Sunday, August 07, 2011

S&P Downgrade - Some Thoughts

1. This downgrade was very much expected. In the interview of S&P Sovereign Debt Rating Division director with Ezra Klein, it was clear that unless there was a credible deal of $4Trillion; down grade was inevitable. Hence, this is not a surprise.

2. Any expectations that this downgrade will jolt dysfunctional Washington are completely misplaced too.

“Any student of sovereign default knows that it is born of precisely the kind of failures of governance that we saw during the debt-ceiling debate. That is why the US cannot hold a triple-A rating from S&P: the chance of having a dysfunctional Congress in future is 100%, and a dysfunctional Congress, armed with a statutory debt ceiling, is an extremely dangerous thing, and very far from risk-free.”

-- Felix Salmon, Reuters

That is why this is a beginning of further, deeper downfall of USA rather than a point where America got her house in order.

3. Blaming S&P is exactly ‘shooting the messenger’ mentality from Washington. As Ezra rightly points here, S&P got it correct in this case. Responses from Washington politicians (including Republicans who are demanding resignation of Tim Geithner as if this down grade was avoidable so long as he had shouted loudly while Congress continued the mess), remind responses from Europeans who always blame rating agencies whenever a downgrade is declared. These very American politicians who would lecture Europeans to get their house in order, need to heed to that advice rather than blaming S&P. Of course, Washington is beyond being able to get it’s house in order. But at least it can spare public of it’s hypocrisy while they are busy destructing American Economy.

4. The first real question is - is the downgrade done for real reasons? I do not share assessment of Chait at TNR and do think that S&P is right to downgrade for the dysfunction of Washington. ‘That is how democracy works and all that’; those are nice arguments in theory but in the practical world, Finance and Businesses have to make real decisions about the given hand and hence this indictment of American System is correct. If American System can accept tax increases from a Republican President only, then ‘fairness’ is not the problem of Businesses.

5. Next, S&P is very clear that it no longer assumes that Bush Tax cuts on rich will expire and by that it assumes that the additional $1Trillion revenue increase will not materialize by end of 2012. Chait thinks it will happen. But as Douthat says clearly, Democrats have never been able to hold the line on taxes on rich and there is no reason that it will happen in December 2012 too. The Daly-Obama playbook is ‘spread the legs, drop the pants and let GOP do the rest...’ as far as Dems are concerned.

“Obama gave in to hostage-takers. You should never negotiate with such people. You stand your ground, at any cost. Let them wreck the economy: then, maybe, people will see what they are dealing with.”

-- Clive Crook, The Atlantic

Since none of this has happened, in the end S&P is right to assume that Bush Tax Cuts ‘will not expire’ and there will be never any revenue increase.

6. That brings us to the final question - if revenue increase is very unlikely to materialize so long as Obama is at the helm of Democrats, are we saying Obama is in the end ‘detrimental’ to the well-being of American Economy? There is no other conclusion than that. It is simply the question of ‘competence and ability to govern’. For Obama, governance means sticking to Daley Playbook and hence not to point out ‘intransigence of GOP’ in matters of fiscal and revenue policy. For example, Obama could have said that S&P downgrade for ‘dysfunctional Washington’ commits the same mistake for which America is paying the price - we refuse to point out who is the real culprit. S&P in its analysis blames equally to both parties and refuses to point the true culprit. It is the epitome of ‘equivalence in blame’ tendency of American Elite and refusal to put blame where it belongs. As a result, American Public continues to fail to hold concerned ‘American Politicians’ accountable. Despite knowing who does what policy-wise, America continues to make wrong choices in her elections. There is no escape from this vicious cycle and Washington dysfunction continues to get entrenched.

7. Competence of Obama as a politician to wage a political war against those who are leading America on wrong road, is exposed. Obama and his presidency is simply ‘incompetent one’ though it might have been successful in early years to handle things better. That much is becoming clearer by every passing day. GOP has tactically waged a brilliant political battle to expose these vulnerabilities of Obama. All this means, Americans are pretty soon going to come to a conclusion - anyone but Obama in 2012. The guy is, for whatever reasons, simply unable to deliver; then who cares if he has been more conciliatory or not? (My cousin commented - he is to America what Dr. Singh is to India; personally impeccable but unable to govern and deliver.) True, this is achieved by folks who are not necessarily prescribing a right policy. But policy issue of those people comes later when they are in power; not before when they are waging victorious political battles. That is the precise lacuna of the American System - it is not an accountable parliamentary system, but it’s politics has been poisoned so much so that much needed and much assumed bipartisan policy approach of what Founders intended is lost. One player is a perfect Parliamentary Opposition without paying any price - that is why I do not agree with Matt - while the other one is unable to adapt for equally forceful plays.

8. President Obama refuses to accept that he is very likely to be one termer unless he changes his ways.

“He goes to fund-raisers to tell people to stick with him, but he seems to be trying to reassure himself.

“I have to admit,” the president said in Chicago, “I didn’t know how steep the climb was going to be.”

At the large fund-raiser in his hometown, he tried to reassure disillusioned liberals about “unfinished business” to help those in need. Later, at a smaller $35,800-a-head dinner, he defended the unpopular debt package like a proud fiscal conservative.”

With such a ‘looser mentality’ why would Americans need a president who is a ‘spent force’ and becoming radioactive by every passing day? Unless Obama fires Daley, revamps his team and fights everything to get ‘tax revenue’ in the Congressional Super Committee along with solid concrete pieces in place for longer term $4Trillion debt reduction plan; there is no road to his re-election. For all the talk, indeed he seems to be a second coming of Carter and pretty soon America will need to move on from the short Obama era.

Update - If you want to read some of the most devastating commentary on Obama frailties, you need to read Drew Westen's article in NYT. Seems like a mile post for Liberal and Progressive opinions to look beyond Obama, especially the last part where the author offers some hypotheses for failed presidency.

Update II - How long would it take for America to regain it's credit worthiness? S&P says a decade or more. Clearly this S&P move, howsoever it is discredited, is setting the stage for American Political Discourse for a decade or so. Quite a longer term seismic event.

Update III - One of the reasons I am inclined to think beyond Obama is I conclude that we do not need Obama or Democrats to 'protect core American entitlements - Social Security and Medicare'. Congressional GOP help in defeating privatization of Social Security immediately after Bush reelection and defeat of Ryan plan during NY-26 in 2011; all that points clearly to the total political commitment of Americans in protecting these two programs. It is not that Americans will not accept changes in these programs, but protecting these two programs is 'truly third rail' of American Politics and there is no real danger of GOP targeting it in political sense or would succeed in that. Also, what has Obama done really to protect these entitlements? He was out to 'sale the house' anyways during recent deals. So we really do not need Obama or Democrats to protect these entitlement programs in sensible ways and there goes the fundamental USP of Obama/Dems. In a way, Democrats and Obama are getting a 'free ride' here as protectors of these entitlement programs while hiding their incompetence in bringing Economic/Fiscal stability to America. That will be the thinking Americans will coalesce in coming days unless things change dramatically.

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