Tuesday, August 9, 2011

S&P downgrades US debt yet Treasuries soar?

So S&P downgrades our debt rating, and US Treasuries are what we sell to finance our debt, so one might assume the downgrade was a statement on our ability to pay on the debt held by those invested in Treasuries? No, that would be too sensible. Yes, the stock market crashed again yesterday but there was a heavy influx of investment into Treasuries, not out of them. It is still the safest and most trusted bet in the marketplace, investing in the US's ability to pay on its debt. So what then is the downgrade all about if not that? Is S&P credible to judge on something that is not about the actual debt? Or even a credible rating agency at all, given their AAA rating of the toxic mortage-backed securities that caused the last crash? And why the market crash and simultaneous investment into US debt?

Recall that S&P was one of the rating agencies that gave an AAA rating to the junk that caused the meltdown. And why did they do so? A Senate committee found that they were pressured by the very companies that sold the crap, like Goldman Sachs. S&P even said this junk was “as safe as government bonds.” (All the more ironic given the debt downgrade.) Granted there is little doubt the likes of Goldman and the other banks that did the pressuring lied through their teeth about the junk but it was S&P’s responsibility to verify what they were told and to rate it accordingly. They did not do their due diligence through corruption and it is their rating that should be on the line here.

S&P did get something right when they said it was due to “brinkmanship and lack of certainty in Congress.” And that is because the debt deal that finally passed was inadequate, and it was inadequate because the Tea Party freshman refused to budge one inch on a sensible, comprehensive debt reduction plan that would include generating revenue and/or raising taxes. There was a plan that would have likely avoided the downgrade, Obama's “grand bargain.” It would have reduced the debt by $4 trillion, with cuts in Medicare, Medicaid and social security but also including some tax increases. But the offer was rejected by Speaker Boehner due to the Tea Part refusal to raise taxes at all. We ended up with the deal in which Boehner bragged he got 98% of what he wanted, a deal that S&P lost all confidence in.

So why then the market crash? The markets too have lost confidence in the government's valid and necessary function to kick-start a lagging economy. And how do they do that? Not by cutting spending only but by also by increasing revenue and actually investing (aka spending) on the right things, like infrastructure projects and education. (See Robert Reich's advice as only 1 example of dozens on this.) With revenue and right spending off the table in a balanced approach there is simply no way the economy will reverse its negative trend. So investors are pulling out of markets and investing in the one thing that was supposed to be downgraded, US Treasuries. Go figure.

1 comment:

  1. This article* provides key insight into the market decline. Therein the author highlights the ongoing battle between two powerful factions in the Republican Party, corporate business and the Tea Party. Major corporate mouthpieces like the US Chamber of Commerce wanted the debt ceiling raised without linking it to tax reform or budget cuts, issues they obviously care about but felt this was the wrong venue and the wrong time. 450 CEOs signed a letter petitioning the President and the Congress to just raise the ceiling without the side show. Some in this group even support government spending on infrastructure. Whereas the Tea Party “manufactured a crisis” by linking to two to gain political points and pushed the economy to the brink while gutting things like infrastructure spending as mere pork. We see which side won the argument but also why businesses lost confidence in the markets, given the extreme wing of their own party which was willing to sabotage the economy over ideology.

    * http://www.huffingtonpost.com/peter-dreier/gop-rift-big-business-vs-_b_921818.html


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