Monday, August 8, 2011

The S&P Ruckus and the Real Policy Challenge

The S&P downgrade was signaled well in advance, so it should not have come as a surprise. Paul Krugman takes a no-holds-barred position today that yes, the United States is a mess, but no, S&P is not the organization to rely on for this evaluation, since its laxity during the mortgage-finance bubble contributed to the meltdown and triggered the Great Recession. A neat summary of blogviews by economists is at Curious Capitalist

My Comment: Since U.S. Treasuries have been the global gold standard for risk-free debt, it is odd to think of them as rating less than AAA. For a rating agency to downgrade the debt in the way it did smacks of petulance over the way Congress conducted the debate. That should not be any business of S&P. The American voter will deal with that in 2012.

What strikes me as sad is that the unnecessary debt-ceiling debate precipitated the downgrade. The U.S. Government should remain focused on the 13.9 million unemployed Americans and the 9.1 percent unemployment rate. Demanding more cuts in spending now will not be helpful unless a package of job incentives is passed ASAP. What ought to have precipitated a rating-agency downgrade of U.S. debt, on technical grounds, was the exclusion of the Iraq and Afghanistan wars from the Federal budget, pushing this spending into the deficit and add to the U.S. debt. Or a downgrade for running up of deficits during the good years of 2004-2006 years unemployment was below 6 percent and falling. But that was when S&P was otherwise preoccupied, selling AAA ratings of evil baskets of CDOs. S&P is about six years late and a couple of trillion dollars off the mark.

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