In my Saturday piece on the downgrading of our Standard & Poor (S&P) credit rating, I hypothesized “that S&P just wanted to take both the Legislative and Executive branches of our Government to task on the grounds that their handling of the debt ceiling legislation amounted to dereliction of duty.” This seemed like a viable hypothesis at the time, but I had no idea where it might stand within S&P itself. Thanks to a report that just appeared on the BBC News Web site, I have discovered that my hypothesis may actually have some confirming evidence.
It turns out that S&P has a Sovereign Ratings department. While this should not have been a surprise, it affirms the extent to which the institution recognizes that there is never going to be a one-size-fits-all approach to rating credit risks. The head of this department is David Beers, and the BBC report includes remarks he made in a conference call this morning. Here is the text that pertains to my hypothesis:
If [there were] broader consensus among parties about how to make fiscal policy choices over the medium-term horizon and in turn that translated into a more substantial and more robust fiscal stimulation package, those two things could together in time lead to the rating returning to AAA.
But given the nature of the debate currently in the country, with the polarisation of views across the country right now, we don't see anything immediately on the horizon that would make this the most likely scenario.
I take this to mean that the downgrade had less to do with any quantitative metrics concerned with how much we would be able to pay how many of our creditors if they all decided to cash in their bond holdings and more to do with the qualitative question of how our government would react in response to such a demand. To return to the language I used on Saturday, S&P issued the moral equivalent of a vote of no confidence in the ability of the United States Government to act upon effective decision-making in a time of economic crisis. When I suggested that our current problems have more do to with such decision-making than with our level of debt a week ago, I concluded by asking, not entirely rhetorically:
Would you lend your money to such a government?
My guess is that most of us would respond with a variation of that old Sixties chant:
Hell, no! We won’t loan!
While the wording may be a bit coarse, I think it captures the logic behind the S&P decision. The ball is now back in the court of the Federal Government. As an institution, it can continue to dither and stagnate under the emotion-driven pressures of conflicting ideologies; or it can wake up and recognize that it has just been beaten with a really big stick of dispassionate logic. All we are saying (in Sixties language again) right now is to give logic a chance; but my guess is that emotions are running way to high for logic to be allowed at the table, let alone prevail.