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Remember the famous Standard and Poor’s downgrade of the U.S. federal government’s credit rating? You know, the incident a year ago that, depending on your point of view represented (a) a warning to gridlocked politicians in both parties to get their act together on long-range budget decisions, (b) a protest against a profligate government heading in the direction of debt-strapped Greece, or (c) a highly irresponsible act of partisanship by a rating agency with a really bad recent record.
Well, what’ s interesting a year later is how very un-prescient S&P turned out to be, as is noted by AP economics writer Paul Wiseman:
The downgrade of long-term U.S. Treasurys threatened to sow chaos in financial markets, driving up U.S. interest rates, pushing the dollar down, scaring investors away from stocks and into that traditional refuge for the fearful: gold. The Dow Jones industrials dropped 635 points in panicked selling the first day of trading after the S&P announcement.
A year later, S&P’s historic move looks like a non-event. Long-term interest rates are sharply lower, the Dow industrials reversed course and is now up more than 1,600 points. The dollar has rallied, and gold prices are down from where they were when S&P lowered the boom.
It is difficult to imagine a more decisive repudiation of S&P’s warning that the U.S. government might not be able to pay its bills.
Wiseman goes on to observe that many of the concerns that led S&P to take its perilous action may have been legitimate and haven’t gone away. But the fact remains the world markets believe in the U.S.—yes, even under the socialist Barack Obama—as the safest investment bet available. And more broadly, it’s worth remembering that much as politicized financial poohbahs would like to intimidate policymakers into doing their bidding via threats of credit downgrades and stock market panics, they like making money even more, and often have trouble sustaining their cries of wolf.
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c u n d gulag on August 06, 2012 9:57 AM:
While all of this may very well be true, don't discount the instability of the Euro while lauding the stability in the US.
In Europe, the austerity measures have virtually ground some economies to a halt - which does nothing but encourage Conservative politicians and economists to call for even more austerity.
Maybe if Spain, Greece, Portugal, and some other countries, weren't the victims of this austerity idiocy, and a single currency, foreign investors might have made S&P's predictions more real.
Hell, even the UK's under the delusion that when an economy is faltering, the best thing to do is starve the government beast.
And we all know how Conservatives here in the US are practically wetting themselves, hoping and praying that Romney gets in with a Republican Congress, so they can finish starving the beast here.
"Doctor, the patient is bleeding to death!"
"Yes, I can see that. WE MUST APPLY MORE LEECHES!!!"
Michael Cargal on August 06, 2012 10:16 AM:
My recollection is that the reasoning was that the Republicans were so irrational that they might refuse to raise our debt limit, so we couldn't pay our bills. They did not say the American economy deserved the downgrade, just the Republican members of Congress.
dj spellchecka on August 06, 2012 10:50 AM:
"Wiseman goes on to observe that many of the concerns that led S&P to take its perilous action may have been legitimate and haven’t gone away."
following on from michael, s&p specifically noted that the republicans refusal to consider any tax-increases was a main reason for the downgrade...
"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."
so i'd say one of the main concerns hasn't gone away
wufnik on August 06, 2012 12:58 PM:
Just to echo the points made here--S&P's direct concern was the fragmenting of the political consensus in Congress for ensuring that the US would pay its bills. They had to word it very carefully, which is what rating agencies have to do when they're opining on sovereign ratings, but their concern was unmistakeable. It was glossed over in the financial and mainstream press, however, for the same reasons that much of what transpires in Washington is glossed over--no one in the media wants to actually come to grips with the fact that one of the two major political parties in the US is insane. These concerns have hardly abated, and will come back in spades should Romney win and Rpublicans gain both houses.
And if the euro weren't facing such uncertainty, there's no question that the year would have looked very different. There's a whole lot of patting ourselves on the back here that is completely unwarranted.
Christiaan on August 06, 2012 1:15 PM:
Normally, when someone fails at his jobs, he pays for it. Not rating agencies. Still, they rake in lots of money for telling investors what they already know or, as in this case, what investors already know is not true. Even so, ratings still seem to have (some) relevance, which means they can exact costs on others. This is moral hazard. So either rating agencies should have real skin in their game, or they should be abolished. I would be very happy for the latter solution.
Daniel Kim on August 06, 2012 1:15 PM:
Headline: "Ed Kilgore Admits Obama a Socialist"
wufnik on August 06, 2012 4:04 PM:
@Christiaan--I'm not sure how much experience you have with the bond markets and rating agencies, but rest assured that there were a whole lot of us who use the agencies a lot, understand how they work, and were horrified at the prospect that Republican intransigence would bring the US to a politically-motivated default without at least one rating agency noticing.