!! History Commons Alert, Exciting News

Context of 'August 11, 2011: GOP Presidential Candidate: Credit Downgrade Proves Her Resistance to Raising Debt Ceiling Was Right'

This is a scalable context timeline. It contains events related to the event August 11, 2011: GOP Presidential Candidate: Credit Downgrade Proves Her Resistance to Raising Debt Ceiling Was Right. You can narrow or broaden the context of this timeline by adjusting the zoom level. The lower the scale, the more relevant the items on average will be, while the higher the scale, the less relevant the items, on average, will be.

Alan Binder.Alan Binder. [Source: PBS]TPMDC reporter Brian Beutler notes that many Congressional Republicans, led by but not limited to those who consider themselves “tea party” members (see April 30, 2011), are heeding the advice of a small number of unorthodox financial experts who go against the “common wisdom” that a possible credit default by the US would lead to potential catastrophe among national and global financial markets. The issue centers on Congressional Republicans’ insistence that they will not raise the US debt limit, or debt ceiling, unless the Obama administration gives them a wide array of draconian spending cuts; in the past, raising the US debt limit has been a routine matter, often handled with virtually no debate and little, if any, fanfare. Beutler says that the most influential of these advisors is Stanley Druckenmiller, who made billions managing hedge funds. Druckenmiller’s advice was that the US could weather several days of missed interest payments if the US debt ceiling were not immediately raised without serious consequences. House Budget Committee chairman Paul Ryan (R-WI), House Majority Leader Eric Cantor (R-VA), and Senator Pat Toomey (R-PA) are all echoing Druckenmiller’s claims in media interviews and in Congress. Beutler writes that the newfound popularity of Druckenmiller’s claims “alarms everyone from industry insiders to Treasury officials to economists, conservative and liberal, to non-partisan analysts who say the consequences of the US missing even a single interest payment to a debt-holder would be catastrophic—even if it was followed immediately by a legislative course correction.” Former Federal Reserve chairman Alan Binder, now a Princeton economist, warns that if the US were to default on its debt even for a few days, the US dollar would crash in value, interest rates would spike, and the US economy would find itself spiraling into a full-blown recession. Binder writes: “For as long as anyone can remember, the full faith and credit of the United States has been as good as gold—no one has better credit. But if investors start to see default as part of US political gamesmanship, they will demand compensation for this novel risk. How much? Again, no one can know. But even if it’s as little as 10-20 basis points on the US government’s average borrowing cost, that’s an additional $10 billion to $20 billion in interest expenses every year. Seems like an expensive way to score a political point.” JPMorgan CEO Jamie Dimon agrees, telling PBS viewers: “Every single company with treasuries, every insurance fund, every—every requirement that—it will start snowballing. Automatic, you don’t pay your debt, there will be default by ratings agencies. All short-term financing will disappear. I would have hundreds of work streams working around the world protecting our company for that kind of event.” JPMorgan issued a statement after Dimon’s comment saying that even a brief default would trigger “a run on money market funds… that would leave businesses unable to meet their short-term obligations and teetering on the bring of bankruptcy.” JPMorgan compares the money-market run to the aftermath of the 2008 Lehman Bros collapse, which sent the US into a recession. Analyses and reports by the Treasury Borrowing Advisory Committee and Government Accountability Office have warned of dire consequences following a default even of a day or two. Toomey and others insist that a credit default would simply make the Treasury Department find other ways to avoid missing interest payments, but, economists and financial leaders warn, the consequences of that would be enormous. Binder writes: “If we hit the borrowing wall traveling at full speed, the US government’s total outlays—a complex amalgam that includes everything from Social Security benefits to soldiers’ pay to interest on the national debt—will have to drop by about 40 percent immediately. That translates to roughly $1.5 trillion at annual rates, or about 10 percent of GDP. That’s an enormous fiscal contraction for any economy to withstand, never mind one in a sluggish recovery with 9 percent unemployment.” Druckenmiller and some Republicans believe that forcing a credit default would end up benefiting the country, as the Obama administration would give in to Republican demands for enormous spending cuts in return for Republicans’ agreement to raise the debt ceiling. Business Insider reporter Joe Weisenthal recently wrote: “Of course, a default by the world’s most stable nation would probably have impacts in ways nobody can imagine, but one thing seems to be clear. The notion—as some people suggest—that a default would somehow increase US credit-worthiness is absurd.” [Business Insider, 4/20/2011; New York Times, 4/26/2011; TPMDC, 5/20/2011]

