S&P has downgraded U.S. government debt from AAA to AA+. While it is easy to lash out at the rating agency for its faulty ratings on mortgage backed securities that contributed to the recent financial crisis, I think that S&P's downgrade decision was justified. Put yourself in S&P's shoes: if you were evaluating a borrower who was openly threatening to refuse to make timely payments on existing debt, would you feel comfortable assigning that borrower the very highest rating available, even if the borrower clearly had the means to avoid default? It seems likely that this line of thinking influenced the downgrade decision:
But then the law of unintended consequences rears its ugly head with the S&P downgrade. Whether the analysts at S&P really believed that congress would have allowed a default or not, S&P has to take congress at its word. So it turns out that there was a downside after all. Maybe it was still worth it, given the concessions that the tea party managed to win. But I think that the lesson to be learned is that it is often easy to outsmart yourself. Sometimes it is better to stick with your core principles and not try to be too clever. I believe that this becomes more true the further up the ladder of responsibility one goes and the more ambiguity that the decision entails. In this case, many members of congress might have been better off just wrapping themselves in the flag, evoking Hamilton and stating up front that they would never allow the U.S. to default on a debt obligation, and choosing another field to fight the debt battle on.
******************************************************************************************************************
I am an individual investor who occasionally shares opinions about investments and other matters on the internet. I am not a registered investment adviser or investment adviser representative. I did pass the series 65 exam in 2011, but I have never been registered as an investment adviser or investment adviser representative in any jurisdiction. I will not respond to any inquiries about investment management services. Nothing posted on this blog should be interpreted as actionable investment advice, financial planning advice, tax advice, or legal advice. I do not derive or seek to derive any income from my blogging activities. This blog is intended solely for the entertainment of the reader, and the author.
“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating,” S&P said.I don't believe that there are more than a hand full of members of congress who would have preferred actually allowing a default to simply agreeing to a "clean" debt limit increase. But the tea party reasoned that they could use the need to raise the debt ceiling as leverage to try to force the spending cuts that they favored. The dynamics of the game that the tea party played are interesting, but I think that their reasoning could be boiled down to the following: if we play this bluff we might get more of what we want than we would get if we didn't play it, and the worst that could happen is that the debt limit is raised at the last minute and nothing is lost. If we let it be known publicly that we would never be responsible for a U.S. default, we waste a good crisis, as Rahm Emanuel said.
But then the law of unintended consequences rears its ugly head with the S&P downgrade. Whether the analysts at S&P really believed that congress would have allowed a default or not, S&P has to take congress at its word. So it turns out that there was a downside after all. Maybe it was still worth it, given the concessions that the tea party managed to win. But I think that the lesson to be learned is that it is often easy to outsmart yourself. Sometimes it is better to stick with your core principles and not try to be too clever. I believe that this becomes more true the further up the ladder of responsibility one goes and the more ambiguity that the decision entails. In this case, many members of congress might have been better off just wrapping themselves in the flag, evoking Hamilton and stating up front that they would never allow the U.S. to default on a debt obligation, and choosing another field to fight the debt battle on.
******************************************************************************************************************
I am an individual investor who occasionally shares opinions about investments and other matters on the internet. I am not a registered investment adviser or investment adviser representative. I did pass the series 65 exam in 2011, but I have never been registered as an investment adviser or investment adviser representative in any jurisdiction. I will not respond to any inquiries about investment management services. Nothing posted on this blog should be interpreted as actionable investment advice, financial planning advice, tax advice, or legal advice. I do not derive or seek to derive any income from my blogging activities. This blog is intended solely for the entertainment of the reader, and the author.
