In Wake of S&P Downgrade, Repercussions Are Dramatic

August 9, 2011 by  
Filed under Personal Finance, Politics, The Economy

Photo: B64 at en.wikipedia

The stock market was in free fall Tuesday afternoon and investors were panicking. Many were seeing their savings dissolve as the Big Board flashed red. The market seemed to be reacting to Standard & Poor’s downgrading of the credit rating of the United States from AAA to AA+.

The lowered credit rating may have caused the record sell-off or it may have been the catalyst that kindled the smoldering fire of general insecurity, high unemployment in a sagging economy and the European debt situation (which is worse than ours). As investors flee from risk, they convert their investments to gold or — you guessed it — U.S. Treasury bonds, the very instruments that were downgraded. Despite S&P’s negative valuation, Treasuries are still considered the safest haven when everything else collapses.

When S&P made its announcement last Friday after the American markets closed, howls of protest screeched out of Washington. The U.S. Treasury pointed out a $2 trillion error in the credit-rating agency’s calculations. Democrats tried to discredit S&P for being unreliable. Republicans blamed President Obama either for making the wrong policy decisions or for not doing anything.

S&P said it had based the downgrade on two factors, one economic and one political. The financial reasoning was undermined by the $2 trillion error, and S&P revised its numbers accordingly. Using the CBO’s estimate of the GDP in 2021 combined with an extra trillion in debt, Paul Krugman calculates that based on 30-year bonds “an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs. Yes, that zero belongs there. The $4 trillion S&P said it needed to see clocks in at less than 0.3% of GDP.” Krugman concludes that the math doesn’t support S&P’s position.

The agency gave more weight to its assessment of the American political climate when it announced the credit downgrade. In its report, S&P cites the weakening of “the effectiveness, stability, and predictability of American policymaking and political institutions.” They are “pessimistic” about the ability of the two political parties to “bridge the gulf” that separates them to reduce the deficit by cutting back on entitlements and raising revenue. This reasoning is indisputable, but it’s not new. Why is it suddenly relevant now? We’ve known for some time that Congress is dysfunctional.

Though the United States has never defaulted, S&P’s downgraded rating has placed the creditworthiness of the United States on a par with Italy’s and lower than that of most European countries.

Democrats are assailing S&P’s credibility, citing its failure to accurately assess the condition of companies like Lehman Bros. S&P affirmed the investment bank’s AAA rating three days before the company collapsed, precipitating a global panic. The financial crisis of 2008 was due in large part to S&P and the other agencies that bestowed a AAA rating on subprime-mortgage-backed securities. Those securities became the toxic assets that would have submerged even the largest banks, had they not been subsequently bailed out by the government (adding to the deficit). It should be noted that the credit-rating agencies are paid by the entities they grade. Does that reek of conflict of interest? A favorable rating redounds to the profit of both parties.

The “Tea Party Downgrade,” said Sen. John Kerry (D-Mass.), is attributable to the intransigence of some Republicans and especially the Tea Party. The protracted debt-ceiling debacle, in which some members of Congress held the debt ceiling hostage to their intractable demands, coupled with their willingness to allow the United States to default made the unthinkable thinkable. A U.S. default suddenly became possible, and reaching consensus on fiscal policy much less likely.

It was primarily the unbridgeable gulf between the two parties that determined S&P’s action. The current ability of the United States to meet its obligations is not in question. The United States has a more favorable debt-to-GDP ratio than some AAA countries, like Great Britain and France.

But the focus on the deficit is misplaced. Our greatest problem by far is unemployment. Right now, corporations are being hounded for not creating jobs, but they aren’t spending because there is no demand. Yet most of the spending cuts will come from defense and other discretionary spending. The Defense Department is not only a huge employer, but it also provides jobs indirectly through its contracts with its suppliers. Trimming back the Defense Department , as well as most of the other cuts in the discretionary budget, will result in job losses as agencies are closed and staff is cut. People who are out of work don’t create demand. People who have lost their homes or are facing foreclosure don’t create demand. The insistence on spending cuts will only worsen the dismal jobs situation.

The other barometer of the economy, the stock market, rallied Tuesday morning, but wiped out its gains in the afternoon after the Fed announced its intention to hold interest rates “exceptionally low” for the next two years. But in the last hour of trading, the Dow Jones Industrial Average spiked, closing at 11,239.77, up 429.92 points, or nearly 4 percent. Stability may remain elusive for a while.

Debt Ceiling Update: Did Obama Sabotage Talks With GOP?

