Last night, during both the GOP presidential primary debate and a post-debate interview with Fox News’ Sean Hannity, Rep. Michele Bachmann (R-MN) claimed that S&P’s downgrade of the United States creditworthiness vindicated her position that the debt ceiling should not have been raised. “Standard & Poor’s essentially proved me right,” she told Hannity, after telling the debate audience that the S&P downgrade came about because the agency said “we don’t have an ability to repay our debt”:
We just heard from Standard & Poor’s, when they dropped our credit rating and what they said is we don’t have an ability to repay our debt. That’s what the final word was from them. I was proved right in my position. We should not have raised the debt ceiling.
After this performance, it’s blatantly clear that Bachmann has no idea what S&P said, because just about every word out of her mouth regarding the agency’s decision was incorrect. For starters, S&P never said “we don’t have an ability to pay our debt.” After all, the agency still rates the U.S. as AA+, meaning it has a “very strong capacity to meet financial commitments.” One S&P analyst characterized the difference between AA+ and AAA as just “degrees of excellence.”
Furthermore, the reasons that S&P issued the downgrade — as it clearly laid out in its release on the subject — were the use of the debt ceiling as a political football and GOP intransigence on taxes. As National Journal put it, “It’s hard to read the S&P analysis as anything other than a blast at Republicans.”
A Standard & Poor’s director added one more justification to the mix yesterday, saying “that one reason the United States lost its triple-A credit rating was that several lawmakers expressed skepticism about the serious consequences of a credit default”:
Without specifically mentioning Republicans, S&P senior director Joydeep Mukherji said the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default,” Mukherji said.
“That a country even has such voices, albeit a minority, is something notable,” he added. “This kind of rhetoric is not common amongst AAA sovereigns.”
Of course, one of those people expressing skepticism about the severe consequences of not raising the debt ceiling was none other than Michele Bachmann.
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand.
Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.
The Committee currently anticipates that economic conditions--including of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
On Friday the U.S. ratings agency Standard & Poor's slapped the United States with a downgrade, demoting the country from a top-notch AAA credit rating to AA+. Although the nation's other two major agencies, Moody's Investor Service and Fitch Ratings, reaffirmed the United States' AAA credit rating, S&P's move triggered fear through the stock market, which on Monday had its worst day since the 2008 financial crisis.
S&P took further action on Monday, downgrading to AA+ the credit ratings of Fannie Mae, Freddie Mac and other entities linked to long-term U.S. debt.
In a statement Friday outlining their reasoning, S&P cited a shaky political climate in Washington, D.C., that nearly caused the country to default on its loans, the fact that $2 trillion in spending cuts under the final debt-ceiling/budget deal fall short of the $4 trillion needed to actually lower deficits in coming years and the refusal from congressional Republicans to raise tax revenues. Some excerpts:
"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.
" ... The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.
" ... Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.
If U.S. Treasury bond investors take heed of S&P's downgrade, they could demand higher interest rates from the government -- which would in turn cause interest rates to rise on all Americans. Yet despite the worries stirred up by such a worst-case-scenario "if," President Obama has taken a more reassuring position. In remarks on Monday, he maintained that U.S. treasuries are still the safest investment in the world and that the government is fully capable of paying its debt.
"Markets will rise and fall, but this is the United States of America," the president said. "No matter what some agency may say, we've always been and always will be a AAA country."
Obama agreed with S&P on one thing, though: Political gridlock has indeed kept the government from effectively managing its debt. "We knew from the outset that a prolonged debate over the debt ceiling -- a debate where the threat of default was used as a bargaining chip -- could do enormous damage to our economy and the world's," he said -- although without specifically calling out Republicans.
With that, he launched into his regular stump speech as of late, about solving the debt problem with measures beyond just spending cuts.
"Last week, we reached an agreement that will make historic cuts to defense and domestic spending. But there's not much further we can cut in either of those categories," he said. "What we need to do now is combine those spending cuts with two additional steps: tax reform that will ask those who can afford it to pay their fair share and modest adjustments to health care programs like Medicare."
So ... are we going to be OK or not? The Root spoke with Wilhelmina A. Leigh, senior research associate on economic security for the Joint Center of Political and Economic Studies about what the credit downgrade means for your finances, S&P's spotty track record on good judgment and whether this will give Congress the urgency it needs to seriously tackle the deficit.
The Root: Should S&P have downgraded the U.S. credit rating?
Wilhelmina A. Leigh: I'm not sure I can answer that question. I have to assume that S&P has a list of criteria that you have to meet for a certain rating, and that they made their assessment based on that. However, I'm also aware that before the rating was downgraded, there had been conversations between the Treasury Department and S&P about it.
S&P made a mistake in how they assessed what our debt would be by the year 2021 -- their math as off by $2 trillion. The Treasury Department pointed out that S&P's numbers were in error, and then it appears that S&P said, "Well, we're going to go ahead and [downgrade you] anyway." That could cast some doubt around S&P having looked carefully at whether the U.S. meets AAA criteria. If they decided to just do it based on erroneous data, that could put the downgrade in a different light.
