Bring on the downgrade! That’s what some in Washington seem to be cheering for these days — maybe enough of them to stop a vote in the House of representatives to raise the debt ceiling before the roof falls in on August 2. It’s time to get serious about this.
The credit rating agencies have made it abundantly clear that, without progress on the debt ceiling budget talks by the middle of this month, they will put the US on credit watch for a likely downgrade of the Americans Triple A credit rating. In the case of Standard & Poors, for example, that will be all the way down to “D” — for “default” — lower than junk. Now the markets may or may not react in mid-July to the rating agencies “final warning’ – Wall Street professionals cannot believe that the politicians in Washington will actually let the US go in to default onits obligations. They rightly view as sheer nonsense the idea of some that we can simply pay the interest on our credit card and let things like military pay or Social security checks fall by the wayside for a while — those latter events would be events of default, too, in the eyes of the rating agencies. They know on Wall Street all too well what the actual consequences of a “D’ rating would be. But Wall Street has lost credibility with the American voter, and too many of them have been led to believe by somem politicians and cable commentators that a credit dwongrade or even “temporary’ default can be managed to a good outcome
Some want this downgrade to happen because they think this would seal Obama’s doom in 2012 as the only President ever to ‘lose’ the Triple A rating or to bring on a shutdown of the government to the point where we stopped paying our Social security checks. But that’s not the half of what would happen. With a “D” rating, virtually the preponderance of the balance sheets of banks, insurance companies, pension funds and even the Us Federal reserve would become worthless overnight; the “freeze-up” of transactions among financial institutions and in commerce generally would make the Lehman event seem like a spring thaw — no bank could trust any other overnight because they would all be capital-impaired, with no market to which to sell their worthless US Treasury securities, because no other financial institution would be able to classify them as capital. There would meanwhile be a run on every bank by depositors, bankrupting the FDIC in short order, as ordinary individuals scrambled for any ounce of cash.
These are not “scare tactics”; we’ve seen the trailer to this movie before in the days after Lehman’s bankruptcy filing — but this time, it won’t just be AIG that goes under — who would rescue the Fed? Every balance sheet stuffed with ‘safe’ US securities would be technically worthless — not because American can’t afford to pay its obligations — we are, for the moment, still a multi-trillion dollar economy — but because one particularly willful but stupid clique of politicians believe that they need the downgrade and default event, and the expectable stock and bond market crashes, as their excuse to vote eventually for the debt ceiling increasde AFTER the damage is done to Obama and because, as they will ex[lain to their Tea Party "base', "the market [which they worship] made them do it”.
It is high time for the media generally to do its homework and alert the public to what happens if this scenario comes to pass and expose those who are shamelessly exploiting public ignorance for short-term political advantage. Although as usual it is the Tea Party denizens and Fox News that are peddling the idiocy of default as a good idea, some on both the Right and the Left are guilty as charges on this count as well, as they argue that their leaders should draw ‘lines in the sand” in the debt ceiling debate to [prevent any compromise or short-term agreement that would violate their budget principles. Lines in the sand, however, only work in the kids’ sandbox — on a real beach, they tend to get wipes out by powerful tides.
Filed under: Uncategorized
