A debt call we should have seen coming
By Ruth Marcus,
The surprising thing about Monday’s market plunge is not the black-diamond angle of descent. It’s that it took so long to arrive at the slope and begin the vertiginous dive.
In fact, if the market were going to plummet, it would have been better if the fall had happened sooner.
An earlier jolt might at least have injected some rationality into a political process that the supposedly all-knowing market consistently overestimated. It might have had a chastening effect on congressional Republicans’ willingness to play with fiscal fire.
I kept waiting throughout the debt-ceiling debate for Wall Street to wake up to the fact that Washington is not nearly as functional as the market calculated. Instead, Wall Street assumed that because default was unthinkable, it did not have to price that possibility into its risk assessment.
Did any of these wizards ever listen to a speech by Michele Bachmann or her fellow Tea Partyers? Rather than turning a crisis into an opportunity, Republicans turned an opportunity into a crisis — one just narrowly averted.
Having underreacted to the default risk, the market is overreacting now. Nothing in Standard & Poor’s analysis should surprise the average newspaper reader, no less a titan of finance.
S&P explained that it lowered the country’s credit rating because “the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.”
Contentious and fitful? Did these guys downgrade their rhetoric along with the U.S. credit rating? Do they get C-SPAN on the office cable system?
More Standard & Poor’s: “We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.”
True, but, again, you didn’t need S&P to tell you that. Click on the Congressional Budget Office analysis of the debt-ceiling agreement and you will find that it estimates the deal will reduce the deficit by a cumulative $2.1 trillion over the coming decade. Next, click on the CBO analysis of what the cumulative deficit would be without the debt-ceiling deal: $6.7 trillion.
I haven’t made millions on Wall Street, but I can do basic math: After the debt-ceiling deal, the national debt will increase by $4.6 trillion. It was always obvious that more needs to be done. As President Obama said Monday, “The fact is, we didn’t need a rating agency to tell us that we need a balanced, long-term approach to deficit reduction.”
So now that a rating agency has told us that, what’s next? The president needs to come up with something a little less lame than Monday’s unconvincing rah-rah: “No matter what some agency may say, we’ve always been and always will be a triple-A country.” This would have been bad enough on its own, but the president’s speechwriters might have recalled that it was Obama himself who questioned, pre-downgrade, whether we “have a triple-A political system to match our triple-A credit rating.”
I’m not a fan of the bring-’em-back-from-vacation approach. To do what? Stand around and shout the same tired slogans? Hands off Granny’s benefits! We have a spending problem, not a revenue problem! Trust me, the best way to reassure markets is not hauling Congress back to town.
Whatever Washington can do to ease the short-term pain — by extending unemployment benefits and the payroll tax reduction — can be done this fall.
Whatever Washington can do to tackle the longer-term issues in the balanced way that Standard & Poor’s called for — indeed, that every rational analysis has called for — is not likely to happen in the politicized, panicky aftermath of the plunge.
The best architecture for the way forward exists in the form of the new super-committee. The deadline for congressional leaders to appoint its members is next week. Before reflexively choosing the most unyielding partisans, both sides ought to review the S&P analysis and its aftermath — and pick a team capable of achieving compromise.
Meanwhile, the best news from a grim Monday was that the president intends to come forward with a concrete plan of his own. The sooner the better. And the sooner he starts selling it to the country, something he should have done months ago, better still.