S&P may have questionable moral authority in downgrading the U.S. from its AAA rating but they have pointed out that if Republicans don’t back down from their anti-tax fervor and Democrats continue to maintain entitlement programs without significant reform- the gridlock will continue to kill us.
There are two other ratings agencies who still give the U.S. a AAA rating, Moody’s and Fitch. Both warn that may change but have also said they put less weight than S&P does on the politics of gridlock. But ironically, the political reaction to the S&P downgrade may change their minds on that. Instead of taking the downgrade as a warning shot across the bow, both sides have come out swinging against one another in response, making the very point S&P highlighted that these intractable political positions make us a riskier investment.
There are indications that the “Super” congressional committee of a dozen lawmakers representing the House and Senate will be every bit as deadlocked as the larger bodies were just last week. Standard and Poor’s and their fellow ratings agencies may have played a significant hand in our current crisis by handing out completely undeserved sterling ratings to the instigators of the subprime lending catastrophe four years ago, but they’re right to express serious concern about the state of our “take no prisoners” political climate.
But a downgrade may be taking it all a step too far. The U.S. economy, anemic as it is, is still way better off than it was, say in 2008 in the midst of the banking crisis and we didn’t get downgraded then. Downgrading the U.S. now carries the risk that interest rates will rise and make paying off debt an even more expensive task, not to mention the ripple effect on an already struggling economy as rates potentially rise for everything from small business lending to auto, credit card, and student loans.
It happened, though, and here we are. If the Congressional “Super” committee finds a spine and a sudden spirit of compromise, we’ll be alright. Given the toxic political environment of the moment, I wouldn’t exactly give that likelihood a sterling, risk-free AAA rating