TR: S&P's past mistakes also include AAA ratings provided for Enron, Lehman Brothers and the subprime junk mortgages that triggered the 2008 financial crisis ...
WAL: I think, in some ways, they may have done this as a way to try to clear up their own bad image -- to make it seem like, "This country screwed up, but we're on top of things."
TR: There have been some foreboding suggestions that the S&P credit downgrade means that our standing in the bond market will plummet, causing creditors to turn away from U.S. Treasury bonds and hike up our interest rates. Is that an accurate forecast?
WAL: I don't know that S&P has that much power. If the other rating services, Moody's and Fitch, followed suit, then I would say that we should be very, very concerned. I think what happens from here depends on what the other rating services do.
In the meantime, President Obama is correct that U.S. Treasury bond is one of the most stable, if not the most stable, investment that can presently be made. Our standing in the bond market is still very good, even though the stock markets have gone a little crazy. But there are so many uncertainties, and that's the bottom line here. If the U.S. were facing its challenges, and there weren't ongoing problems in the rest of the world, like in the European markets, then I don't think people would be as jittery about it.
TR: Do you think that more credit rating agencies will follow suit?
WAL: My sense is that if they were going to, they would have done it by now. Moody's, for example, mentioned earlier that they were monitoring the [debt ceiling negotiations] very closely, and I think enough time has passed for them to have looked at how that situation was handled and have made their assessment. So far they haven't acted.
TR: President Obama suggested that the downgrade will light a fire under lawmakers on the joint "super committee" to get serious about taking a balanced approach that combines budget cuts with raising tax revenues. Do you think this stands to make a difference in our gridlocked political discourse around the deficit?
WAL: When I heard that S&P had downgraded the U.S. credit rating, I thought, Maybe this will jolt Congress into realizing that this is more serious than just saying, "Oh, we can pay off our interest but we don't have to pay off the principal." I mean, something has to wake these folks up. It's like cutting away bone and flesh without adding anything. You just can't solve the problem that way.
TR: What if Democrats and Republicans are unable to bridge their differences on that issue? Is there any other way to get the economy growing, or are we just stuck?
WAL: The only two general ways that I know to do that are to cut spending, and the other is to raise taxes. The form that doing either one of those takes will make all the difference. Hopefully, whatever package they come up with will have in it enough of a stimulating effect, so that the economy can move forward. It's not going to be pleasant for many people, but if they can do it in a way where people can see progress, economic growth and a light at the end of the tunnel, then that amounts to something.
Sources: ABC News, AP, Fox News, Huffington Post, PBS, The Root, Yahoo News, Youtube
Five days after the US Senate Permanent Subcommittee on Investigations released a voluminous report detailing the criminal activities of the banks and credit rating firms that precipitated the 2008 Wall Street crash and global recession, one of the named culprits, Standard & Poor's Credit Ratings Services, issued an ultimatum to the White House and Congress demanding an agreement on savage austerity measures ahead of the 2012 elections.
In lowering its outlook from "stable" to "negative" on the top AAA rating for US Treasury bonds, S&P spoke Monday for the entire financial mafia that is headquartered on Wall Street. The ratings firm declared in a press release that failure to reach an agreement in the coming months to reduce the federal deficit by at least $4 trillion over the next decade "could lead us to lower the rating."
This amounts to a threat to crash the US and global economy and undermine the status of the dollar as the world reserve currency. The move is part of an internationally orchestrated drive by the major banks and speculators to push through devastating attacks on the living standards of the American working class.
They are applying to the United States the extortionate methods used previously to stoke up speculative attacks on the sovereign debt of a number of European countries, including Greece, Ireland, Portugal and Spain. S&P and its major ratings rivals Moody's and Fitch have issued strategically timed credit warnings and downgrades to create a crisis atmosphere, which governments have then utilized to override popular opposition and impose mass layoffs and wage cuts and shred social programs.
John Chambers, chairman of the sovereign ratings committee at S&P, virtually admitted as much, according to a report in Tuesday’s Wall Street Journal. The Journal wrote: “If the US reaches a British-style resolution, S&P will restore the US outlook to stable, Mr. Chambers said.”
In May of 2009, S&P lowered Britain’s credit outlook. It reversed the action 17 months later after the newly elected Conservative-Liberal Democrat coalition government announced a program of draconian cuts that will shatter the country’s social safety net.
Readers can make their own judgment as to S&P’s standing to be issuing such ultimatums. The Senate report on the Wall Street crash describes the corrupt process by which S&P routinely slapped AAA ratings on worthless securities marketed by the banks as follows: “Credit rating agencies were paid by Wall Street firms that sought their ratings and profited from the financial products being rated… The ratings agencies weakened their standards as each competed to provide the most favorable rating to win business and greater market share. The result was a race to the bottom.”
Senator Carl Levin, the chairman of the subcommittee, described what the investigation uncovered as “a financial snake pit rife with greed, conflicts of interest and wrongdoing.”
