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.
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
Julien GONG Min (CC-BY)