July 30, 2011 by  
Filed under Newsmakers, Politics

Photo: Architect of the Capitol

As the epic conflict over the debt ceiling draws on, President Obama is besieged by denunciations from the right while fielding a blitz of disapproval from the angry left. The Democrats feel betrayed by his apparent willingness to sell the farm by agreeing to spending cuts demanded by Republicans to programs dear to Democrats. Obama has also been accused during the past week of being too removed from the fray after he and Speaker John Boehner reached an impasse, and negotiations over raising the debt ceiling moved to Congress.

Lawrence O’Donnnell, an MSNBC talk show host who has first-hand knowledge of how congressional negotiations work, rejects that idea. (He served as a key legislative aide to Sen. Daniel Patrick Moynihan from 1989 to 1995.) O’Donnell believes the president has been very much involved — albeit behind the scenes — and is, in fact, orchestrating the entire drama. Unbeknownst to all the other players, theorizes O’Donnell, Obama never had any intention of agreeing to the cuts in Medicare and Social Security so painful to Democrats and so desired by Republicans. He may well have sabotaged the negotiation with Boehner to ensure the Republicans wouldn’t accept his offer. After the speaker had made the huge (for a Republican) concession of allowing $800 billion in tax increases, Obama called him and left a message asking for a 50 percent increase to $1.2 trillion in revenue. The president had to know that Boehner could never agree to such a large sum. (It is widely thought that Boehner walked out of his talks with the president because he knew he couldn’t sell the deal to his caucus.) Boehner was right — he couldn’t muster the votes to pass even the Republicans’ own plan. The president instead gained points with the public for being reasonable. He can now say he was willing to give, while the Republicans would only take. Of course, Obama also knew that his bluff would never be called, because his own party would have rejected the concessions he made.

We are now in the “stunt game” stage of the process, O’Donnell said on Thursday morning. On the other side of the aisle, the speaker is fully aware that the Democrats won’t accept the demands of the Tea Party faction of his members. He also knows that any Republican budget proposal will need Democratic votes to pass — but he didn’t expect to lack the necessary Republican votes. After 20 years in Congress, Boehner knows his way around Washington, so he also knows what to do to convince recalcitrant House members to vote for a distasteful bill.

Well, he thought he did. First he let the House pass the “Cut, Cap and Balance” bill (far more extreme than Rep. Paul Ryan’s plan, excoriated by Democrats), knowing it would die in the Senate. The speaker himself touted the virtues of the bill to gain credibility with the Tea Party. Boehner figured, O’Donnell believes, that that was the only way to convince the freshmen members of the futility of their demands and introduce them to the practical realities of a divided government. As Boehner had foreseen, Majority Leader Harry Reid immediately tabled “Cut, Cap and Balance,” essentially killing it. Boehner’s tactic should have been enough, and in previous years it would have been. But Boehner hadn’t reckoned with the extent of the freshmen’s intransigence and commitment to their pledges of shrinking the deficit exclusively with spending cuts.

The House majority fashioned another bill. It too, was rejected by the Senate. The Republicans wrote a third bill, but Boehner had to postpone the vote scheduled for Thursday afternoon, an implicit admission that the Republicans still weren’t able to agree among themselves. By Friday evening, Boehner had threatened or cajoled enough of his caucus to pass the bill. It squeaked by with a vote of 218-210, with no Democrats joining the slim majority. But to no avail: that bill too was quickly dismissed by the Senate.

The ball has landed in the Senate’s court. It was up to the Democratic majority to construct a bill that would be acceptable to the Republican-controlled House. On Saturday afternoon, however, the ball was forced out of bounds. Forty-three Republican senators wrote to Reid announcing they would not vote for the bill, meaning the legislation as it stands won’t make it out of the Senate. And the minority leader, Mitch McConnell (R-Ky.), said he would only negotiate with the president. Meanwhile, the House went ahead and voted on the Reid plan — even though the Senate has not — and rejected it by 173-246.

In the Senate, Reid is three votes short of the 60-vote super-majority insisted upon by the Republicans. The majority leader will have to either wheedle those votes from the Republican minority or convince them to vote with a simple majority. He does have one slim ray of hope: four Republican moderates didn’t sign the letter. One of them, Sen. Scott Brown (R-Mass.), said on Friday that he could vote on Reid’s plan as it stands.

With Tuesday’s sword of Damocles hanging over Congress and the nation, McConnell and Boehner held a news conference Saturday afternoon in which the Senate minority leader said that he believed the president was now fully engaged in the debate and that he believed a solution could be reached. “I’m confident and optimistic that we’re going to get an agreement in the very near future and resolve this crisis in the best interests of the American people,” McConnell said. Meanwhile, Reid and the House minority leader, Nancy Pelosi, were meeting with the president at the White House. After that meeting, Reid said the were no closer to a deal.

