The S&P Downgrade / by Simmon Li

Historic, and it's been 2 days since it happened, I figured that I wanted to sit on it for a while and think about it. Here's how I think the finger pointing should go down (because that's the part that opinion reigns supreme on the blog-o-sphere). First, I think there's a question of credibility on both sides of the coin. The US government (as per S&P's analysis) lacks the credibility to address its long term deficit (ie, the deficit driven by social spending costs). I agree. On the other hand, I think all the credit rating agencies lack credibility. All you need to look at is the run up to 2008. There was a massive failure in the system. Second, I think the problem largely lies in congress and is the result of both parties playing extremely partisan politics. As I quoted from the Globe and Mail the other day, a lack of strong convictions from President Obama helped to create this situation. I thought that Obama's balanced, 10-year $4 trillion plan was a good starting point, but there is a lack of political will to address the problem (on both sides of the aisle, but I believe that the Republican insistence on the issue of revenue is completely irrational). I get the basic argument: tax increases would be pro-cyclical. However, the upper brackets of income earners aren't experiencing the same cycles as everyone else.

At the end of the day, the US got what it deserved. Playing politics and spin doctor with the country's future is unacceptable. S&P, for all the flak it is getting, is on the right track. The lowering of the credit rating one notch still reflects the incredible bias that the agencies have for the greenback, but I think that will slowly change. I believe that the S&P downgrade was warranted, but that the timing was not very conducive to recovery. The US posted weak numbers the week leading up to the culmination of the debt ceiling deal, and the downgrade will surely jitter markets even more.