By rights, the top S&P executives who presided over this fraud and pocketed multi-million-dollar salaries in the process should be sitting in prison. Instead, still at their posts and having suffered no consequences, they are using the disaster of their own making to gut bedrock social programs such as Medicare, Medicaid and Social Security upon which tens of millions of people depend.
The statement issued by S&P on Monday described both the Republican fiscal year 2012 budget plan and that outlined by President Obama last week as a basis for cutting the federal deficit by $4 trillion. However, the two sides had to come to an agreement before the national election in 2012, the company insisted.
This demand underscores the anti-democratic character of the so-called budget debate. It is an elaborate charade, behind which stands the dictatorship of the banks. The deal to eviscerate what is left of the social reforms of the 20th century has to be sealed before the elections to make sure that the vote in no way becomes a referendum on austerity and the electorate has absolutely no say in the matter.
The mass opposition to the measures being proposed by both parties is well known to Wall Street and its political servants in Washington. On Monday, the same day as the S&P announcement, McClatchy Newspapers published the results of a McClatchy-Marist poll showing that voters by a margin of 2-to-1 support raising taxes on incomes above $250,000, with 64 percent in favor and 33 percent opposed. They oppose cutting Medicare and Medicaid by 80-18 percent.
S&P intervened at the behest of the banks to shift the phony budget debate even further to the right and create the conditions for even deeper cuts than those being currently proposed. Interviewed Monday on Bloomberg Television, David Beers, S&P’s global head of sovereign finance ratings, said the $4 trillion deficit-cutting target was “not enough to ultimately halt the rising trajectory of US debt.” It was, he said, merely “a useful starting point.”
The establishment media immediately signaled that it had gotten the message. The Los Angeles Times editorialized that “Congress and the White House can’t afford to ignore this warning shot.” The Financial Times of London published an editorial that declared, “S&P’s warning shot should galvanise America’s leaders.”
Democratic leaders rushed to reassure Wall Street that they were on board. Speaking at a community college in Virginia Tuesday, Obama said, “I believe that Democrats and Republicans can come together to get this done.”
Steny Hoyer of Maryland, the No. 2 Democrat in the House of Representative, said Monday, “Today’s revised outlook shows the urgent, bipartisan action needed to put our nation on a serious path to reduce deficits.”
Erskine Bowles, a former White House chief of staff for Bill Clinton and co-chair of last year’s bipartisan fiscal commission, was even more emphatic. Speaking to the Financial Times, he said S&P had been “absolutely right” in lowering its outlook on US debt. “If anything, they understate the extent of the problem,” he said.
Only a mass, independent movement of implacable opposition by the working class can defeat this criminal conspiracy. The World Socialist Web Site and the Socialist Equality Party urge workers and young people to reject the entire framework of the so-called budget debate. There must be uncompromising opposition to any cuts in jobs, wages or social programs and services. The working class bears no responsibility for the crisis of the capitalist system.
We propose an alternate policy. As a down payment, to begin to recoup the wealth plundered by the financial elite, we propose a 50 percent tax surcharge on all household wealth over $5 million.
This should be supplemented by raising the income tax on households taking in more than $500,000 a year to 90 percent.
These measures will not only generate hundreds of billions of dollars for jobs, schools, health care, housing and pensions, they will attack the profligate squandering of resources and contribute mightily to the moral as well as the economic health of society.
These initial steps lead inexorably to the nationalization of the banks and major corporations and their transformation into public utilities under the democratic control of the working population. This is a socialist program. It requires that the working class break politically from the two parties of big business and build a mass movement to fight for a workers’ government.
A day after Standard & Poor’s took the unprecedented step of downgrading the creditworthiness of the United States government, the ratings agency offered a full-throated defense of its decision, calling the bitter stand-off between President Obama and Congress over raising the debt ceiling a “debacle,” and warning that further downgrades may lie ahead.
In an unusual Saturday conference call with reporters, senior S.& P. officials insisted the ratings firm hadn’t overstepped its bounds by focusing on the political paralysis in Washington as much as fiscal policy in determining the new rating. “The debacle over the debt ceiling continued until almost the midnight hour,” said John B. Chambers, chairman of S.& P.’s sovereign ratings committee.
Another S.& P. official, David Beers, added that “fiscal policy, like other government policy, is fundamentally a political process.”
Administration officials at the White House and Treasury angrily criticized S.& P.’s action as based on faulty budget accounting that discounted the just-enacted deal for increasing the debt limit.
The agreement set spending caps in the fiscal year that begins Oct. 1 and calls for a bi-partisan Congressional “super committee” to propose more deficit reduction — for up to $2.5 trillion in combined savings over a decade.
“The bipartisan compromise on deficit reduction was an important step in the right direction,” the White House press secretary, Jay Carney, said in a statement on Saturday. “Yet, the path to getting there took too long and was at times too divisive. We must do better to make clear our nation’s will, capacity and commitment to work together to tackle our major fiscal and economic challenges.”
