In my column a few weeks ago, Debt Ceiling for Dummies, I discussed how a Congressional failure to raise the national debt ceiling could lead to financial calamity. The ceiling, of course, was raised; but the fiscally timid and wildly unpopular Congressional deal prompted the credit rating agency Standard & Poor's to downgrade the nation's credit Friday night.
Such as with the debt ceiling debate, much of the financial jargon used to explain credit downgrade is confusing, esoteric and sometimes downright yawn-inducing. So, drawing on my more than a decade's experience working with these issues as Kentucky's elected State Treasurer and then its CFO, and now as the lead correspondent at The Recovering Politician, I offer the following straightforward, plain-English summary to, hopefully, help better explain the real-life impact of credit downgrade:
Who are the credit rating agencies and what did they just do?
There are three primary national credit rating agencies:  Fitch, Moody's Investors Service ("Moody's"), and Standard and Poor's ("S&P"). These agencies rate the creditworthiness of governments, companies and individual securities, allowing investors to better understand the risk of their investments. The higher the rating, the more creditworthy -- or, alternatively, the less risky -- the investment.
Our federal government is one of the many entities these agencies rate. The U.S. borrows money -- by issuing bonds and Treasury bills to governments, corporations and individual investors -- in order to operate all of its essential functions. The outstanding current federal debt currently exceeds $14.5 trillion.
Since the credit rating agencies were established, U.S. Treasuries have always enjoyed a triple A rating, the very highest: indicating to global financial markets that they are among the safest investment instruments in the world. Friday night, however -- for the first time in the nation's history -- S&P downgraded the rating of the nation's long-term debt to AA+, one notch below AAA, meaning that the U.S. has been removed from its list of risk-free borrowers.
Earlier in the week, Moody's and Fitch both declined to downgrade the country's credit rating. Moody's, however, changed its "outlook" on U.S. debt to "negative," meaning that there is a risk of a future downgrade. Fitch stated it would determine whether to lower its own outlook by the end of the month. Both have urged Congress to make more progress in debt reduction in order to avoid a potential full downgrade.
Why should we listen to the credit agencies -- aren't they part of the problem?
There is broad consensus that credit rating agency action -- or often times, inaction -- was a significant contributor to the 2008 financial collapse. This April, a U.S. Senate investigations panel declared that Moody's and S&P triggered the financial crisis when they were forced to downgrade their ratings on the very complex and controversial mortgage-backed securities that were at the heart of the collapse that almost brought our entire financial system to its knees. Had the ratings agencies been exercising more diligence, many experts argue, they would have alerted investors of the riskiness of these controversial financial instruments long before they became a problem.
However, while the credit ratings agencies do not enter the discussion with entirely clean hands, their decisions are extraordinary significant. Their role is written into the statutes and regulations that govern the financial system. Think of it this way: Even though progressives may decry the partisanship on the U.S. Supreme Court, and thoroughly detest some of its recent 5-4 decisions, we must abide by them.
What is the impact of this credit downgrade?
Thanks to those awful free credit report commercials, most of us understand that having a low credit rating is a bad thing: Low credit scores for individuals could mean the denial of credit for the purchase of cars, homes and other items.
For the nation, a credit downgrade informs investors that U.S. Treasuries are a riskier proposition. This means that in order for the nation to borrow funds to pay for essential services, Treasury might have to provide investors with a higher interest rate to compensate for the additional risk they would be taking.
Once those interest rates begin to climb, the U.S. would have to spend billions more on interest payments, further increasing the national debt. Moreover, many individual states may experience their own credit rating downgrades, depleting their already-bleak coffers further by higher interest payments, potentially requiring state tax hikes and/or cuts in education, health care and law enforcement.
These interest rate hikes would not be limited to our governments' borrowing. They would translate to higher interest rates on our credit cards and mortgages, directly reducing the incomes of regular Americans.
Finally, many institutions that by law or policy invest only in risk-free, triple-A rated bonds -- such as many pension funds and investment trusts -- would be forced to dump their U.S. holdings. This would shift financial transactions away from the U.S., potentially resulting in the dollar losing its status as the world's reserve currency, a major blow to American global financial leadership.
But wait: Only one of the three agencies downgraded U.S. credit? Is that significant?
Yes, the split verdict among the credit agencies provides a measure of hope for the economy. U.S. debt is still deemed risk-free by two out of the three credit rating agencies; and most of the time, interest rate hikes and/or the mandatory dumping of riskier holdings by some investors are triggered only when a majority (i.e., two) of the credit rating agencies issue a downgrade. That's why many analysts suggest that the impact of the S&P decision could be modest. Moreover, the Federal Reserve immediately issued a statement that the creditworthiness of U.S. securities has not changed.
