Standard & Poor's poor show

Sorting through the blame game on the morning after Black Monday. The reaction has been an over-reaction, which is standard when emotion rules the markets.

Crosscut archive image.

Sorting through the blame game on the morning after Black Monday. The reaction has been an over-reaction, which is standard when emotion rules the markets.

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.

The debt problem was created before the Tea Party.  Tea Partiers pledged to address it.  No action at all would have been taken last week if they had not persisted in pressing for it. That said, the Tea Partiers can be maddeningly rigid and immoderate. Their influence already is waning. I regard the present Tea Party as being at the state of evolution of 1992 Perotistas, who also rallied behind cut-spending-and-deficits banners. Their standard bearer, Ross Perot, initially outpolled President Bush and Gov. Bill Clinton as a presidential candidate.  Within months, Perot and the Perotistas no longer were major factors. 
If you must pin blame for the market falloff, blame it on debt, on S&P's irresponsible downgrade, or on market irrationality.
Third, will the present market correction lead us into a serious global recession or worse?
There are many reasons why it should not. In days before the correction, several major international financial institutions and corporations reported healthy earnings.  U.S. and global growth were slow but not negative.  But, all the same, these things take on life of their own.  The European Union has been scrambling for months to keep financially afloat its southern European governments.  Incremental EU measures have not been enough.  German public opinion, specifically, has turned against further rescues of what Germans view as financially and politically irresponsible fellow EU members.

Obama and the Congress came out of last week's debt-ceiling deal looking dumb and weak.  But, as related, it was how they did their work, as much as their work product, which brought them such domestic and international scorn. 
Much money no doubt will be made by investors who choose now to buy stocks of underpriced companies with low price/earnings ratios.  But many others will simply freeze and hold their resources in money-market funds or their mattresses.  I expect the Federal Reserve and European Central Bank to take whatever steps they think necessary to avert a further meltdown or panic.  But such situations are governed more by emotion than by reason.
Perhaps the biggest short-term loser will be McGraw-Hill, S&P's parent company. It took a big hit Monday.

Please support independent local news for all.

We rely on donations from readers like you to sustain Crosscut's in-depth reporting on issues critical to the PNW.


About the Authors & Contributors

Ted Van Dyk

Ted Van Dyk

Ted Van Dyk has been active in national policy and politics since 1961, serving in the White House and State Department and as policy director of several Democratic presidential campaigns. He is author of Heroes, Hacks and Fools and numerous essays in national publications. You can reach him in care of