Entity Tags: Government Accountability Office, Eric Cantor, US Department of the Treasury, Alan Binder, Treasury Borrowing Advisory Committee, Stanley Druckenmiller, US Congress, Brian Beutler, JP Morgan Chase, Jamie Dimon, Paul Ryan, Pat Toomey, Joe Weisenthal, Obama administration

Timeline Tags: Global Economic Crises

Representative Michele Bachmann (R-MN) tells a CBS News viewing audience that the Obama administration is lying when it says the US government would default on its loans if Congress refuses to raise the US debt ceiling. Bachmann accuses the Obama administration of using “scare tactics” to push for a debt-ceiling increase. Bachmann has said previously that Congress should not raise the debt ceiling (see April 30, 2011). Treasury Secretary Timothy Geithner and other Obama adminstration members, along with a bevy of economists and financial leaders including Federal Reserve Chairman Ben Bernanke and former Chairman Alan Greenspan, have urged Congress to raise the debt ceiling by August 2 to avoid the US defaulting on its outstanding loans and engendering what many call an economic catastrophe (see May 20, 2011). The US Treasury has used accounting steps, what it calls “extraordinary measures,” to avoid default since the nation reached its debt limit on May 16. The final deadline for the US to raise its debt limit is August 2. Bernanke and others have said that even a brief US default could cause an uproar in the global economy. But Bachmann says she has “no intention” of voting for a hike to the limit, saying instead: “It isn’t true that the government would default on its debt. Because, very simply, the Treasury secretary can pay the interest on the debt first, and then, from there, we have to just prioritize our spending.” Face the Nation host Bob Schieffer asks Bachman: “Experts inside and outside the government say that, if we don’t raise the debt ceiling, we face the United States having to default on its financial obligations. Are you saying these are scare tactics? Or are you saying that’s not true? How can you say that?” Bachmann replies: “It is scare tactics. Because, Bob, the interest on the debt isn’t any more than 10 percent of what we’re taking in. In fact, it’s less than that. And so the Treasury secretary can very simply pay the interest on the debt first, then we’re not in default.… What it means is we have to seriously prioritize. It would be very tough love. But, I have been here long enough in Washington, DC, that I’ve seen smoke and mirrors time and time again.” Bachmann says if elected president, she would end the nation’s deficit problem by making extreme cuts in spending. “I would begin very seriously by cutting spending,” she says. “President Obama, again, he spent a trillion dollar stimulus program that’s been an abject failure. We need to seriously cut back on spending first and foremost, and then prioritize.” Her only recommendation to handle the job crisis is to cut corporate tax rates; she explains: “We have one of the highest corporate tax rates in the world; we need to drop that significantly, so that we have a pro-business, pro-job creation environment. So if we cut back the corporate tax rate, if we would zero out the capital gains rates, allow for 100 percent expensing when a job creator buys equipment for their business, that would go a long way toward job creators recognizing that this is a pro-business environment.” She says that the administration’s health care package, which she calls “Obamacare,” will cost “800,000 jobs.” Schieffer says, “That is data that other people would question,” and she retorts by saying the Congressional Budget Office (CBO), not she herself, has made that claim. A recent analysis by the St. Petersburg Times’s PolitiFact showed that Bachmann’s claim of “Obamacare” costing 800,000 jobs is an “exaggeration” of the CBO’s figures, and is “misleading.” Bachmann dodges questions about the elimination of the minimum wage, which she has advocated since 2005, and the elimination of farm subsidies, from which she and her family have benefited. [CBS News, 6/26/2011]

Entity Tags: CBS News, Alan Greenspan, Barack Obama, Bob Schieffer, US Department of the Treasury, PolitiFact (.org ), Congressional Budget Office, Ben Bernanke, Obama administration, Michele Bachmann, Timothy Geithner

