OPINION:The Republicans are fighting dirty while Obama acts like a Harvard professor, writes LARA MARLOWE
OH, THE humiliation of it. On Friday night, 94 years after it was first awarded AAA credit status, the US was cut down a notch, to AA+. Henceforward, according to Standard & Poor’s rating agency, the world’s biggest economy is as reliable as that of Belgium or New Zealand; less creditworthy than Britain, Canada, France or Germany.
S&P predicted the “super committee” of six Republicans and six Democrats who are supposed to find another $1.2 trillion in spending cuts before Thanksgiving Day won’t reach agreement. The agency also believes Bush-era tax cuts for the rich, which Obama has sworn to stop, will continue.
All of which led S&P to slap a “negative outlook” on its judgment, meaning that if the US doesn’t reform its gridlocked politics and profligate ways, it will be downgraded again, to plain AA, on a level with Bermuda, Spain and Qatar.
S&P announced its “Friday night massacre” after the markets closed for the weekend. This morning we’ll know how the Asian markets greeted the downgrade and by tonight Wall Street will provide a good barometer.
The consequences of the US credit downgrade are unpredictable. As Harvard economist Kenneth Rogoff told the New York Times: "It's a very emotional and volatile environment. An event like this can sometimes trigger a reaction far in excess of what you might expect."
JP Morgan Chase investment bank had predicted a downgrade would raise the cost of US borrowing by $100 billion, based on the supposition that lower demand for treasury bonds will drive up the yield. But despite the US’s problems, treasuries and gold are still widely considered the safest place to store money. In the short term, consequences could be less severe than feared.
Many funds ban investment outside AAA rated securities. But the other two leading ratings agencies, Moody’s and Fitch, have maintained the US’s AAA status.
And why should anyone believe a ratings agency? Throughout the housing bubble, the agencies helped flog rotten mortgage-backed securities with AAA ratings to widows and orphans, in a corrupt system where they were paid by the very brokers whose wares they rated.
The treasury and Obama’s economic adviser, Gene Sperling, berated SP for a $2 trillion mistake in calculations on Friday. The agency initially claimed the US would accumulate $22 trillion in debt over the next decade; the correct figure is closer to $20 trillion.
None of which mitigates the gravity of the US predicament. The political response to the “Friday night massacre” exemplified the failings which led the US to the cliff edge in the first place: President Obama’s inability to forcefully present an economic argument, and the Republicans’ blatant disregard for facts. The latter showed no sign of being chastised by SP’s denunciation and the downgrade is unlikely to force anyone to do anything they would not do otherwise.
In a chronicle of downgrade foretold, SP began threatening the move last April, later adding the stipulation that if spending were not slashed by $4 trillion over the next decade, there was a one in two likelihood of a downgrade. At best, the deal reached last week will cut $2.1 trillion.
In every speech he gave during the debt ceiling crisis, Obama warned of the risk of a downgrade that would raise interest rates for all Americans. If ever there was an opportunity for the president to say, “I told you so”, this was it.
Instead, the White House reverted to ostrich mode. Obama’s radio address on Saturday did not even mention the downgrade. Nor did a statement by his press secretary Jay Carney.
There's a powerful case to be made that growing the economy – not drastic spending cuts – is the way out of the US's economic problems. It is a case the New York Timesmakes often in editorials, that is supported by most mainstream economists.
Yet Obama made only a faint allusion to the wrong-headedness of the Republican obsession with shrinking government in his radio address. “In the short-term, our urgent mission has to be getting this economy growing faster and creating jobs,” he said. Obama reiterated a litany of pathetic little economic measures he proposes. Does anyone seriously believe that cutting red-tape in patent applications is going to turn the US economy around? Both Obama and Carney pleaded for “Democrats and Republicans to work together to help grow this economy”.
The problem is that Republicans are fighting with brass knuckles, while Obama acts like a Harvard professor. Since the debt ceiling crisis, he is compared more often to the one-term Democratic president Jimmy Carter. Sure enough, the Republicans blamed Obama for the US’s humiliating credit downgrade. “America’s creditworthiness just became the latest casualty in President Obama’s failed record of leadership on the economy,” said Republican presidential frontrunner, Mitt Romney. “The president has destroyed the credit rating of the US,” charged Representative Michele Bachmann, the head of the Tea Party caucus and a presidential candidate.
The Republicans conveniently ignored the fact that Obama alone strived to achieve exactly what SP recommended. The beleaguered president included both tax rises and spending cuts, for a total of $4 trillion in deficit reduction, in the package he tried to negotiate with Speaker of the House John Boehner.
A telling piece of video, from a press conference last December 7th, has come back to haunt Obama.
With astonishing prescience, Marc Ambinder of the National Journaland The Atlanticasked Obama why he didn't include raising the debt ceiling in negotiations with the Republican Senate minority leader Mitch McConnell. When the debt limit was reached, wasn't there a risk, Ambinder asked, that Republicans would say: "We're not going to agree to it unless the White House is able to or willing to agree to significant spending cuts across the board?"
Considering events of recent days, Obama’s response seems hopelessly naïve. “I’ll take John Boehner at his word,” Obama replied.
The president believed “that nobody, Democrat or Republican, is willing to see the full faith and credit of the US government collapse.” Boehner would “have responsibilities to govern”, Obama argued. “You can’t just stand on the sidelines and be a bomb thrower.”