Monday's global falloff in financial markets, in the wake of Standard & Poor's downgrade of U.S. government debt, was both predictable and unfortunate. The roller coaster no doubt will run for several days until things stabilize.
The thing to remember, in all of this, is that leaders and so-called experts at all levels are often flailing around and only half informed. Moreover, the so-called "investors" (i.e., big institutions and traders, not ordinary folk) who buy or sell usually react late to events — and then overreact.
Let's take this in several parts. First, was the downgrade justified?
No. The modest debt reduction negotiated last week, in conjuction with lifting of the debt ceiling, was by no means a decisive attack on the long-term federal debt burden. However, it was more than had taken place before; moreover, a mechanism was put in place for more serious and ordered reductions within a few months. S&P went off half cocked in declaring last week's product lacking and the president and Congress incapable. What they did last week was modest but as much as could have been expected and an improvement over previous inaction.
S&P had badly bungled ratings of derivatives and of financial houses prior to the 2008 financial-system meltdown. Its downgrade appeared a blatant attempt to regain its credibility with a dramatic action. It was an unjustified and destructive action. The two other major ratings agencies did not follow suit.
Second, who was to blame politically for the market plunge?
Had President Obama and the Congress completely botched a debt-ceiling deal, and come up with nothing, they would deserve blame. They, and previous presidents and Congresses, deserve full blame for careless taxing and spending policies which allowed long-term federal debt to surpass $14 trillion. But neither Obama nor the Congress did anything last week to justify the S&P downgrade and subsequent market tumble.
Obama and allies have attempted to lay blame on Tea Partiers for taking a tough stance against new taxes, and for spending cuts, in last week's negotiations. But that is what they were elected to do. Their voters sent them to the capital with exactly that mandate. As one commentator pointed out, blaming the Tea Party for the market plunge is about like blaming a 911 caller for reporting a fire.
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