However, with Moody's lowering its outlook to negative, and Fitch considering the same, a potential downgrade by a second agency -- or even all three -- is certainly a real possibility in the short-term. Moreover, Friday night's first-in-history U.S. credit downgrade alone will undoubtedly rattle many investors, shaking their confidence, causing some to demand higher interest rates and others to flee U.S. Treasuries.
In short, we have not reached financial Armageddon. But unless Congress immediately begins to address our financial debt in a meaningful, bipartisan way -- including both tax and entitlement reform -- our economy will suffer a devastating blow.
What can I do?
The credit agencies have given Congress clear marching orders: Come together in a bipartisan way and start making the tough choices necessary to restore fiscal sanity.
It is up to the rest of us to enforce them.
We are at the brink of economic disaster because the loudest voices that our elected representatives are hearing come from the extremes of our political system, particularly Tea Partiers who are unwilling to accept the real-life economic impact of their ideology and who threaten to punish those representatives who are willing to forge bipartisan compromise for the good of the nation.
If the rest of us make ourselves heard -- and polls continue show that a clear majority of Americans support bipartisan compromise -- Congress will listen. So please contact your congressmen today, using all of the technologies our new media and social networks offer. Share your message with your friends and neighbors, at church or synagogue, when you drop your kids off at school or when you attend the next sporting event.
And if you are looking to participate in bipartisan, grassroots activism, join us at No Labels, a new national movement of Democrats, Republicans and Independents, all of whom agree that we must put aside our labels on occasion to work in the country's best interests. Our message is simple: In order to solve the debt crisis, everything needs to be on the table, and everyone needs to be at the table. Click here to identify 12 things you can do today stand with No Labels in demanding a bipartisan solution to the debt crisis.
While the Tea Party has been the most significant recent contributor to our nation's hyper-partisan paralysis, the debt crisis is a bipartisan problem that requires a bipartisan solution. It's up to all of us to pitch in to fix it.
Follow Jonathan Miller on Twitter: www.twitter.com/RecoveringPol
Jeff Madrick: S&P Downgrade Brought On by Republican Obstructionism
Robert Kuttner: Triple-A Idiots
Jeff Reeves: Don't Panic: The U.S. Credit Downgrade Changes Nothing
S&P downgrades US credit rating from AAA - Yahoo! Finance
S&P downgrades U.S. credit rating - Aug. 5, 2011
Standard & Poor's Downgrades US Credit Rating From AAA to AA ...
Standard & Poor's Downgrades U.S. Credit Rating : The Two-Way : NPR
In Downgrading U.S. Rating, Standard & Poor's Fires 'Warning Shot ...
I think your article did a very good job of outlining the credit rating situation as it stands now.
However, your political bias comes in near the end when you blame the Tea Party ideology for a situation they did not create. I think that is a cop out. The US has a spending problem, not a revenue problem. We need to cut our spending and we need to do it in a meaningful way. Those countries that have been where we are today have all pulled themselves out primarily through spending cuts and/or legislation that requires them to bring their medium-to-long-term budget into balance.
That is where we need to go if we want to start on the path to prosperity.
Kai
READ POLICIES PROMOTE WASTE AND ABUSE
WAIT !!!! WE WILL BE DOWNGRADED BY THE OTHERS
MEDICAID STAFF PROMOTE WASTE OF NONTAXPAYING ENTITLED
THEY GIVE FREE MAIDS AND NANNIES AT TAXPAYER EXPENSE!!!
OIG DOES NOT TIMELY INVESTIGATE THE FRAUD IN THESE PROGRAMS
NO STOPPING THE WASTE AND ABUSE IN THESE PROGRAMS
CUT MEDICAID BUDGET BEFORE ITS TO LATE
http://www.youtube.com/watch?v=wMljoEOh6d8
- Futurama
In the year of the lord 2011
The city of San Diego borrowed 100 million
The city of LA borrowed 1 billion
The state of Calif borrowed 7 billion
The feds borrowed 3 trillion
In the year 2012 the feds will borrow another 3 trillion
The reason you'll never hear an economist or tv talking head argue for default is the same reason you'll never see recent pictures of the wreckage in Joplin, Mi where 650 people are still homeless as of August 1st. A default would wipe out 20 trillion in debt. Force the feds to balance the budget by living without borrowing and end the three wars we are engaged in. Not bad. No debt! no wars.
How outrageous it is, that it got so far out of hand, and that it must be reined in NOW.
My question is why?
Why should a small group, financed by billionaires, representing an extreme viewpoint of a minority of Republicans control the debate.........when it was Republican policies that were/are responsible for the majority of the debt in the first place?