What got people at least talking again? No one has said specifically, but one theory has it that troops in Afghanistan may have jolted the politicians into action when they asked Adm. Mike Mullen if they would be paid if a deal isn’t reached on the debt ceiling. “I actually don’t know the answer to that question,” said Mullen, chairman of the Joint Chiefs of Staff. He added: “I have confidence that at some point in time, whatever compensation you are owed, you will be given.”

Independence Day Belongs to All of Us (VIDEO)

July 4, 2011 by  
Filed under Musings, Politics

Today, politicians both active and aspiring are pressing the flesh at Fourth of July gatherings. Many, perhaps especially on the Tea Party end of things, have been claiming the mantle of that week in July pretty hard for the past few years. And now, just in time, Harvard University tells us that Fourth of July parades inherently turn kids into Republicans, claiming that “there is a political congruence between the patriotism promoted on the  Fourth of July and the values associated with the Republican Party. Fourth of July celebrations in Republican-dominated counties may thus be more politically biased events that socialize children into Republicans.”

But like Jonathan Turley, who teaches at Harvard, I refuse to concede the Fourth of July, or the idea of America, to any one political faction. Today belongs to me, too.

It belongs to women too, from Abigail Adams to Sally Hemings, mother of some of Thomas Jefferson’s children; from Maj. Alice Davey Sheldon to Dolores Huerta (left), co-founder of the United Farm Workers.

The best of those Fourth of July parades are the small-town ones, like the one I saw 20 years ago in Saugerties, N.Y., where moms cheered the local Junior ROTC contingent and everyone sang the town song, “Oh Saugerties,” before the Star-Spangled Banner. Or they’re the raucous multicultural festivals we see in Los Angeles, New York, Seattle and Philadelphia, where tonight I’ll stand and watch fireworks not far from where the Declaration of Independence was brewed.

I don’t claim to know whether that document was a simple declaration of war, with all that “general welfare” stuff thrown in for fun, as pundits have claimed. But I do know that those words have been cited by men and women around the world, from hundreds of countries and a thousand political perspectives. And today is about celebrating the sense of infinite possibility that America at its  best can represent. And yes, we could all list what America at its worst might mean. But that’s not what today is about.

I’ve watched fireworks on the Fourth when I was 13 and called myself a “democratic socialist”; when I was 16 and a fan of Atlas Shrugged, like Ron Paul; when I was 35 in San Francisco and newly realizing I was a lesbian. None of those times came with a partisan agenda, though my determination to preserve that sense of possibility has only increased. So has the range of fighters for freedom worth applauding. Yesterday, it included the kids, from 3 to 19 years old, dancing at a block party nearby. They deserve the Fourth, too.

Thank you, crazy 18th-century men who gave us this day. Before I go out tonight, I’ll make sure to watch a little of this:

Fourth of July Tea Party American History Pop Quiz

July 4, 2011 by  
Filed under Humor

Inspired by Sarah Palin’s recent rewrite of American history, in which she explained that the purpose of Paul Revere’s famous ride was to “warn the British … that they weren’t going to be taking away our arms,” we present the Tea Party American Revisionist History Pop Quiz. Put on your Tea Party hat and see if you can complete these famous historical quotes:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of ________ .”
a. hand guns
b. lower taxes
c. a smaller government

“Ask not what your country can do for you — ask ________ .”
a. for lots of guns
b. for lower taxes
c. for a smaller government

President John F. Kennedy delivering his inaugural address.

“Give me liberty or give me ________ .”
a. an Uzi
b. lower taxes
c. a smaller government

“Don’t fire until you see ________ .”
a. a tax cut
b. a smaller government
c. more handguns

“The only thing we have to fear is ________ .”
a. gun control
b. big government
c. higher taxes

“Speak softly and carry ________ .”
a. an M-16
b. a sign protesting big government
c. a whopping tax refund

“A house divided against itself ________ .”
a. needs a spiffy new arsenal
b. needs a tax break
c. needs a smaller government

“I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin, but by ________ .”

Crowds pack the Washington Mall for the Rev. Dr. Martin Luther King Jr.'s "I Have a Dream" speech.

a. the caliber of their firearms
b. the size of their tax refund
c. how little their government does for them

“Mr. Gorbachev, tear down this ________ !”
a. tax code
b. federal system
c. gun control law

“Go west, young man, and ________ .”
a. escape big government
b. fight for lower taxes
c. take along lots of guns

“I only regret that I have but one life to give for ________ .”
a. the right to bear arms
b. lower taxes
c. a smaller government

“O say, does that star-spangled banner yet wave, o’er the land of the free and the home of the ________ ?”
a. legal assault rifle
b. untaxed corporation
c. downsized federal government