The ratings agency put additional pressure on the joint Congressional committee to find additional spending cuts, tax hikes or both to bring down the inexorably rising national debt.
Still, the posturing on Capitol Hill continued.
“Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground,” Speaker John A. Boehner, an Ohio Republican, said in a statement.
Senate Majority Leader Harry Reid said the downgrade affirmed the need for the Democratic approach, which would combine spending cuts with tax increases.
The decision, he said, “shows why leaders should appoint members who will approach the committee’s work with an open mind — instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S.& P. are demanding.”
Even as the ratings agency insisted on Saturday that its move shouldn’t have come as a shock, it reverberated around the world as political and financial leaders scrambled to assess its impact on the already troubled world economy.
China, the largest foreign holder of United States debt, said on Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the S.& P. downgrade.
While Europeans had girded for a possible downgrade, the news that S.& P. had actually yanked the United States’ AAA rating was nonetheless received with a degree of alarm in the corridors of power across the Continent. Finance Minister François Baroin of France questioned the move Saturday, noting that the figures used by S.& P. didn’t match those of the Treasury, and overstated the federal debt by about $2 trillion.
Mr. Baroin said he found it curious that neither Moody’s nor Fitch, the two other major ratings agencies, had reached a similar conclusion. Moody’s has said it was keeping its AAA rating on the nation’s debt, but that it might still lower it.
“We have total confidence in the solidity of the American economy,” Mr. Baroin said in an interview on French radio. Nonetheless, he added, the decision confirms that the world’s most developed economies are confronted with the same urgent priorities: to lift growth and reduce public and private debt.
The lowering of a core financial instrument of the global economy is freighted with symbolic significance, but carries few clear financial implications. The downgrade could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for local governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have not downgraded the government at this time.
The wrangling over the downgrade to AA+ from AAA stretched over days. S.& P. executives came to the Treasury Department earlier in the week to meet with a group of administration officials led by Mary J. Miller, the assistant secretary for financial markets, who is one of the government’s main liaisons to the rating agencies, according to a government official with knowledge of the meeting.
At the meeting, the S.& P. executives walked the Treasury team through its analysis, the official said. Even then, Treasury officials raised concerns about the methodology. S.& P. pointed out that there were at least three sets of assumptions that could be made to project future growth in government spending, according to the official.
The Congressional Budget Office projects spending in two ways — one that shows Congress increasing spending for the domestic and defense programs it finances annually by the projected rate of inflation, and another that shows spending rising by a higher amount pegged to the expected growth in the nation’s gross domestic product.
The Treasury argued for a third way, that would make sure that whichever so-called base line S.& P. used, it would take into account the spending caps and deficit reduction that Congress and the White House agreed to in the recent debt-limit deal.
Rumors of a potential downgrade started swirling through the financial markets on Friday morning, causing stocks to fall sharply. Although Moody’s and Fitch had affirmed the government’s AAA rating late Tuesday afternoon, S.& P. was silent.
But around 1:30 p.m on Friday, S.& P. sent a memorandum outlining its preliminary position, including specific figures underscoring their argument for a downgrade. Treasury officials were told that S.& P. planned to make its announcement after 4 p.m., when the stock market closes, according to two administration officials.
Treasury officials flagged a concern over how S.& P. crunched the numbers. S.& P. had chosen to assume that government spending grew at the pace of economic growth, rather than rely on numbers that incorporated the new spending limits into its actual budget projection. That is what Treasury officials are now calling a $2 trillion error — and raised the issue with S.& P.
In Saturday’s conference call, the Mr. Chambers said the $2 trillion difference, in one scenario for 2021, equals only about 2 percent of gross domestic product, and doesn’t alter the fundamental reality that the country’s debt burden will continue to rise.
Randy Neugebauer, a Texas Republican who heads the House Financial Services’ subcommittee on oversight and investigations, said that while it was appropriate for S.& P. to consider the political situation in its analysis, it was speculative of it to use predictions of what Congress will likely do in the future as a rationale for a downgrade.
“One thing that puts them out in uncharted waters is trying to predict what the political environment is going to be,” Mr. Neugebauer said. “They’re not predicting an overly cooperative environment in Congress and that’s a very subjective call.”
The ratings agencies, for their part, spent Saturday trying to defend their positions on the nation’s debt. Moody’s and Fitch analysts said Saturday that a downgrade remains a possibility. “Our rating is AAA until the day it changes,” said David Riley of Fitch in London. “That being said, we haven’t formally reaffirmed the rating.”
Moody’s has reaffirmed the AAA, though it put the country on negative watch on Tuesday. The company’s sovereign analyst said Saturday that his company is not as concerned about Washington’s political gridlock.
Steven Hess, a Moody’s analyst, said the debt deal “is not enough, but we thought a downgrade would be premature given that they have come up with a plan for deficit reduction.”
A senior Obama administration official is calling Standard & Poor's move to downgrade U.S. credit "a facts-be-damned decision," saying the rating agency admitted to an error that inflated U.S. deficits by $2 trillion.
