S&P's Flawed Thinking
August 15, 2011
It is ironic that Standard & Poor's, one of the three major credit rating agencies at the heart of the financial crisis, would downgrade the United States' credit rating from triple-A to AA+. After all, S&P should have properly assessed the asset-backed housing securities that led to the Great Recession not as investment-grade but what they actually were. Junk.
A full $3 trillion of the $14.3 trillion U.S. deficit that S&P cited as its main reason for the downgrade has been spent as a result of the recession that S&P helped cause. This money has been put into emergency bailout measures to maintain some stability in the economy and prevent the recession from becoming a full blown-out depression. This includes the Troubled Asset Relief Program (TARP), Federal Reserve rescue efforts and stimulus programs.
And then, of course, on top of this $3 trillion, there is the $2 trillion discrepancy that the U.S. Treasury said that S&P made, and admitted to, in its assessment of the future of the federal debt burden.
As one Treasury representative said, "a judgment flawed by a $2 trillion error speaks for itself."
S&P's downgrade continues further, to say that should macroeconomic conditions deteriorate and the government fail to enact a second round of spending cuts, the U.S.'s net public debt burden could rise from a projected 74% of GDP in 2011 to 90% in 2015 and 101% by 2021. If this happens, S&P warns it will further downgrade the nation's credit rating to AA.
S&P also notes that the recent revisions of first and second-quarter GDP growth, to 0.8% and 1.3%, respectively, "show the recent recession was deeper than previously assumed. Consequently, the debt burden is slightly higher."
John Chambers, head of S&P's sovereign ratings, told ABC's "This Week" that even if Washington agrees on spending cuts and higher taxes, it could take nine to 18 years for the country to regain its triple-A rating.
Moody's countered this with a confirmation of the U.S.' Aaa rating, citing the Budget Control Act as "positive for the credit" of the nation. Moody's also said the U.S. debt is in line with other Aaa-rated nations, and noted America's "long record of relatively solid economic growth."
Asset management firms must cancel out S&P's overly harsh assessment and blow to investor confidence by pointing to the might of our nation and the prospects for our future.