox
News on Saturday that the downgrade was “motivated by
a number of factors.”

“One was the political gridlock in Washington, which
make us think that it’s going to be difficult for
elected officials to put the fiscal profile of the
U.S. government on a long-term sustainable path,” he
said.

“And part of it was because of the fiscal path
itself,” he said, explaining that U.S. debt accounts
for 75 percent of gross domestic product and will
“trend up over the next decade unless we get
additional fiscal measures than what we have on the
table right now.”

The agency was also worried that the eleventh-hour
budget deal reached last weekend fell short of S&P’s
expectations, he said. S&P was seeking $4 trillion in
budget cuts over the next decade. But Congress passed
a plan on Tuesday that slashes up to $2.4 trillion in
cuts over that time.

“If you get to the $4 trillion figure—which had
been mentioned by the Bowles-Simpson commission,
which had been mentioned by the president in his
April 13 speech, which had been mentioned by Paul
Ryan in his alternative budget—that, if you have
decent growth behind it,would have done the trick,”
Chambers said.

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By RayLan, August 9, 2011 at 12:51 pm Link to this comment

@John M
“The ratings agency’s warned they needed to see
4 trillion in CUTS - it never happened.”

They were that specific? How do you know this?
Even if it were a fact - the fact that it was a threat - based on which facts? More importantly on what principles? Political ones, or actual financial ones?

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By Inherit The Wind, August 9, 2011 at 11:42 am Link to this comment

OM:
Your guys got their way. And the nation’s rating was lowered and the stock market crashed.  Today, it’s up 40 points after dropping 1100 points in two days.

Do you need more proof that every policy you espouse damages our economy?  The economy was in a shithole when Bush left the White House.  It’s STILL in a shithole, now worse, and that’s after Obama’s spent two years doing everything the GOP wanted.  That’s 10 years straight of total mis-management.  And here’s where we are: (and only two of those were with Obama in the WH)

about 10% unemployment
Foreclosures are picking up again.
Gold is knocking on $1750.
Dow is down 1100 points in two days
Drive down Main Street in any town, even a better-off one like mine and the number of closed stores is downright scary.

If somebody chops your hand off, what proof do you need to be convinced that you cannot wiggle your fingers?

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By OzarkMichael, August 9, 2011 at 11:10 am Link to this comment

Gene, you keep defending President Obama, but he had two tools, at least, two weapons he didn’t use.
He could have invoked the 14th Amendment to trump the TeaParty.

Of course if Bush was President and he invoked the 14th Amendment to trump Leftists who had recently campaigned, organized, and voted for a change in policy, I think that ITW and his close personal friend ‘Gene’ would be complaining that the democratic process just got run over.

Ah, but in our case today its just the tea party, we all know they arent real people, right? I mean we are just some sort of front group for millionaires who manipulate everything, so we apparently deserve whatever disenfranchisement you can come up with, whatever punishment you can come up with, however you can manipulate to make it happen.

i now how the Leftist mindset works. You are, after all, the only real person in our arguments.

However, what you dont seem to know is that whatever you propose to disenfranchise others… that same process will be used against you later.

Think ahead.

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By racp, August 9, 2011 at 10:51 am Link to this comment
(Unregistered commenter)

Fact: only a fraction of the American population believes in the idea that the USA will not be able to pay back the borrowed money. Everybody else in the World understands that the USA is 2nd largest economy, a sovereign country (which can print money) and with all the tools to become the last country defaulting.

FACT: even today, if not risk-free, the USA debt is the one with the lowest risk in the world (don’t trust me, check the markets)

FACT: As anyone moderately versed in finance knows, every debt risk assessment includes a political risk assessment.

Here my 2 cents: Making all the long term adjustments in the short term is like eating all the food you need for the next 10 years in one dinner. You will get an indigestion and probably die.

Eugene, I cannot agree more with your assessment. Thank you putting it in words.

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By John M, August 9, 2011 at 8:50 am Link to this comment

An article devoid of facts:

Fact: If the debt ceiling had been raised in December
when the dems controlled everything in Washington
there would be no “crisis” Reid wanted a political
tool to use against repubs and miscalculated.

Fact: The ratings agency’s warned they needed to see
4 trillion in CUTS - it never happened.

Fact: The downgrade didn’t happen during the standoff
it happened after the bill was signed.

Reid played politics Obama did anything and
everything to reach is singular goal - push the next
debt debate past the election at all costs.

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By Ron Paul guy, August 9, 2011 at 7:13 am Link to this comment
(Unregistered commenter)

Ron Paul thinks we should have paper money. He just wants it backed by gold, you
know, like it was for most of our history until Nixon took us off the gold standard.
People didn’t walk around with “doubloons” like you call them, they just had paper
notes that could be traded in for gold. Also you fail to mention that printing the money
to pay off our debts would also inflate the dollar, which directly hurts millions of working
families immediately. The GOP and the dems both have a huge part to do with the
current crisis, mainly cause neither will stop the huge amounts of spending on military.
If we cut the military we solve our problems fiscally.

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By RayLan, August 9, 2011 at 6:39 am Link to this comment

Obama is an accomplice after the fact. When you witness a crime and do nothing, you are guilty by inaction. The hysteria about the deficit was heard around the world - so it’s not surprising that rating agencies like Poor Standards paid attention. So now if anybody is dumb enough to take them seriously, our economy will become worse - a self-fulfilling prophecy.
Thank you mindless voters-for-Repugs.

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By Rodney, August 9, 2011 at 6:31 am Link to this comment
(Unregistered commenter)

Obama needs to realize that the Republicans are still fighting the civil war. They are trying to destroy him personally and his presidency. If the country fails so be it. A civil war within. They can’t bring back slavery but they can bring back slave wages. They can’t bring back jim crow, but they can make it difficult for minorities to vote. They work for the owners of this country, use to be the slave owners who over the past two hundred years now own America’s corporations. They don’t want any programs that would improve the life of the middle class because the really don’t believe in or want a middle class. That is why they want to destroy social security,medicare, medicaid. Health care is only for the rich in their minds. Every one else has to pray to god for better health. And if middle class whites get hurt then they need to work to become rich like them. They have come to take their country back. Back to 1776

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By Inherit The Wind, August 9, 2011 at 5:13 am Link to this comment

Gene, you keep defending President Obama, but he had two tools, at least, two weapons he didn’t use.
He could have invoked the 14th Amendment to trump the TeaParty.
He could have told them that as President, he gets to decide which funds are actually spent (Bush didn’t release monies to programs he didn’t like).  Then he could have made clear that the cuts would ALL be implemented in the districts of the Congressmen and states of the Senators that forced this action. To let the cutters have the cuts hit THEIR voters.

He chose not to do this, preferring to let them damage the economy, the political process, our ability to make reasonable laws, and for what? To be able to blame them for the mess?

I am rapidly coming to the conclusion that Barack Obama is a one-term President, and may well be replaced by Mitt Romney or, worse, Rick Perry.

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