Timeline Tags: Global Economic Crises

Three members of the US House of Representatives’ “tea party” caucus introduce a measure to force the federal government to pay the principal and interest on the debt, and to continue to pay military personnel, even if the government goes into default because Congress refuses to raise the debt ceiling. The Obama administration and a bevy of economists and financial leaders have warned that if Congress refuses to raise the debt ceiling by August 2, the US will go into default on its debt, sending the nation’s economy into a tailspin and perhaps triggering a worldwide economic downturn (see May 20, 2011). Representatives Michele Bachmann (R-MN), Steve King (R-IA), and Louis Gohmert (R-TX) introduce House Resolution 2496, the PROMISES Act (Payment Reliability for Our Obligations to Military and Investors to Secure Essential Stability Act). All three accuse the Obama administration of lying about the potentially disastrous effects of a national default (see April 30, 2011 and June 26, 2011). President Obama recently said he could not promise that Social Security and disability checks would go out to senior citizens and veterans on August 3 if the nation defaulted on its debt on August 2 (see July 11-12, 2011); Bachmann and the others accuse Obama of lying and “fear mongering.” Bachmann says, “Don’t allow military men and women to dangle over a fire and claim they won’t get paid.” All three say that even if the government defaults on its loans, there is enough money to pay the Defense Department, Medicare, Medicaid, and Social Security benefits. Gohmert says that Obama should have told the nation, “The only thing that you have to fear is fear itself,” and says House Speaker John Boehner (R-OH) should “not… trust the president anymore.” King says of Obama, “I can’t imagine what his argument would be against paying our military and keeping our credit rating up.” Obama has offered Congress a package containing $4 trillion in spending cuts and small tax increases on the wealthy, a package that has been rejected by Congressional Republicans. Instead, Bachmann says, “President Obama is holding the full faith and credit of the United States hostage so he can continue his spending sprees.” Bachmann refuses to say who would not get paid if the nation went into default, saying instead, “We want to take the politics out of this issue.” [Minnesota Independent, 7/13/2011]

Entity Tags: Obama administration, US House of Representatives Tea Party Caucus, John Boehner, Michele Bachmann, Payment Reliability for Our Obligations to Military and Investors to Secure Essential Stability Act, US House of Representatives, Louis Gohmert, Steve King

Timeline Tags: Global Economic Crises

The outside of the Standard & Poor’s office complex on Wall Street.The outside of the Standard & Poor’s office complex on Wall Street. [Source: Satellite Radio Playground (.com)]The US loses its top-rank AAA credit rating from the financial services company Standard & Poor’s; the firm drops the US credit rating one notch to AA-plus. The US has never had anything but top-tier credit ratings in its financial history, and has top credit ratings from S&P since 1941. S&P makes its decision based on the huge Congressional battle over raising the US’s debt ceiling, normally a routine procedural matter that was used by Congressional Republicans, who threatened to block the ceiling raise unless they were given dramatic spending cuts by the entire Congress and the White House. (House Speaker John Boehner (R-OH) boasted that he and his Republican colleagues got “98 percent” of what they wanted in the debt ceiling deal—see August 1, 2011.) Because of the dispute, the US was hours away from an unprecedented credit default until legislation was finally signed and the default avoided. S&P also cites the government’s budget deficit and rising debt burden as reasons for the rating reduction, saying in a statement, “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” The drop in the US credit rating will result in a rise in US borrowing costs for American consumers, companies, and the government. US treasury bonds, once seen as the safest securities in the world, are now rated lower than bonds issued by countries such as Britain, France, Germany, and Canada. S&P says the outlook on the US’s credit rating is “negative,” implying another downgrade is possible in the next 12 to 18 months. A senior investment officer with a West Coast management company says such a downgrade was “once unthinkable,” and says the entire global economic system will be affected. After the fierce Congressional battle, President Obama signed legislation mandating $2.1 trillion in spending cuts over the next decade, but S&P officials had asked for $4 trillion in savings as a “down payment” for restoring the US’s financial stability. Part of S&P’s rationale for the downgrade is its assumption that Congressional Republicans will not allow tax cuts implemented by the Bush administration in 2001 and 2003 to expire as scheduled by the end of 2012. The Obama administration immediately notes that S&P’s made a $2 trillion error in calculating the US debt, an error that the firm acknowledges but says does not affect its decision to downgrade the US credit rating. A Treasury Department spokeswoman says, “A judgment flawed by a $2 trillion error speaks for itself.” [New York Times, 8/5/2011; Reuters, 8/6/2011] Credit rating agencies such as S&P have suffered tremendous damage to their credibility in recent years; a Congressional panel called the firms “essential cogs in the wheel of financial destruction” after what the New York Times calls “their wildly optimistic models [that] led them to give top-flight reviews to complex mortgage securities that later collapsed.” [New York Times, 8/5/2011]
S&P Explains Decision: 'Political Brinksmanship' - S&P explains its decision in a press release. The firm is “pessimistic about the capacity of Congress and the [Obama a]dministration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.” Fiscal policy decisions between Congress and the White House, the firm says, “will remain a contentious and fitful process.” The firm accuses Congressional Republicans in particular of “political brinksmanship” in threatening to allow a debt default if their conditions were not met, and says such tactics destabilize both the US and the global economy. “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy,” the firm says. “[T]he majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the” legislation. “The outlook on the long-term rating is negative.” [Standard and Poor's, 8/5/2011] In an email before the debt ceiling was raised, S&P’s global head of sovereign ratings wrote: “What’s changed is the political gridlock. Even now, it’s an open question as to whether or when Congress and the administration can agree on fiscal measures that will stabilize the upward trajectory of the US government debt burden.” [New York Times, 8/5/2011]
GOP Presidential Candidates, Congressional Members Blame Obama - The day after the downgrade, Republicans in Congress and on the campaign trail blame the Obama administration for the downgrade (see August 6-9, 2011).
Economist Lambasts S&P, Blames Congressional Republicans - Nobel Prize-winning economist Paul Krugman lambasts S&P and blames Congressional Republicans for the downgrade (see August 5-6, 2011).