U.S. Treasury officials received S&P's analysis Friday afternoon and alerted the agency to the error, said the administration official, who was not authorized to speak for attribution.
The agency acknowledged the mistake, but said it was sticking with its decision to lower the U.S. rating from a top score of AAA to AA+.
"This is a facts-be-damned decision," the official said. "Their analysis was way off, but they wouldn't budge."
Other sources familiar with the S&P matter called the move political and said the decision was rushed out too quickly.
The White House is now in wait-and-see mode -- hoping the decision and the S&P analysis face outside scrutiny, the official said.
"A judgment flawed by a $2 trillion error speaks for itself," a Treasury Department spokesperson said.
John Chambers, head of sovereign ratings for S&P, admitted there was an error in a CNN interview Friday night, saying "we agree with the Treasury's position on this and our figures reflect that."
But he also said the error "doesn't make a material difference -- it doesn't change the fact that your debt-to-GDP ratio ... will continue to rise over the next decade," he told "AC360."
In July, S&P placed the United States' rating on "Credit Watch with negative implications" as the debt ceiling debate devolved into partisan bickering.
To avoid a downgrade, S&P said the United States needed to not only raise the debt ceiling, but also develop a "credible" plan to tackle the nation's long-term debt.
Chambers said the slowness at raising the debt ceiling and the political infighting led to the move. In announcing the downgrade, S&P cited "political risks, rising debt burden; outlook negative."
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," the agency said.
The immediate implication of the downgrade was unknown. "Only time's going to tell how we're going to be affected," former U.S. Comptroller General David Walker told CNN's Anderson Cooper. "Interest rates that affect the U.S. government ultimately can ripple throughout the economy, which is not good news given our weak economic condition already."
S&P has not spelled out what the United States has to do to regain its AAA rating, sources said.
However, Chambers said "it's going to take a while to get back to AAA." Walker, who served as comptroller general from 1998 to 2008, said he wasn't "totally surprised" by the downgrade, saying S&P in April "made it very clear that they were looking for at least a $4 trillion reduction in the projected deficit over the next 10 years.
Within hours of S&P's move, both parties were playing the blame game. Former Sen. Rick Santorum of Pennsylvania, who is among a field of Republican contenders for the 2012 presidential nomination, attributed the downgrade to a lack of leadership.
"The markets are scared and the credit downgrade has happened because the president and this Congress continue to address the symptoms and not the disease," he said in a statement.
Former Utah Gov. Jon Huntsman said the downgrade was due to "out-of-control spending and a lack of leadership in Washington"-- a sentiment echoed by several GOP lawmakers, including House Speaker John Boehner.
"The spending binge has resulted in job-destroying economic uncertainty and now threatens to send destructive ripple effects across our credit markets," Boehner said in a statement.
Mitt Romney, the former governor of Massachusetts and also a GOP presidential contender, called the downgrade "a deeply troubling indicator of our country's decline under President Obama."
South Carolina GOP Sen. Jim DeMint, meanwhile, called on Obama to replace Treasury Secretary Timothy Geithner immediately.
"The president should demand that Secretary Geithner resign and immediately replace him with someone who will help Washington focus on balancing our budget and allowing the private sector to create jobs," DeMint said in a statement.
On the Democrats' side, Senate Majority Leader Harry Reid stressed "the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners."
A special joint committee of Congress will recommend further deficit reduction steps totaling $1.5 trillion or more, with Congress obligated to vote on the panel's proposals by the end of the year.
"This makes the work of the joint committee all the more important, and shows why leaders should appoint members who will approach the committee's work with an open mind -- instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S&P are demanding," Reid said.
Chambers, however, told CNN that "there's plenty of blame to go around," calling it "a problem that has been a long time in the making well over this administration and the prior administration."
It was a sentiment echoed by many, who took to social media sites Facebook and Twitter to communicate about the issue.
"Not really a surprise the credit rating was lowered. Both parties acted like children. Compromise is like using a water gun to put out fire," tweeted Michael Ross, who uses the Twitter handle MWRoss.
Rich Tucker, 36, of Charlotte, North Carolina, used humor to get his point across, tweeting that Standard and Poor's had also just downgraded the Beatles to the Monkeys.
"OK, done with the S&P downgrade jokes ... truly sucks that we are here ... we all need to sacrifice to get out of this hole," Tucker tweeted.
Later, Tucker told CNN that he believed "there is almost no one who isn't to blame for where we are." "We are all in this situation as a country together, and we are going to all have to sacrifice to get out of it," Tucker said.
Standard & Poor’s removed the United States government from its list of risk-free borrowers for the first time on Friday night, a downgrade that is freighted with symbolic significance but carries few clear financial implications.
The company, one of three major agencies that offer advice to investors in debt securities, said it was cutting its rating of long-term federal debt to AA+, one notch below the top grade of AAA. It described the decision as a judgment about the nation’s leaders, writing that “the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finances.
