It was "amateur hour," with a "stunning lack of knowledge" from "the last people whose judgment we should trust."
One supposes Standard & Poor's should have expected a little push-back from its decision to downgrade the United States' creditworthiness. Most of the folks I know who don't follow the bond markets on a daily basis had a simpler reaction: Aren't these the folks who screwed up in the last financial crisis?
Yes, fair enough. But as I like to point out, S&P's problem in 2008 – shared by its rating-agency peers – was that it didn't recognize the problems with toxic mortgage debt, and downgrade it, fast enough. And unfortunately for President Barack Obama, who said "we always will be a triple-A country," and for the rest of the country's elite, it's probably more accurate to blame S&P for maintaining the United State's triple-A rating as long as it did. (Moody's, Fitch Ratings, maintaining the triple-A rating? Et tu?)
In a piece in Tuesday's Globe and Mail, academics Daniel Muzyka and Lawrence A. Weiss argued that S&P "got it wrong."
"There is no reasonable scenario in which the U.S. government would default on its debt," they write. "Like a corporation experiencing medium-term financial stress, it has several options. The United States controls valuable resources and undervalued assets on its balance sheet, all of which it could sell or pledge to meet debt obligations. In addition, it could immediately move to lower its expenses by reducing the activities it undertakes, with some significant disruption, of course."
It is a well-argued and accurate piece, but it frames the issue incorrectly. S&P has 12 ratings, all of which can be modified with a minus or plus. It's a long way from triple-A – which S&P describes as "extremely strong capacity to meet financial commitments, highest rating" – to a D, which S&P says means "payment default on financial commitments."
Mr. Muzyka and Mr. Weiss are arguing that the U.S won't default, which is a fine argument against classifying U.S. debt as non-investment grade. But S&P's new rating for the U.S., a doulbe-A-plus, means "a very strong capacity to meet financial commitments."
Which may itself be generous, given what we've seen recently. It was only two weeks ago that we were speculating what the United States would do if it did not raise its debt ceiling Aug. 2; economist Nigel Gault of IHS Global Insight noted that there were $23-billion (U.S.) in Social Security payments due on Aug. 3 that U.S. federal revenues received that day would not cover.
Here's my view: A creditor that has to begin prioritizing payments in order to make good on its debt in order to avoid default is a closer to a D than either a triple-A or a doulbe-A-plus.
Of course, the U.S. government isn't like a troubled company that can't sell enough goods to cover its interest payments. It can print money, issue more debt, raise revenue from taxes. Its powers to service its debt seem endless.
But will it use them? As a baseball fan, I am reminded of a power-hitting prospect of some years ago. No less an authority than Barry Bonds said, "He's so strong, he can hit a home run anytime he wants." Given he had but a few home runs on the season, my reaction was, "Well, when does he intend to start?"
And, well, when does Washington begin to start to solve its problems? The bargain reached to avert default – no new tax revenue, spending reductions that only seem large until compared with the deficit, a bipartisan committee that's supposed to find much more to cut – seems less a start than the full package, leaving the problem fundamentally unsolved.
Much was made by the Obama administration of S&P's "math error" in preparing for the downgrade (hence Treasury Secretary Tim Geithner's reference to "amateur hour"). It made it sound as though S&P's top strategists couldn't operate an Excel spreadsheet.
Yet the error was more of a mistake in assumptions. S&P used the Alternative Fiscal Scenario of the nonpartisan Congressional Budget Office (CBO), which assumed that government discretionary spending will grow at the same rate as nominal GDP. After the Obama administration objected, S&P agreed to adopt the CBO's Baseline Scenario, with a lower spending growth rate. That assumption "would be more consistent with CBO assessment of the savings set out by the Budget Control Act of 2011" S&P acknowledged in a statement explaining the change.
So what was the result of this momentous error? S&P initially estimated the 2015 debt level at $14.7-trillion, or 81 per cent of that year's projected GDP. With the revised spending-growth figure, S&P figures 2015 debt at $14.5-trillion, or 79 per cent of 2015 GDP.
The 2021 estimates changed from $22.1-trillion in debt, or 93 per cent of that year's GDP, to $20.1-trillion, or 85 per cent of 2021 GDP.
Whoopee, crisis over. Bring back that triple-A rating!
Of course, the politicians in Washington, D.C., have reacted to S&P's warning by blaming the messenger. The Wall Street Journal reported that Democrat Rep. John Tierney called on the House oversight committee to convene a hearing to investigate "the motivation and decision-making process" behind S&P's decision. Rep. Dennis Kucinich, a member of that committee, has already requested documents from S&P's parent company.
Rep. Barney Frank, primary author of the Dodd-Frank financial reform bill, told the Journal the ratings agencies "did a terrible job" in advance of the last financial crisis.
With Republicans blaming Obama for the downgrade and Democrats blaming the Republicans, the next debt crisis is likely just a few months away. This time around, the "terrible job" wasn't done by Standard & Poor's; it was done by the people in Washington, D.C., who now want to blame Standard & Poor's for saying the emperor has no clothes.