Monday, August 08, 2011

Why Robert Reich is Wrong

Robert Reich is not happy with Standard & Poor. This is what he says at the Huff Post:

“S&P has downgraded the U.S. because it doesn't think we're on track to reduce the nation's debt enough to satisfy S&P -- and we're not doing it in a way S&P prefers.
Here's what S&P said: "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." S&P also blames what it considers to be weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions.

Pardon me for asking, but who gave Standard & Poor's the authority to tell America how much debt it has to shed, and how?”

What concerns him is that S&P’s decision is not based on whether or not the US can pay its bills when they become due – which they can for now - but on whether S&P sees the US as having an ability to deal with the $211 trillion in debt and unfunded liabilities.

His argument is overly simplistic: if you can pay your bills it doesn’t matter what your underlying finances are. It is this kind of thinking that led to the recession, based on busted housing bubble and shady derivatives. S& P are right.

They are right for a very simple reason. The commitment made in the brinkmanship politics of last week was to cut $21 billion for a $3.7 trillion budget for 2012 – no congress can legislate for budgets for a decade – and to raise the debt ceiling modestly. They kicked the issue down the road and will ask a committee of 12 to do the dirty work (and then fight over their recommendations).

A 1% rise in interest rates would wipe out the budget cut and increase debts. In fact, as Fareed Zakaria noted on CNN on Sunday, such a rise in debt interest payments to attract investors would lead to the budget deficit rising by $1.3 trillion over 10 years. That would more than wipe out the entire 10 years of cuts proposed in the debt deal. S&P simply observed that the underlying financial strengths and the realism of Congress and the White House in tackling its debt and unfunded liability problems do not deserve the credit protection of a triple A rating. S&P told the Emperor (Congress) that they have no clothes – well done S&P.

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