Following in the footsteps of Standard & Poor’s, which downgraded U.S. credit to AA back in August, another one of the big three Wall Street rating firms has decided to play the ultimatum game, after Congress’ “supercommittee” failed to agree on a plan to implement spending cuts last week.
Fitch Ratings gave the United States until 2013 to come up with a “credible plan” to tackle its ballooning budget deficit before it downgrades the country’s coveted AAA rating.
The ratings agency said on Monday it revised to negative from stable the outlook on the U.S. credit rating after a special congressional committee failed last week to agree on at least $1.2 trillion in deficit-reduction measures.
“The negative outlook reflects Fitch’s declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. AAA sovereign rating will be forthcoming,” the ratings agency said in a statement.
Fitch has some nerve lecturing the U.S. government on fiscal responsibility. Fitch and its fellow Wall Street rating houses Moody’s and Standard & Poor’s precipitated the very economic crisis that continues to drag on to this day. They handed out AAA ratings like candy during the run-up to the collapse of September 2008.
And they still haven’t learned their lesson, as Bloomberg’s Robin Farzad points out in this edition of Businessweek.
On Nov. 21 a court-appointed trustee estimated that at least $1.2 billion is unaccounted for at failed brokerage MF Global. Sunk by some risky bets on European sovereign debt, the firm run by former New Jersey Governor Jon Corzine filed for Chapter 11 bankruptcy late last month, the eighth-biggest failure in U.S. corporate history.
While that’s tragic for some clients, it’s an outright embarrassment for the three largest ratings firms, Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings. They all rated MF Global investment grade a week before its bankruptcy.
“Where is the outrage?” asks James H. Gellert, chief executive officer of Rapid Ratings, which had rated MF Global at junk for two years. “Things have gotten absurd.”
We’d argue that absurd is actually an understatement.
Fitch, S&P, and Moody’s didn’t see MF Global’s collapse coming, just like they didn’t see the downfall of AIG or Lehman Brothers coming, just like they didn’t see Enron’s failure coming… or Tyco’s… or WorldCom’s. In fact, these self-appointed experts have failed to forewarn us of pretty much every major U.S. corporate collapse during the last decade. We can’t trust their ratings. So what good are they?
Ironically, if Congress continues to deadlock on fiscal matters, our deficit problem will begin to solve itself. In part, that’s because the Bush tax cuts are set to expire at the end of this year, but there’s more to it than that. The Center on Budget and Policy Priorities has estimated “doing nothing” would reduce the deficit by $7.1 trillion over ten years. This bears repeating: If Congress lets tax cuts and other measures expire, the deficit will go down by $7.1 trillion over ten years.
So what we need is not “timely fiscal measures” to “place U.S. public finances on a sustainable path”. Rather, we need the opposite.
We need Congress to not continue what it has been doing for the last few years: Borrowing and spending while cutting taxes at the same time. That’s the irresponsible, reckless behavior that has caused our deficit to get too high.
The federal government’s budget deficit, incidentally, isn’t the bogeyman it is often made out to be. The United States has actually run a deficit for most of its history, and it hasn’t caused us to self-destruct. In fact, Andrew Jackson was the only president who ever succeeded in zeroing out the deficit.
Our persistent deficit hasn’t stopped our economy or population from growing. It hasn’t stopped us from developing an extremely powerful, technologically advanced military. It hasn’t stopped scientific research, space exploration, the expansion of our safety net, or efforts to clean up and protect our environment.
America has climbed out of a depression with a deficit, defeated fascism with a deficit, and outlasted the Soviet Union in a decades-long “Cold War” with a deficit. We’ve already proved that our deficit is something we can live with.
So we shouldn’t be worried that our government has a deficit. What we do need to worry about is whether we’re keeping it in check. And we haven’t been.
Most of the recent fiscal insanity that we’ve experienced was caused by a Republican president and a series of Republican-controlled congresses, who saw fit to increase expenditures while simultaneously decreasing revenues. (And the money they borrowed wasn’t even spent improving Americans’ lives. It was spent invading other countries, building a bigger police state with unprecedented surveillance powers, and rewarding their corporate buddies with subsidies and tax breaks).
It’s their bad example we need to stop emulating. If our common wealth (comprised of our collective tax dollars, our membership dues in America) keeps shrinking, we’ll have no ability to pay for the public services that we want and need.
Many of the same Republicans who are preaching the let’s live within our means gospel now were voting for precisely the opposite when George W. Bush was in charge. Not that they’d admit that. Republicans these days act as if the Bush error never happened. Well, we haven’t forgotten it. And we won’t.
The real danger we face is the prospect of Republicans gaining control of the Senate and the presidency. If that happens, they’ll have the ability to pick up where they left off during the Bush error, and they will take us down the road to fiscal ruin. That’s the scenario that Fitch, Moody’s, and S&P should be warning the country about. But evidently they can’t see that tragedy playing out in their heads.
Just like they didn’t see the warning signs that foretold of the collapse of the casino that is Wall Street and the ensuing economic slump we’re dealing with now.