My Reaction to the Obama/Boehner Speechfest

by Pejman Yousefzadeh on July 26, 2011

Unlike Megan McArdle, I am not sure that we are “hosed” just yet (at least, I would hope that we are not), but like her, I don’t see what the point of Monday night’s speeches were, other than for each side to have yet another go at saying that the other is worse than Hitler. The most important speeches are not being given in front of television cameras. Rather, they are being given in negotiating rooms, by congressional and White House leaders, and by their staffs. One hopes that from those speeches will spring an acceptable compromise.

By “acceptable,” of course, I don’t just mean “sufficient to raise the debt ceiling before Aug. 2.” I also mean “sufficient to convince the ratings agencies not to downgrade the United States.” Most of the ratings agencies realize that the chances that we will actually default are exceedingly small (though it would be nice to stop tempting fate on this issue).

But they appear to be inching toward a resolution that absent bipartisan deficit reduction (pegged at around $4 trillion over a period of years), the United States will lose its AAA rating. This would be a disastrous outcome. It will be hard enough to raise the debt ceiling in time, though it likely will be done. It will be even harder to satisfy the ratings agencies if they are suddenly determined to play hardball over the details of any deficit cutting agreement, and if our credit rating depends on whether the ratings agencies are happy with what the political class comes up with in terms of a resolution.

What we really need is the $4 trillion in deficit reduction over a period of ten years, and an agreement that does not force us to have to go through this exercise anew in just a matter of months. I am not sure that we will get either condition met, and I am quite worried about what will happen if/when we fail to meet these conditions.

  • http://thefatguy.com Scott

    I’m struggling with 99% of this, but if I understand correctly, the entire US economy is now, perhaps always was, a hostage of the ratings agency? 

    I do understand that these ratings are baked in to many, many, many investment vehicles.  Therefore, chaos is automatic and unavoidable once these agencies provide the signal of AA?

    Just two and a half years ago, it was determined, by some, that these same ratings agencies were complicit, at least somewhat, in the 2008 mortgage meltdown.  Which really bugs me, given what you and others are saying now about the enormous power they wield.  How can they continue to maintain that choke-hold, given past performance?

    Perhaps I’m just dumbly cynical, but I’m sensing the beginnings of yet another Wall St. bailout, maybe even bigger, than 2008.  And I’m happy to be shown where I’m wrong, and why I should explicitly trust that the ratings agencies are sincerely doing their jobs correctly.

  • http://thefatguy.com Scott

    I’m struggling with 99% of this, but if I understand correctly, the entire US economy is now, perhaps always was, a hostage of the ratings agency? 

    I do understand that these ratings are baked in to many, many, many investment vehicles.  Therefore, chaos is automatic and unavoidable once these agencies provide the signal of AA?

    Just two and a half years ago, it was determined, by some, that these same ratings agencies were complicit, at least somewhat, in the 2008 mortgage meltdown.  Which really bugs me, given what you and others are saying now about the enormous power they wield.  How can they continue to maintain that choke-hold, given past performance?

    Perhaps I’m just dumbly cynical, but I’m sensing the beginnings of yet another Wall St. bailout, maybe even bigger, than 2008.  And I’m happy to be shown where I’m wrong, and why I should explicitly trust that the ratings agencies are sincerely doing their jobs correctly.

    • Anonymous

      I don’t maintain that the rating agencies are without fault in their past performance. Far from it. But they do wield power, and we have to contend with that fact.

      • http://thefatguy.com Scott

        So the answer is yes, the ratings agency are the issue in the next week?

        Not interested in placing fault or laying blame.  Unless and until someone, or many someones, are enriched by the results of their actions.

      • http://thefatguy.com Scott

        So the answer is yes, the ratings agency are the issue in the next week?

        Not interested in placing fault or laying blame.  Unless and until someone, or many someones, are enriched by the results of their actions.

      • http://thefatguy.com Scott

        So the answer is yes, the ratings agency are the issue in the next week?

        Not interested in placing fault or laying blame.  Unless and until someone, or many someones, are enriched by the results of their actions.

        • Anonymous

          The ratings agencies are certainly an issue, yes.

          • http://thefatguy.com Scott

            I guess I’m being a jackass, but if their ratings change from AAA is going to cause chaos (“disastrous outcome”), then aren’t they THE issue, not just an issue? 

            This is only important in as much as that, if I’m reading correctly:
            no debt-limit raise = rating reduction to AA = disaster
            and I’m trying to understand why.  The overall market isn’t that dumb, sitting around waiting for a Moody’s change.

            Maybe a better question: what is the disaster for which the de-rating is the trigger event? 

            And really, seriously — this is a new issue to Moody’s?  They just noticed the governmental over-spending?  It seems rather capricious to just now poke their heads out, with not a peep for the last umpty years.  It also seems rather coincidental, but I can’t put a finger on who benefits. 

            Oh well.

          • Anonymous

            There are three issues as I see it: (1) Are we going to default on our debt? (2) Even if not (1), are we going to fail to pay the bills on other obligations that might make us a credit risk? And (3) even if not (1) and (2), is the deficit reduction plan going to be credible and impressive enough to convince the ratings agencies to let us keep AAA status?

      • http://thefatguy.com Scott

        So the answer is yes, the ratings agency are the issue in the next week?

        Not interested in placing fault or laying blame.  Unless and until someone, or many someones, are enriched by the results of their actions.

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