Standard & Poor
Shortly after four o’clock on the afternoon of Wednesday, April 13, 2011, U.S. Treasury Secretary Tim Geithner walked down the hallway near his office toward a large conference room facing the building’s interior. He was accompanied by a retinue of counselors and aides. When they arrived in the room—known around Treasury simply as “the large”—four people were seated at a long walnut table on the side near the door.
Everybody agrees that the bipartisan deficit super committee had better hurry up and strike a deal to cut the federal budget by $1.2 trillion so it can meet its November 23 deadline. If it doesn’t, then all hell will break loose. Except it won’t. You may have lost track of the deficit story after Congress and President Obama averted catastrophe at the end of July by agreeing to raise the debt ceiling. Perhaps I can help.
Mitt Romney has shed the dark blue suit, white shirt, and pale blue tie of his 2008 campaign for an open-neck tattersall shirt with its sleeves rolled up. His sideburns are graying, and his eyes are lined, but he still sports a boyish grin and radiates the can-do enthusiasm of a man who is promising to turn the country around the way he once turned around the Salt Lake City Winter Olympics.
[Guest post by John Judis] When Standard & Poor’s issued its statement downgrading America’s long-term credit rating from AAA to AA+, it said it based its decision on two factors: first, “the difficulties in bridging the gaps between the political parties over fiscal policy,” and second, because the “fiscal consolidation plan that Congress and the Administration agreed to … falls short of the amount … necessary to stabilize general government debt burden by the middle of the decade.” In the longer exposition of the decision, S&P singled out the “political brinkmanship of recent month
As they have with the Great Depression, economic historians will argue for decades about the origins of our current crisis. But, surely, we can agree that the failure of international economic cooperation in the early 1930s—and worse, the sequential adoption of beggar-thy-neighbor domestic policies—made matters worse at a time when enlightened statesmanship could have made them better for everyone. Similarly, the current crisis is not just a U.S. problem or a European problem; it is a global problem that requires a coordinated global response.
Standard & Poor’s did not downgrade the U.S. political system. It did not downgrade the stock market. It downgraded United States Treasury bonds and bills—and did so after Congress had removed whatever tiny chance existed of even a small delay in payments. So it’s instructive that, on the next market day, investors moved massively out of stocks, and into the safety of U.S. Treasury bonds and bills.
Everybody was predicting that S&P's decision to downgrade American debt would cause the stock market to decline. And, sure enough, the Dow is down more than 300 points as I write this. But is the market reacting to the downgrade itself? Or the misguided reaction it might spark?
There is an absurd quality to the debate over the S&P downgrade that captures the perverse incentive structure of our political system. House Republicans successfully played chicken with the debt ceiling and have vowed to continue doing so. As a result S&P downgraded Treasury debt: The "conclusion was pretty much motivated by all of the debate about the raising of the debt ceiling," John Chambers, chairman of S&P's sovereign ratings committee, said in an interview.
Bloomberg's Eric Martin and Michael Tsang have a good story on the big difference between economists and stock market analysts over 2010's growth forecasts: Never before have Wall Street stock analysts diverged more with economists at their own firms over the outlook for earnings in the Standard & Poor’s 500 Index. Profits for companies in the S&P 500 will rise 25 percent next year, according to the average estimate of more than 1,500 equity analysts tracked by Bloomberg.