“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” the company said in a statement.
The Obama administration reacted with indignation, noting that the company had made a significant mathematical mistake in a document that it provided to the Treasury Department on Friday afternoon, overstating the federal debt by about $2 trillion.
“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokeswoman said.
The downgrade could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have decided not to downgrade the government at this time.
The announcement came after markets closed for the weekend, but there was no evidence of any immediate disruption. A spokesman for the Federal Reserve said the decision would not affect the ability of banks to borrow money by pledging government debt as collateral, a statement that could set the tone for the reaction of the broader market.
S.& P. had prepared investors for the downgrade announcement with a series of warnings earlier this year that it would act if Congress did not agree to increase the government’s borrowing limit and adopt a long-term plan for reducing its debts by at least $4 trillion over the next decade.
Earlier this week, President Obama signed into law a Congressional compromise that raised the debt ceiling but reduced the debt by at least $2.1 trillion.
On Friday, the company notified the Treasury that it planned to issue a downgrade after the markets closed, and sent the department a copy of the announcement, which is a standard procedure.
A Treasury staff member noticed the $2 trillion mistake within the hour, according to a department official. The Treasury called the company and explained the problem. About an hour later, the company conceded the problem but did not indicate how it planned to proceed, the official said. Hours later, S.& P. issued a revised release with new numbers but the same conclusion.
In a statement early Saturday morning, Standard & Poor’s said the difference could be attributed to a “change in assumptions” in its methodology but that it had “no impact on the rating decision.”
In a release on Friday announcing the downgrade, it warned that the government still needed to make progress in paying its debts to avoid further downgrades.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” it said.
The credit rating agencies have been trying to restore their credibility after missteps leading to the financial crisis. A Congressional panel called them “essential cogs in the wheel of financial destruction” after their wildly optimistic models led them to give top-flight reviews to complex mortgage securities that later collapsed. A downgrade of federal debt is the kind of controversial decision that critics have sometimes said the agencies are unwilling to make.
On the other hand, S.& P. is acting in the face of evidence that investors consider Treasuries among the safest investments in the world. Yields rose before the Congressional deal on fears of default and a possible downgrade. But after a deal was struck, yields sank as money poured into Treasuries as a safe haven from sharply falling stocks and the turmoil of the European debt markets.
On Friday, the price of Treasuries fell sharply in heavy selling, and yields rose, reversing the moves of recent sessions. The 10-year Treasury note ended the day with a yield of 2.56 percent.
The United States has maintained the highest credit rating for decades. S.& P. first designated it AAA in 1941, reflecting a steadfast belief that the richest nation in the world would not default on its debt payments. The rating was also bolstered by the role of the dollar as the world’s leading currency, ensuring that demand for American debt securities would remain strong in spite of burgeoning deficits.
“What’s changed is the political gridlock,” said David Beers, S.& P.’s global head of sovereign ratings, in an e-mail several days before a debt ceiling agreement was announced. “Even now, it’s an open question as to whether or when Congress and the administration can agree on fiscal measures that will stabilize the upward trajectory of the U.S. government debt burden.”
Experts say the fallout could be modest.
The federal government makes about $250 billion in interest payments a year, so even a small increase in the rates demanded by investors in United States debt could add tens of billions of dollars to those payments.
In addition, S.& P. may now move to downgrade other entities backed by the government, including Fannie Mae and Freddie Mac, the government-controlled mortgage companies, raising rates on home mortgage loans for borrowers.
However, because Treasury bonds have always been considered perfectly safe, many rules prohibiting institutions from investing in riskier securities are written as if there were no possibility that the credit rating of Treasuries would be less than stellar.
Banking regulations, for example, accord Treasuries a special status that is not contingent on their rating. The Fed affirmed that status in guidance issued to banks on Friday night. Some investment funds, too, often treat Treasuries as a separate asset category, so that there is no need to sell Treasuries simply because they are no longer rated AAA. In addition, downgrade of long-term Treasury bonds does not affect the short-term federal debt widely held by money market mutual funds.
In other words, almost no one would be precluded from investing in federal debt, and even the ratings agencies have concluded that few investors would walk away voluntarily.
Friday's news on GDP shows the double dip has arrived — an expansion of only 1.3 percent and consumer spending up 0.1 percent in the second quarter. Astonishingly low by any account. The debt ceiling trouble and lack of a longer term resolution to the deficit will make it worse.
The U.S. has entered a second recession. It may not be as bad as the first. Economists say that the Great Recession began in December 2007 and lasted until July 2009. That may be the way that the economy was seen through the eyes of experts, but many Americans do not believe that the 2008-2009 downturn ever ended. A Gallup poll released in April found that 29 percent of those queried thought the economy was in a “depression” and 26 percent said that the original recession had persisted into 2011.
It is any wonder that many Americans believe that the economic downturn is still in progress? Home prices have fallen to 2002 levels. Values have dropped nearly 50 percent in parts of Florida, California, Nevada and Arizona. Property values are also down that much in parts of troubled big cities like Detroit. Estimates are that as many as 11 million homes have underwater mortgages. Banks have inventories of as many as 2 million foreclosed homes which have not even been released to the market. Home prices could fall another 10 percent if current trends persist.
