Standard & Poor’s delivered an unambiguous message to investors Friday that has serious implications not only for the nation’s economy but also for President Barack Obama, the tea party and anyone else with skin in the 2012 elections:
America’s political system is subprime.
Friday’s downgrade seems likely to spur a public backlash against S&P, which now assesses U.S. government debt at less than the top-shelf rating it once gave mortgage-backed securities ahead of the 2008 financial world implosion. But the ratings agency won’t be on the ballot in November 2012.
For everyone who will be, the political stakes of the debt-limit deal – and the deficit-reduction committee it spawned – have been raised exponentially. Rather than forcing conciliation, the analysis spurred many in the political class to dig deeper into the very trenches identified in the report — and to begin trading blame.
The partisan battle lines were quickly drawn: Republicans blamed Obama for reckless overspending, and Democrats said tea party intransigence blocked the sort of “grand bargain” that might have fended off a downgrade. Sen. Jim DeMint (R-S.C.) called on Obama to fire Treasury Secretary Tim Geithner. Pragmatists in Congress took the report as a wake-up call to go for a big deficit-reduction plan, and the fret set crooned in unison, “We told you so.”
Still, it was hard not to read the S&P analysis as a report card on Obama’s oft-repeated pledge to cure Washington’s hyper-partisanship, the promise that won him the White House in 2008.
And much as the credit agency knocked the U.S. credit rating to AA+, it didn’t give passing marks to Obama’s efforts either — producing a soundbite-worthy nugget for any Republican ready to use it: under Obama, we’re not triple-A anymore.
“If Team Obama believes the first downgrade in our history occurring on his watch … is not going to be a boulder in his political backpack, they are delusional,” veteran Republican strategist Mary Matalin told POLITICO Friday night.
GOP presidential contenders wasted no time jumping in. “America’s creditworthiness just became the latest casualty in President Obama’s failed record of leadership on the economy. Standard & Poor’s rating downgrade is a deeply troubling indicator of our country’s decline under President Obama,” said former Massachusetts Gov. Mitt Romney.
Added former House speaker Newt Gingrich: “The Obama disaster continues. Highest food stamp level and lowest credit rating in history in the same 24 hours.”
But ultimately, S&P didn’t only downgrade the U.S. credit rating. It downgraded the whole political system. If it’s any comfort to Obama and his re-election team, no one was spared, including the Republicans. In the eyes of the raters, both parties punted the tough decisions. Both parties used the debt and the threat of default as “political bargaining chips.”
The report dings Democrats for envisioning “only minor policy changes on Medicare and little change in other entitlements” but also pops Republicans by asserting that “new revenues have dropped down on the menu of policy options.” It also notes that a rollback of the Bush-era tax cuts for the wealthiest earners would produce $950 billion in savings that might go a long way toward getting the U.S. closer to the deficit-reduction targets that S & P would smile upon — which is pretty much exactly what Obama will be arguing this fall.
S&P concluded that even its moments of greatest cohesion – less than a week after a $2.4 trillion debt-limit deal was iced – it’s clear that Washington’s broken. And the bottom line on the platinum triple-AAA credit rating? The U.S. doesn’t deserve it, says S&P. It’s like American Express yanking your gold card and replacing it with the standard green one. According to S&P, America’s a bigger credit risk than Finland and on par with South Korea.
Already, however, some Democrats were seeing the report as a chance for Obama to strike back at the tea party, including the House GOP freshman who helped block Speaker John Boehner (R-Ohio) from striking the “grand bargain” he and Obama wanted.
Said Sen. Chris Coons (D-Del.): “By refusing to negotiate in good faith, Republicans turned the debt ceiling debate into a hostage crisis and last night we saw its first casualty.”
“The Tea Party forced us into the lowest common denominator, and we punted,” said a veteran Democratic hand who lamented the lack of political will to reform entitlement programs and the tax code as part of the debt-limit deal. That source acknowledged the potential political fallout for Obama but argued that the moment presents an opportunity for the president to unload on the tea party and force what he called “real Republicans” to choose sides.
“If ever there was a time for Obama to win on the negative dial, this is it,” the source said.
