The Obama Speech Downgrade

it's like back during 2009, when the stock market would fall every time the President explained a Brilliant New Idea.


Why did Standard & Poor's drop its "negative" long-term outlook bomb on America's AAA credit rating yesterday? S&P revealed no numbers not previously known to a "shocked" stock market, which dropped 140 points. So what's new?

Chief White House economist Austan Goolsbee declared that S&P had made a "political judgment," and we'd have to agree, though probably not for the same reasons...There is only one reason the rating agency could suddenly have turned this dark on politics in Washington: President Obama's speech at George Washington University last Wednesday. Mr. Obama's "fiscal policy" speech may have sent progressive pundits cart-wheeling, but its political effect was to poison the prospect for budget negotiations.

The harshness of Mr. Obama's anti-Republican rhetoric and the universal conclusion that this was a Presidential campaign speech make it very difficult for GOP Congressional leaders to believe they can enter into a budget negotiation in which the White House will deal in good faith.

The hyper-politicized Obama White House calculated that the release of a GOP proposal by House Budget Chairman Paul Ryan was the moment to unveil its re-election counter-attack. This week Mr. Obama is taking that speech on what looks like the campaign trail, first at a Virginia community college and then in front of the millionaires and billionaires at Facebook's headquarters in Silicon Valley...

The Ryan budget has been criticized as heartless and cruel. But its purpose is to address the rising U.S. debt problem without tanking the U.S. economy, and to do so before a truly heartless and cruel credit downgrade of the sort S&P gave Japan in January. Mr. Obama's response was simply to mock the GOP proposal.

The ratings agencies are hardly the last word on U.S. economic health. But the S&P outlook is a warning to the White House that financial markets have noticed that this President seems to have decided that his path to re-election lies in demonizing his opponents rather than seeing to the nation's fiscal well-being.

You have an opinion or are you just researching for us?

it's also worth noting that Credit-rating agencies (CRAs) such as S&P are a government-chartered cartel, with constraints on competition and a customer base guaranteed by statute. They are the sleepy backwaters of the financial world — and they are always the last to know...

The textbook example of this is the case of Enron. All of the credit-rating agencies had Enron rated like stacks of solid gold until a few weeks before Jeff Skillings’s financial underpants finally hit his ankles. But long before the CRAs woke up, the markets had driven Enron’s stock price down to almost nothing. The ratings agencies aren’t the opening act — they’re the fat lady sweating out the final aria in our national fiscal Götterdämmerung.

A little over a year ago, the markets already were telling us that the government’s story about how it is finally going to fix its finances is pure fiction... As in the case of Enron, the smart money gets gone long before credit downgrades start hitting the headlines. As noted in this column, PIMCO, the world’s largest bond fund, got clear of U.S. Treasuries some time ago, following the lead of a number of hedge funds. The oil-exporting countries are dumping U.S. debt, too...

Nothing about this is a secret. In the phrase adopted by Rep. Paul Ryan, what is coming is the most predictable economic crisis in our history: a nominal national debt of more than $14 trillion, a real national debt ten times that, and Barack Obama standing between the reformers and the needed reforms with a veto pen and excellent chances of being reelected in 2012. This isn’t sophisticated macroeconomic analysis; this is that anvil falling out of the sky onto the head of Wyle E. Coyote, and you don’t have to be a super-genius to figure out that it’s going to hurt like hell when it hits him. Even S&P gets that.

And that’s probably the reason this announcement hasn’t really sent big-time shock waves through the markets: It’s just confirming what everybody already knows: Washington’s finances are Enron writ large...

Here’s the thing to watch: Nobody really knows what interest rate the bond market is going to demand to finance U.S. debt in the future. Right now, the Fed is buying most of the bonds Treasury puts up for sale, and simply printing money to do that. This “quantitative easing” is scheduled to end this summer, at which point Washington will find out what it is really going to cost to finance its debt. In FY2010, we spent $164 billion just on interest payments on the debt — up 18 percent from the year before. And that’s at historically low interest rates. If rates should go back up to their 1970s or 1980s levels, we could easily end up spending more on debt service than we spend today on big-ticket items like Medicare or national defense. That’s the hidden landmine on our national balance sheet: We don’t have to be worried only about the trillions of dollars in new debt that Obama proposed to load upon our backs, but also about what that proposal is going to do to the cost of paying interest on the debt we already have. We already know that we cannot afford the new debt that Obama would have us endure, but the real crisis will come when we find out that we cannot afford the debt we already have.

I wish I were smart enough to research who made a bundle off this, who they know at S & P. then watch every ones bank accounts on and off shore. Then we might know another reason A & P did what they did.

Just a thought.

whysoserious said:

You have an opinion or are you just researching for us?

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I agree with the assessment. The President had an amazing opportunity. He could have come out, announced room for compromise, and started an actual bipartisan effort to fix the debt crises. Instead he chose to launch his 2012 campaign by attacking Republicans.

S&P downgraded the outlook because they realized at that point that there wouldn't be any solutions actually put through until after the 2012 elections at the earliest. Because the one man with the power to say Yes had chosen instead for political reasons (advantageous ones, admittedly) to say no.

Councilman said:

I wish I were smart enough to research who made a bundle off this, who they know at S & P. then watch every ones bank accounts on and off shore. Then we might know another reason A & P did what they did.

Just a thought.

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the smart money was dumping US bonds a while ago.

the dumb money (cpwill) is holding them.