Perhaps the most powerful argument that the recession never ended or that a new one has begun is the persistence of unemployment. Fourteen million people are out of work. A third of those have been jobless for more than a year. May employment data showed the jobless rate rose unexpectedly and that the economy added only 58,000 jobs. Experts believe that the unemployment rate will not improve significantly until the monthly gain in jobs is consistently 300,000 jobs or more. And, at that rate the gains would have to go one for more than two years to bring the economy back to what is traditionally considered a reasonable unemployment figure.
There are several signs that a recession is firmly in place again and that the downturn could last for several quarters. Most are already easy for the average American to see.
1.) Inflation
There is almost nothing that damages consumer confidence as badly as a rapid rise in prices. Starbucks recently increased the price of a bag of coffee by 17 percent because wholesale prices have risen by almost twice that rate in the last year. Cotton prices nearly doubled in 2010 but have fallen this year. But, apparel is made months in advance of when they reach store shelves. Summer clothing prices are up as much as 20 percent. That may change in the fall, but for the time being, the consumer’s ability to buy even the most basic clothing has been undermined. Consumers today pay more for sugar, meat, and corn-based products as well.
2.) Investments have begun to yield less
Part of the recovery was driven by the stock market surge which began when the DJIA bottomed below 7,000 in March 2009. The index has risen above 12,000 and the prices of many stocks have doubled from their lows. As result, American household nest eggs that were decimated by the collapse of the market have rebounded and enabled people to splurge on themselves. However, the market has stumbled in the last quarter. The DJIA is up only 1 percent during the last three months and the S&P 500 is down slightly.
Americans, though, have few other places to put their money. Ten-year Treasuries yield about 3 percent. Gold was a good investment over the last year, but it has begun to falter as well. The market may not be a friend to investors for quite some time.
3.) The auto industry
The auto industry has staged an impressive comeback, although its profitability is based as much on the layoffs it has made over the last five years as generating new sales. GM and Chrysler have emerged from bankruptcy. Year-over-year monthly sales improved late last year and through April. May sales stalled. GM’s revenue dropped by 1 percent compared to May of 2010. Ford’s sales were down about as much. There are many reasons for this trend including high gas prices and the constrained manufacturing capacity of the Japanese automakers because of the earthquake. Consumers also may be deferring big purchases because they are worried about their economic prospects. Slow car sales are not just a sign of lagging consumer confidence. They also may be a harbinger of tougher times ahead. These companies shed several hundreds thousand jobs before and during the last recession. Car firms have only just begun to hire again, but that trend will die with a plateau in sales.
4.) Oil prices
Oil prices are supposed to drop as the economy slows as they did in 2008 and early 2009 when crude fell from over $140 to under $50. That drop at least allowed consumers and businesses like airlines to more easily afford fuel. Recently, crude has moved back above $100 and appears to be stuck there regardless of the economic situation. American budgets have been hurt by the rising cost of gas. Americans of more modest means have been particularly affected. A slowdown in driving usually also leads to a decline in the retail sector as consumers reduce unnecessary travel to stores. The impact on other businesses is just as great. Airlines suffer and so do firms which rely on petrochemicals. OPEC, for now, has signaled it will not increase production.
5.) The federal budget
The federal budget deficit has decimated any chance for another economic stimulus package which many prominent economists like Nobel Prize-winner Paul Krugman say is essential to create a full recovery. His theory has become more of an issue as GDP growth slows to a rate of 2 percent. The first $787 billion Obama stimulus package may have saved some American jobs, but it is long over and did not work if a drop in unemployment and a sharp improvement in GDP were its primary goals. The deficit has caused a call for severe austerity measures which have already become part of the economics policies of countries from Greece to the U.K. to Japan. Job cuts in the U.S. will not be restricted to the federal level.
A recent UBS Investment Research analysis predicted that state and local governments will cut 450,000 jobs this year and next. That process is already well underway. States like California and New York currently run massive deficits and the rates they must pay on bonds has risen accordingly. Newspaper headlines almost daily report on battles between state unions and governors over employment and benefits.
6.) China economy slows
A slowdown in the Chinese economy is usually seen as a cause of global commodity price inflation, but the effects cut two ways. China’s appetite for energy and raw materials may fall. But, the demand for goods and services by its very large and growing middle class drops as well. Chinese purchaser manufacturing and export numbers have fallen as the central government has tightened the ability to borrow money. US exports to China are key to the health of many American businesses.
John Frisbie, the president of The US-China Business Council, recently said, "Over the last decade we have seen exports to China rise from $16.2 billion to $91.9 billion — a 468 percent increase.” As that rate slows, it has a profound effect on tens of thousands of American companies and their employees. U.S. firms with large operations in China are also effected. GM is one of the two largest car firms in China along with VW. Large U.S. corporations like Wal-mart and Yum! Brands rely significantly on China to boost global sales. Without vibrant consumer spending in China, American companies will suffer.
