Tuesday, August 09, 2011
Obama's claim that America has "always been and always will be a AAA country" is half-true at best, but wholly misleading and quite dangerous
From Jake Tapper:
In his first public reaction to Standard & Poor’s decision Friday to downgrade the nation’s credit rating, President Obama reassured markets today that “no matter what some agency may say, we've always been and always will be a AAA country.”
The half-truth is that since the current rating agencies have been in existence and since they've been giving this sort of letter grade, American government debt instruments have indeed qualified for a AAA rating. The major ratings agencies, including S&P's predecessors, got their starts rating railroad companies in the last half of the 19th Century. But America has been selling debt instruments for many, many more decades than there have been credit rating agencies and letter grades for their ratings.
In fact, we've been selling debt instruments since before there was a United States of America in its present form: the individual colonies had issued "bills of credit" as far back as the early eighteenth century. Our earliest diplomats (including Adams, Franklin, and Jefferson) spent much time trying to finance our revolution through borrowing abroad.
But for the first several decades of our national history, our national credit was not good — and even the substantial risk premiums extracted by our lenders would likely not have been enough to induce them to make the loans were they not also motivated by political concerns. (The French, especially, had their own reasons to want to see the American revolution persist as a thorn in the British lion's paw.)
So no, if Obama meant to convey an impression of a longer "always" than just the last few decades, or if he meant to convey a general impression rather than make a technical statement specifically about ratings by rating agencies, then America has not always been a AAA country. That's basically a phenomenon of late nineteenth and twentieth centuries, because even as late as our Civil War we often had hard times finding foreign financiers for our government debt.
Nor, of course, is it at all certain that America will "always be" a AAA country. The ratings downgrade last week was from only one agency, and it was the smallest downgrade available. Consider the difference in our deficit and our spending between, say, 2007 and now: If a rating system isn't sensitive enough to pick up on the fact that we're spending multiple trillions every year now, and running deficits every year between 1.2 and 1.5 trillion dollars, it's a pretty damned insensitive rating scale, isn't it? What's amazing, frankly, is that the other agencies didn't also downgrade our government debt instrument ratings.
But only a complete moron — someone like David Axelrod, who's not very smart and really doesn't care at all about being truthful — could deny that America's finances are at risk. If they're mismanaged as badly as they have been since the Democrats took control of both chambers of Congress, we will drive our government debt instrument ratings into junk bond territory well before the next American census.
And that's precisely why Obama's statement is wholly misleading and dangerous: We have a problem. Denying it or soft-pedaling it is neither honest nor helpful. Even if you think it's a problem that should be solved primarily by tax increases (see my comment about morons and one in particular, above), you still have to acknowledge that we cannot survive as a country — debt ratings be damned — if we don't stop adding $1.5T or so to the deficit every year while the demographic freight trains of Medicare, Medicaid, and Social Security continue barreling toward us with the inexorability of Baby Boomers getting older.
This is the opposite of leadership. Even if you're a Democrat and you're spitting mad at the GOP and the Tea Party and the rating agencies, you have to admit that Obama is not leading the way toward any kind of solution to this problem. When he's not showing his ignorance of history, he's simply alternating between impotent inaction, pedantic lecturing, and finger-pointing.
We don't yet have double-digit inflation and interest rates, nor gas lines for miles, so I suppose stalwart Obama defenders can argue amongst themselves as to whether he's already become a bigger domestic-policy failure than Jimmy Carter was. But he's certainly giving Carter strong competition in the race to the bottom.
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(1) sh made the following comment | Aug 9, 2011 1:25:27 PM | Permalink
"Pay no attention to that man behind the curtain."
Thank you for your article. You mention the "insensitivity of the rating scale". I wonder how much of the decision was based upon backlash to the criticism over the laxity of the rating sytem for mortgage-backed securities that led to the mortgage meltdown? Will this move actually restore credibility to their rating system? Or will AA just become the new AAA?
(3) Clayton Yendrey made the following comment | Aug 9, 2011 7:04:39 PM | Permalink
One thing to keep in mind as you listen to Obama and his cohorts bash the rating agencies in general and S&P in particular about their past failures.
In every instance, the agencies/S&P's error was that they overrated the entity in question, not underated.
So if Dem's really believe that S&P has made an error, then history strongly suggests that they didn't drop the US rating far enough.
(4) Jim Davis made the following comment | Aug 10, 2011 10:14:51 AM | Permalink
re Dana @2---I read Michael Lewis' book The Big SHort over the weekend. He savages the rating agencies several times in his account of the sub-prime mortgage fiasco. S&P and Moody's should have been the grown-ups in the room, but were negligent in their oversight.
I had the same thought: that the downgrade was a CYA move in light of past transgressions.
That kind of comment really just smacks of ostrich-like sticking your head in the sand. I'm surprised that such an important politician would say something so obviously untrue. The good news is that the country CAN get back the higher rating at some point. But things might be tough for awhile.
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