That’s in line with the increasingly inflammatory rhetoric from Democrats and their allies about the tea party. Vice President Joe Biden accused that wing of the GOP of having “acted like terrorists” in the debt limit debate, according to several sources present at a closed-door House Democratic meeting this week. Former administration official Steve Rattner said they were “strapped with dynamite” recently, and columnist Thomas Friedman referred to them as the “Hezbollah faction” of the Republican Party.
A second senior Democratic official argued that it was “Republican brinksmanship and intransigence” that led to the downgrade. “This is going to be laid at the feet of the Republicans. To read S&P’s decision to downgrade it stems almost
entirely from the failure to get a big deal that included revenues – a deal Boehner walked away from at least twice – an abdication of leadership and responsibility that every GOP presidential candidate endorsed.
“Republicans manufactured this crisis for their own political ends and then they walked away from the deals required to resolve it in a way that didn’t result in a downgrade of our credit rating,…and the public won’t soon forget it,” this official said.
Obama’s team stayed out of the partisan fracas on Friday night – choosing instead to try to undermine S&P – in what appeared to be a tacit acknowledgment that throwing political punches now would only serve to reinforce the negative assessment of Washington’s operating system. Friday night and Saturday morning e-mails to Obama’s campaign spokesman were not returned. Senate Majority Leader Harry Reid (D-Nev.) issued a subdued statement, and House Minority Leader Nancy Pelosi (D-Calif.) called for transparency on the new “supercommittee” created by the debt limit deal.
The understated response from Washington’s top echelon of elected Democrats could also speak to the fear the downgrade struck in the hearts of some party officials. “Forget about the economic consequences, which could be very bad, this is a political thermonuclear explosion that probably just wiped out President Obama’s re-elect,” fretted one senior Democratic official. “The only chance we got now is Republicans nominate a crazy person, and after this, we may still lose. The worst part is, if this White House showed a gram of leadership on the debt crisis we could have avoided this historic embarrassment.”
By contrast, Republicans pounced on the S&P decision, pointing their fingers at Obama and Democrats in Congress who they say weren’t willing to cut enough – even though the final deal included the “dollar for dollar” reductions that formed the heart of the GOP’s list of demands throughout the debt-limit negotiations.
“The administration and Democrats in Congress had sought an increase in the debt limit without any spending cuts or reforms. Republicans made clear the American people would not tolerate that and fought for the largest spending cuts possible. With the Budget Control Act, we made a positive first step toward reducing the debt, but much more must be done,” Boehner (R-Ohio) said in a statement released late Friday.
Over the past couple of weeks, as S&P officials were communicating their concerns to the Treasury Department in person, White House spokesman Jay Carney delicately sought to portray the debt-limit deal as a message that should calm markets while acknowledging that S&P and other ratings agencies might not listen.
“The rating agencies are obviously independent and it is up to them. What we can do is take actions that make clear that the United States is still the gold standard when it comes to investments; that it is the safest of safe harbors, as it has been for 100 years or more, and — because Washington functions and can compromise and can do the right thing by the economy,” Carney said late last month. “We do that and we think that will help enormously in terms of how international investors look at the United States and our treasuries as a potential place to put their money.”
But rather than convincing S&P that Washington could work well, the debt-limit agreement appeared to have the opposite effect – confirming that the big deal fell far short of the kind of “grand bargain” needed to demonstrate that Congress and the White House would seriously restructure U.S. finances.
Indeed, like all new information, the downgrade appeared mostly to reinforce the strongly held beliefs not only of partisans but of non-partisan groups.
“The inability of Washington elected officials to make the tough but necessary choices to put our nation on a sustainable fiscal path has shaken the stock market, harmed our already fragile economy, and now resulted in the first credit rating downgrade in the U.S. government’s history,” said Dave Walker, a co-founder of the group “No Labels.”
Some lawmakers said they see the report as a “wake up call” for Congress to do more.
“Now we must fight to ensure that the cuts promised in the debt limit agreement actually happen, and that Congress takes the necessary next steps to reform our unsustainable entitlement programs and our inefficient tax code,” Sen. Rob Portman (R-Ohio), a former White House budget director under President George W. Bush, told POLITICO. “Just a day after the nation’s debt hit 100% of the size of the U.S. economy, this news is a clear sign that record deficits and debt is having a negative impact on our current economy.”