Entity Tags: US Congress, US House of Representatives, Timothy Geithner, Paul Krugman, Obama administration, Barack Obama, John Boehner, New York Times, Standard & Poor’s, US Department of the Treasury

Timeline Tags: Global Economic Crises

In a Republican presidential primary debate in Iowa, candidate Michele Bachmann (R-MN) claims that the recent decision by financial services firm Standard & Poor’s to downgrade the US credit rating (see August 5, 2011) proved that she and her fellow “tea party” Republicans in the House of Representatives were right to resist an increase in the debt ceiling. S&P itself (see August 11, 2011), along with an array of economists and private-sector financial leaders (see May 20, 2011, August 5-6, 2011, and August 12, 2011), says that the battle by Bachmann and her fellow House Republicans to refuse a debt-ceiling increase, even if it meant the US would default on its debt, is what led to the downgrade. But Bachmann sees the issue very differently. She reiterates her position in a post-debate interview on Fox News, saying, “Standard & Poor’s essentially proved me right.” The firm’s decision to downgrade the US credit rating came about, she says, because “we don’t have an ability to repay our debt.… We just heard from Standard & Poor’s, when they dropped our credit rating and what they said is we don’t have an ability to repay our debt. That’s what the final word was from them. I was proved right in my position. We should not have raised the debt ceiling.” Pat Garofalo of the progressive news Web site Think Progress writes that “it’s blatantly clear that Bachmann has no idea what S&P said, because just about every word out of her mouth regarding the agency’s decision was incorrect.” Garofalo notes that “S&P never said ‘we don’t have an ability to pay our debt.’ After all, the agency still rates the US as AA+, meaning it has a ‘very strong capacity to meet financial commitments.’ One S&P analyst characterized the difference between AA+ and AAA as just ‘degrees of excellence.’” Moreover, Garofalo notes, S&P downgraded the nation’s credit rating because, as it said in its own press releases and subsequent statements, “the use of the debt ceiling as a political football and GOP intransigence on taxes.” Bachmann has long derided the idea that not raising the debt ceiling would be detrimental to the US economy (see June 26, 2011, and July 13, 2011). [Think Progress, 8/12/2011]

Entity Tags: Michele Bachmann, Fox News, Pat Garofalo, US House of Representatives Tea Party Caucus, US House of Representatives, Standard & Poor’s