7.) Unemployment
Unemployment creates two immediate problems. People without jobs drastically curtail their spending, which will ultimately affect GDP growth. The second is the need for tens of billions of dollars every year in government aid to keep the unemployed from becoming destitute. That support has increased deficits and the domino effect is that cash-strapped governments need to make more spending cuts. It may be the biggest challenge the economy faces.
Unemployment has worsened because people over 65 to continue to work because the values of their homes — which they once counted on as the financial basis of their retirements — have dropped so sharply. Older Americans also fear that cuts in Medicare and perhaps Social Security are inevitable which increases the cost of their golden years. The jobs that older Americans have taken are often ones that younger Americans might have. People in their 20s must accept low wages to enter the workforce. This has delayed their prime consuming years well into their 30s which will damage GDP recovery now and for another decade.
The worst of the unemployment problem is the roughly 5 million Americans who have been unemployed for over a year. Their unemployment benefits have run out in many cases. The burden of their care falls to their families, friends, community organizations and non-profits. A family which has to support an unemployed person may be a family which cannot spend beyond its basic needs. To the extent that the federal or state governments can support the unemployed, the cost to run support programs increases.
8.) Debt ceiling
The United States debt ceiling, currently at $14.294 trillion, will probably be raised before the government has to cut back essential services on Aug. 2. It might seem that the economic and employment effects of the debt cap are the same as the deficit, but they are actually more insidious and longer term. The first by-product of debt reduction, or at least a slowdown in its growth, is a combination of higher taxes and a lower level of government services. Higher taxes usually slow economic improvements, particularly when they are not coupled with stimulus measures.
A number of economists have pointed out the expense reduction alone will not sharply improve the United States balance sheet. The increase in Medicare and Social Securities costs, brought on by an aging population, are also likely to trigger a need for higher taxes. Tax increases could keep the economic growth of the US on hold for years. The taxation of companies decreases and often eliminates profits, particularly during an already troubled economic period. Profits which disappear usually cause cuts in purchasing and jobs. Taxes on wages and inheritance undermines consumer spending. And, a growth in national debt from already all-time highs will increase the borrowing costs of the U.S. That, in turn, drives up interest rates for everything from mortgages to credit cards.
9.) Access To credit
The lack of access to credit has hurt the economic activity or both individuals and small businesses. Many very large companies can borrow money at rates as low as 2 percent because of their strong cash flows and balance sheets. Banks have been much less willing to loan money to companies with under 100 workers because these firms often rely on a few customers for revenue and usually have very little money on hand.
Early in June, the House Small Business Committee held hearings and among its findings were that concerns about risk and a slow economy has made financial institutions reluctant to lend to small businesses, the main driver of economic growth. Committee Chairman Sam Graves (R-Mo.) said Congress will need to “bridge the gap” between the two sides. There is no plan to accomplish that. Individual borrowers find themselves in a similar position. The cost of credit cards debt is still above 20 percent in many cases although the Federal Reserve loans money to large financial firms for interest rates close to zero.
Potential home buyers, who might help break the gridlock of slow house sales, often find that banks want down payments as high as 20 percent. The median down payment in nine major U.S. cities rose to 22 percent last year on properties purchased through conventional mortgages, according to an analysis done for The Wall Street Journal by real-estate portal Zillow.com. That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997. Homes which are not sold often put such great burdens on owners that they are barely consumers of the goods and services that drive GDP. Home builders have continued to struggle. Construction jobs, which were a huge amount of the employment base in states like Florida, have not returned.
10.) Housing
Housing is considered by many economists to be the single largest drag on the American economy, and the housing market has gotten much worse in the last two months. A report from The New York Federal Reserve published early this year said: “When home prices began to fall in 2007, owners’ equity in household real estate began to fall rapidly from almost $13.5 trillion in 1Q 2006 to a little under $5.3 trillion in 1Q 2009, a decline in total home equity of over 60 percent.”
Real estate research firm Zillow reported on more recent developments. “Negative equity in the first quarter reached new highs with 28.4 percent of all single-family homes with mortgages underwater, from 27 percent in Q4.” Many homeowners who want to sell their homes cannot do so because they cannot afford to pay their banks at closing. Whether for good or ill, the American home was the primary source for money used for retirements, college educations and the purchases of many expensive items such as cars.
Economists point out the this leverage helped contribute to the credit crisis as people could not cover the costs of home equity loans as real estate values collapsed. This may be true, but the drop in value happened so quickly that the balance sheets of millions of Americans were destroyed. Their ability to consume was severely damaged, further harming GDP. High mortgage payments bankrupted or nearly bankrupted people who have lost jobs or have found that their incomes had stagnated. The building industry became a shambles overnight. And, whatever the effects have been over the last three years, they are getting progressively worse as home values drop to decade lows. There is no relief in sight because potential buyers worry that price erosion has not ended.
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