When Allen Greenspan testified before congress in 2001, he said the US Government would have a surplus of 800 Billion dollars by 2011.
10 years later, we have a 14 Trillion dollar debt.
So what happened?
Two unfunded wars in the Middle East, and the Bush Tax Cuts that the Congressional Budget Office told Congress in 2001 would create a massive Federal debt.
It was Republican policies that made the mess in the first place. Why are they now able to blame President Obama, and the Democrats for the bad outcome of what THEY did?
Shouldn't the Party of Personal Responsibility, be held responsible?
A few points:
a) I know that it is an oft-repeated talking point that the Tea Party is funded by billionaires, but so are the Democrats and Republicans. That is really a non-issue.
b) Republicans and Democrats are big debtors. You are right. It is good that the Tea Party held them to a hard commit on reducing that debt.
c) Alan Greenspan oversaw two major bubbles, the IT bubble and the Housing bubble. His loose monetary policies that produced cheap and easy credit that caused a structural shift into industries that were unsustainable is partially what happened to our economy. Add in the wars, the expansion of Medicare, etc. are all contributors to the debt. What did not contribute to the debt were the Bush Tax Cuts for the Poor. Normalized tax revenue as a percentage of GDP recovered to 18%, same as it has been historically since the 1950’s. However, I agree the poor should pay more so I have no problem rescinding this tax cut.
d) Republican spending that is making a did make a mess of the budget, but if you look at the budget, it is Democrat items that take up the most of the mess. The government has become a welfare transfer agent and therein lies much of the increase in budget over the years and it is the reason that S&P, etc. are downgrading America due the structural imbalances in our budget caused by runaway nondiscretionary spending.
Kai
That also makes sense then as to why S&P would reach a different conclusion than Fitch and Moody, who may have only looked at the finances.
So what has changed from out AAA government to out less than that now? It has been the introduction of dogma driven government by hostages taking and ultimatums. And where has that come from? The tea party candidates.
It is up to the rest of us to enforce them."
Excuse me, what?
The last time I checked, it was the People who issued the marching orders. Not a privately-appointed, unaccountable board of robber barons. It's time for the People to demand that the Department of Justice take anti-trust action against S&P and break up its monopoly as the sole ISIN issuer in the United States.
MAJOR.
The Tea Party was spot on about this mess.
The reality is cuts alone will not get us out of this hole. Several things need to happen. First areas to be cut need to be identified by waste, fraud and abuse in areas of spending, defense and discretionary. The so called entitlements are not the problem and as such should be the last to be touched. Second, raise revenues. Do corporations need tax breaks for jets, does a guy making 50 million really need a tax cut? Part of the reason some people on the bottom don't pay taxes is because they earn at or below the poverty level. Third, create jobs or bring them home and put people back to work. Simple economics dictates that in order for economies to move and grow, money has to move.
This one act would take us out of the red, and be constitutional.
My view is a bit less knowledgeable. I for instance see the continued suffering by countless millions as an example of lowering the tax rate. The death of progressive tax rates in this country as well as others signifies a huge redistribution in wealth into fewer and fewer hands. That a calamity of catastrophic proportions must occur seems to me not only probable but inevitable. That wealthy persons or companies need to pay an increased portion of taxes was the foundation that the respective societies were built upon.
An uneducated opinion.
Never forget, the economy was losing 800,000 jobs per month when Bush left office. The economy was tanking at a never before seen rate. We have made progress.(http://mobile.salon.com/politics/war_room/2011/06/08/lyons_gop_recovery/index.html)
The debt "crisis" has been caused by a) a poor economy, 2) two wars, and 3) the Bush tax cut.
There are no cuts just a reduction in the projected growth of spending.
Please get the facts and stop spouting BS
Wall Street Journal/NBC Poll
Last March, on the 10th anniversarÂy of the Bush tax cuts for the rich, CongresswoÂman Schakowsky (Illinois) proposed the "Fairness in Taxation Act". The tax brackets, for income starting at $1 million would be:
* $1-10 million: 45%
* $10-20 million: 46%
* $20-100 million: 47%
* $100 million to $1 billion: 48%
* $1 billion and over: 49%
These brackets would undo some of the damage caused by the Bush tax cuts, but would still leave the rates below the Reagan era. The bill’s 13 co-​sponsoÂrs include co-​chairs of the CongresÂsiÂonal ProgressivÂe Caucus, U.S. Reps. Raul Grijalva (D-​AZ) and Keith Ellison (D-​MN), plus U.S. Rep. Jesse Jackson, Jr. (D-​IL).
http://www.politiscoop.com/component/content/article/35/123-bill-to-tax-millionaires-and-billionaires-finally-someone-listens.html