Timeline Tags: Global Economic Crises

Ethan Harris of Bank of America.Ethan Harris of Bank of America. [Source: National Association for Business Economics]Many prominent economists and financial leaders lay the blame for the US credit rating downgrade (see August 5, 2011) at the feet of Congressional Republicans. Republicans have been unified in blaming the Obama administration’s economic policies for the downgrade (see August 6-9, 2011), though House Speaker John Boehner boasted that he and his fellow Republicans received “98 percent” of what they wanted in the debt-ceiling legislation that led to the downgrade (see August 1, 2011). Nobel Prize-winning Paul Krugman, a self-described liberal, blamed Congressional Republicans for the downgrade hours after credit rating agency Standard & Poor’s announced it (see August 5-6, 2011), and S&P itself implied that Republicans were at fault for the downgrade for being willing to risk sending the nation into default if they were blocked from getting their way in the debt-ceiling legislation (see August 11, 2011). Even before the credit rating downgrade, the New York Times reports, “macroeconomists and private sector forecasters were warning that the direction in which the new House Republican majority had pushed the White House and Congress this year—for immediate spending cuts, no further stimulus measures and no tax increases, ever—was wrong for addressing the nation’s two main ills, a weak economy now and projections of unsustainably high federal debt in coming years” (see May 20, 2011). These economists and forecasters generally agree with the Obama administration’s wishes to immediately stimulate the economy to include greater private-sector spending and create more jobs, with spending cuts more useful as a long-term remedy. Republicans in Congress and on the presidential campaign trail, however, continue to insist that their policies are what will rescue the US economy; House Majority Leader Eric Cantor (R-VA) says that he and his fellow Republicans “were not elected to raise taxes or take more money out of the pockets of hardworking families and business people,” and will never consider tax or revenue increases of any sort. Even Republican economic figures such as Reagan advisor Martin Feldstein and Henry Paulson, the Treasury secretary under President George W. Bush, say that revenue increases should balance any spending cuts, a position Congressional Republicans—particularly “tea party” Republicans such as presidential candidate Michele Bachmann (R-MN)—refuse to countenance. Bank of America senior economics research official Ethan Harris writes: “Given the scale of the debt problem, a credible plan requires both revenue enhancement measures and entitlement reform. Washington’s recent debt deal did not include either.” Ian C. Shepherdson, the chief US economist for research firm High Frequency Economist, says, “I think the US has every chance of having a good year next year, but the politicians are doing their damnedest to prevent it from happening—the Republicans are—and the Democrats to my eternal bafflement have not stood their ground.” Joel Prakken, chairman of Macroeconomic Advisers, and Laurence H. Meyer, former Federal Reserve governor, both call the Republicans’ calls for spending cuts “job-kill[ers].” Bill Gross, head of the bond-trading firm Pimco, lambasts Republicans and what he calls “co-opted Democrats” for throwing aside widely accepted economic theory for Republican-led insistence that draconian spending cuts, largely in social safety-net programs such as Social Security and Medicare, will “cure” the US’s economic ills. Instead, Gross writes: “An anti-Keynesian, budget-balancing immediacy imparts a constrictive noose around whatever demand remains alive and kicking. Washington hassles over debt ceilings instead of job creation in the mistaken belief that a balanced budget will produce a balanced economy. It will not.” [New York Times, 8/12/2011]

Entity Tags: Ian Shepherdson, US Congress, Eric Cantor, Bill Gross, Standard & Poor’s, Henry Paulson, Paul Krugman, New York Times, Joel Prakken, John Boehner, Laurence H. Meyer, Martin Feldstein, Michele Bachmann, Ethan Harris, Obama administration

Timeline Tags: Global Economic Crises

Ordering 

Time period


Email Updates

Receive weekly email updates summarizing what contributors have added to the History Commons database

 
Donate

Developing and maintaining this site is very labor intensive. If you find it useful, please give us a hand and donate what you can.
Donate Now

Volunteer

If you would like to help us with this effort, please contact us. We need help with programming (Java, JDO, mysql, and xml), design, networking, and publicity. If you want to contribute information to this site, click the register link at the top of the page, and start contributing.
Contact Us

Creative Commons License Except where otherwise noted, the textual content of each timeline is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike