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Official numbers released today show that the US economy fell by 6.2 percent during the fourth quarter of 2008. The decline was much worse than analysts initially predicted, sending US stocks spiraling lower. “Plunging exports and the biggest fall in consumer spending in 28 years dragged the annualized figure down from the preliminary estimate of 3.8 percent,” the BBC reports. As a whole, in 2008, the economy grew at its slowest pace since 2001, posting a mere 1.1 percent growth. The blue-chip Dow Jones industrial average dropped 119.15 points, or 1.66 percent, to 7,062.93. The broader Standard & Poor’s 500 Index fell 2.36 percent to 735.09, a 12-year low. US consumer spending accounts for nearly two-thirds of domestic economic activity, but fell by a rate of 4.3 percent in the final quarter—the biggest fall since the second quarter of 1980. This was a revision of the earlier figure of 3.5 percent. Rising unemployment, sliding home values, increasing numbers of repossessions, and the slumping value of investments indicate that many US consumers are hanging on to disposable cash. US exports fell at the sharpest rate since 1970 at an annual rate of 23.6 percent, down from 19.7 percent. Prior to the current economic crunch, exports supported the economy. “It shows the weak state of the world’s largest economy,” says Matt Esteve, a currency trader at Tempus Consulting. “Latest GDP figures are just awful and illustrates the weak state of the world’s largest economy.” Boris Schlossberg, director of currency research at GFT Forex, adds, “There is doom all over,” but predicts that the dollar would not weaken too much against the euro since “there’s no good news on the other side of the Atlantic, either.” (BBC 2/27/2009)
The latest government bailout gives Citigroup bond holders excellent terms and doesn’t provide the bank with new money. Instead, Citigroup cut expenses with the elimination of preferred stock dividends, and also converted shares into common equity at an above-market-value of $3.25, positioning itself to take the first hit if it encounters additional losses. Analysts are predicting that the company’s losses will continue to increase. Since the beginning of 2009, Citigroup’s stock has fallen 78 percent. “Debt holders could eventually be required to participate in further government-led restructuring actions,” Standard and Poor’s says. (Reilly 3/2/2009) Citigroup CEO Vikram Pandit tells investors that increasing the bank’s “tangible” common equity from $29.7 billion to as much as $81 billion should “take confidence issues off the table,” about the bank’s loss absorption ability. The bank lost $27.7 billion in 2008, and is predicted to lose $1.24 billion during the first six months of 2009. “There’s no difference here,” says Christopher Whalen, co-founder of Institutional Risk Analytics, a Torrance, California risk-advisory firm. “It won’t fix revenue, and you’re still going to see loss rates.” Whalen says that the government’s efforts are mainly protecting other financial institutions and foreign goverments that are Citigroup bonds holders. “The taxpayer is funding the operating loss and protecting the bondholders,” Whalen notes. “The subsidy for the banks will become one of the biggest lines in Washington’s budget.”
Government Should Organize Citigroup, AIG Bondholders - Whalen also says it would be better if the government organized Citigroup and insurer American International Group Inc. bondholders, since the insurer received a $150 billion US bailout, and also made a deal with the government to convert some of its debt to equity. US government investment fell by more than 50 percent, and the government plans to convert up to $25 billion of its preferred stock to common shares, gaining a 36 percent stake in the bank. At Friday’s closing price of $1.50, government investment is worth approximately $11.5 billion. The bank itself has a stock market value of $8.2 billion as of market closing on February 27.
Analyst: Investors Should Avoid Citigroup Shares - Richard Ramsden, head of a group of analysts at Goldman Sachs Group, recommends that investors avoid investing in Citigroup shares: “It is unclear whether this is the last round of capital restructuring, which means that existing equity may be further diluted in the future.” The bank’s move to convert preferred shares to common equity led Moody’s Investors Service to adjust its senior debt rating for the bank from A3 to A2. Standard and Poor’s also changed its outlook on the bank’s debt from negative to stable. “Citi will face a tough credit cycle in the next two years, which will likely result in weak and volatile earnings,” S&P analyst Scott Sprinzen says. “We cannot rule out the possibility that further government support may prove necessary.” With the first two Citigroup rescue bailouts, the US Treasury bought $45 billion of preferred stock, and the Federal Reserve and FDIC guaranteed the bank against all but $29 billion of losses on a $301 billion portfolio of assets. With the third bailout, the Treasury, the Government of Singapore Investment Corporation, Saudi Prince Alwaleed bin Talal, and other preferred stockholders, agreed to take common stock at $3.25 a share, giving up dividends. The chairman of the House Ways and Means Committee, Charles Rangel (D-NY), says: “The administration and the past administration have tried so many different ways that we can only hope and pray that this time they get it right. It seems like with the banks it is a never-ending thing.” (Harper 2/28/2009)
Third US Rescue Forces Citigroup Board Changes - The Obama administration demonstrated its willingness to force changes on executives at top banks that receive taxpayer-funded rescue packages by pressing Citigroup to reorganize its 15-member board with new, more independent members. The move sends a message to Wall Street that there are consequences when taxpayer dollars are used to save them. “The government is the new boss, and the new executive committee is no longer on Park Avenue,” says Michael Holland who, as chairman and founder of New York’s Holland & Co., manages nearly $4 billion in investments. (Katz and Keoun 3/2/2009)
Wells Fargo, the second largest home lender in the US, posts a surprising record first-quarter profit, outperforming the most hopeful estimates on Wall Street. The bank’s earnings are the most since July 16, 2007, with shares down 33 percent in 2009. The report also states that Wachovia Corporation, acquired by Wells Fargo in October 2008, is exceeding expectations. According to data compiled by Bloomberg, Wachovia’s $101.9 billion in losses and writedowns are the most for any US lender, and its adjustable-rate home loans are considered among the industry’s riskiest. Yet, in its preliminary report, Wells Fargo states that acquiring Wachovia “has proven to be everything we thought it would be.” Official first-quarter results will be released the third week in April.
Other Banks Also Gain; Profits Expected - The preliminary earnings report rallies the stock market, and the S&P 500 caps a fifth consecutive weekly gain and adds 3.8 percent to a two-month high of 856.56, the longest stretch since the bear market began in October 2007. The Dow Jones Industrial Average rises 246.27, to 8,083.38. The largest US lender, Bank of America, gains 35 percent today; JPMorgan 19 percent, and Citigroup 13 percent. The 24-company KBW Bank Index surges 20 percent, its biggest one-day gain since May 1992. Oppenheimer & Co. analyst Chris Kotowski says of these firms, “Barring an act of God, they had better report some number that is in the black or potentially risk being involved in some of the most intense securities litigation on record.”
Accounting Rules May Have Helped Profit Statements - Christopher Whalen, a managing director of Risk Analytics, says that the Financial Accounting Standards Board’s relaxation of accounting rules may have helped banks—including Wells Fargo—report a profit. “Most analysts are expecting loss rates to be much, much higher than we have seen in the last 20 to 30 years, even longer,” he says. “Given that, provisions of the large banks are not high enough.”
Wells Fargo 'Underperforming?' - While Wells Fargo Chief Financial Officer Howard Atkins says that increasing the bank’s provision for loan losses to $23 billion is adequate compared with other large US banks, FBR Capital Markets analyst Paul Miller wrote in a report that the bank’s addition of a $4.6 billion provision was below his estimate of $6.25 billion. “We remain cautious based on what we don’t know.” Miller rates Wells Fargo shares “underperform” and said that the preliminary report did not contain the percentage of non-performing loans and trends in Wachovia’s option-adjustable rate mortgate portfolio, a percentage Miller deems important. Atkins says that Wells Fargo benefited from strong trading results at Wachovia’s capital markets business, which the bank continues to shrink. He said that the improvement will not reverse those plans. Approximately 75 percent of Wells Fargo’s mortgage applications are refinance. President Obama said that homeowner interest rates, at less than five percent, are the lowest since 1971, and that it was “money in their pocket” for homeowners. Wells Fargo’s biggest shareholder is Berkshire Hathaway Inc., an acquisitions and investments firm owned by Warren Buffett. (Shen and Mildenberg 4/9/2009)
The World Bank predicts a 2.9 percent contraction in the global economy and adds that unemployment and poverty will continue to rise in developing nations in 2009. The revised previous estimate of a 1.7 percent decline causes a slide in US and European stocks and commodities. Three months ago, the World Bank issued a new estimate of 2 percent in 2010. Although the S&P 500 remains up 33 percent from its 12-year low in March, since June 12, the index has fallen 5.1 percent. Last week, the S&P 500 lost 2.6 percent, as a turndown in crude oil wounded fuel producers and Standard & Poor’s rating agency downgraded 18 banks’ credit ratings. Speaking in Paris today, economics professor Nouriel Roubini—who predicted the current financial crisis as early as 2006—says the global economy could suffer another slump due to higher oil prices and increasing budget deficits. “I see the worry of a double whammy” because of energy costs and fiscal burdens, thus increasing the risk of a setback in the economic recovery. He says that oil might rise to $100 a barrel. The increase in the value of the dollar blunted the appeal of commodities as an alternative investment, and sent copper, gasoline and oil prices lower. Amid the resignations of two more board members, bringing the total of departing directors to seven since April, Bank of America stock falls 6.1 percent to $12.41, the bank’s steepest intraday decline since May 15. It is expected that at the end of their two-day meeting on June 24, Federal Reserve officials might announce that the US is showing signs of surfacing from the worst recession in 50 years, although, after their last meeting in April, they announced that the economy would “remain weak for a time.” It is anticipated that central bankers will keep the benchmark interest rate in the range of zero to 0.25 percent. (Thomasson 6/22/2009)
Group of 8 (G-8) leaders from across the globe release a statement from their meeting in L’Aquila, Italy, saying that economic recovery from the worst recession since World War II is too frail for them to consider repealing efforts to infuse money into the economy. US President Barack Obama, British Prime Minister Gordon Brown, European Commission President Jose Barroso, German Chancellor Angela Merkel, Canadian Prime Minister Stephen Harper, French President Nicolas Sarkozy, Japanese Prime Minister Taro Aso, Italian Prime Minister Silvio Berlusconi, and Russian President Dmitriy Medvedev assembled for the annual gathering where Obama pressed to maintain an open door for additional stimulus actions. A new drop in stocks generated global concern that, to date, the $2 trillion already sunk into economies had not provided the economic bump that would bring consumers and businesses back to life. “The G-8 needed to sound a second wakeup call for the world economy,” Brown told reporters after the gathering’s opening sessions. “There are warning signals about the world economy that we cannot ignore.” A G-8 statement embraces options ranging from a second US stimulus package—advocated by some lawmakers and economists—to an emphasis by Germany on shifting the focus to deficit reduction.
What Next? - Disagreements over what to do next, as well as calls from developing nations to do more to counteract the slump, emphasize that the Group of 8 has little if any room to maneuver, since the largest borrowing binge in 60 years has, so far, failed to stop rising unemployment and has left investors doubting the potency of the recovery. Even as G-8 leaders held their first meeting, the Morgan Stanley Capital International (MSCI) World Index of stocks continued a five-day slide, and the 23-nation index had dropped 8 percent since its three-month rally that ended on June 2. The International Monetary Fund (IMF) upgraded its 2010 growth forecast, saying the rebound would be “sluggish,” and urged governments to stay the course with economic stimuli. The IMF also said that emerging countries such as China would lead the way, with an expansion of 4.7 percent in 2010, up from their April prediction of 4 percent. “It’s a very volatile situation,” said European Commission President Barroso in a Bloomberg Television interview from L’Aquila. “We are not yet out of the crisis, but it seems now that the free fall is over.”
Exit Strategems Discussion - “Exit strategies will vary from country to country depending on domestic economic conditions and public finances,” the leaders conclude, but deputy US National Security Adviser Mike Froman tells reporters, “There is still uncertainty and risk in the system.” Froman says that although exit strategies should be drawn up, it’s not “time to put them into place.” The IMF forecasts that, in 2014, the debt of advanced economies will explode to at least 114 percent of US gross domestic product because of bank bailouts and recession-battling measures. German Chancellor Merkel, campaigning for re-election in September and the leading opponent of additional stimulus, warned against burgeoning budget deficits, which the IMF has predicted will rise to an average of 6 percent of the EU’s 2009 gross domestic product, from 2.3 percent in 2008. At last month’s European Union summit, Merkel pushed through a statement that called for “a reliable and credible exit strategy,” and insisted, “We have to get back on course with a sustainable budget, but with the emphasis on when the crisis is over.” (Summit 7/2/2009; Fouquet and Neuger 7/9/2009)
The ratings agency Standard & Poor’s puts Greece’s credit rating, currently A-, on negative watch with a view to downgrading it. (Reuters 3/3/2010)
In an interview with CBS News’s Scott Pelley, House Speaker John Boehner (R-OH) says that he got “98 percent” of what he wanted in a deal with Senate Democrats and the White House in the just-concluded debt ceiling extension legislation. Boehner says he and his House Republicans successfully blocked a comprehensive “grand bargain” with the Obama administration because, as he says, the “president was insisting on more taxes [and] never got serious about the kind of spending cuts that were necessary in order to get America back on a sound fiscal footing.” He tells Pelley that he “walked away” from Obama’s final proposal. “We had a lot of productive conversations, a lot of tense conversations,” Boehner says. “But it became pretty clear to me that I wasn’t going to be for higher taxes, and the president wasn’t going to cut spending as he should.… I told the president: ‘I’m not going there. I can’t do that.’” Boehner says that he has no intention at this time of ever supporting revenue increases of any sort, whether it be tax increases, closing of corporate tax loopholes, or other ways to bring more revenue into federal government; instead, he hopes that the future focus of Congressional debate “will be on reducing expenditures coming out of Washington.” Asked if Republicans would ever support tax increases, Boehner says: “I think that would be a stretch. It doesn’t seem likely to me that that would be recommended, much less supported, but I’ve been surprised before.” He concludes: “When you look at this final agreement that we came to with the White House, I got 98 percent of what I wanted. I’m pretty happy.” Sixty-six House Republicans voted against Boehner’s final plan, though it passed both chambers and was signed into law by Obama hours before the US would have defaulted on its debt. According to the Congressional Budget Office, the deal cuts federal deficits by $2.1 trillion over 10 years while also raising the debt limit by an equal amount. The deal also creates a joint, bicameral committee of legislators charged with finding additional cuts. (Pelley 8/1/2011; Strauss 8/1/2011) Days later, Standard & Poor’s cuts the US credit rating (see August 5, 2011). Republicans, including Boehner, will blame Obama for the legislation and the resulting credit reduction (see August 6-9, 2011).
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.” (Appelbaum and Dash 8/5/2011; Brandimarte and Bases 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.” (Appelbaum and Dash 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.” (Appelbaum and Dash 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).
Hours after financial services firm Standard & Poor’s downgrades the US credit rating from AAA to AA+ (see August 5, 2011), Paul Krugman, a liberal economist and Nobel Prize winner, blasts both the firm and Congressional Republicans for the downgrade. “On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation,” he writes. “And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency. On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?” Krugman states that he and other economists believe S&P’s call for a $4 trillion cut in US spending is “nonsense,” writing: “US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs.” He concludes that S&P is “in no position to pass judgment” on the US economic situation. (Krugman 8/5/2011) The next day, the National Journal’s Edmund Andrews agrees with Krugman, writing: “[I]t’s hard to read the S&P analysis as anything other than a blast at Republicans. In denouncing the threat of default as a ‘bargaining chip,’ the agency was saying that the GOP strategy had shaken its confidence. Though S&P didn’t mention it, the agency must have been unnerved by the number of Republicans who insisted that it would be fine to blow through the debt ceiling and provoke a default.” (Andrews 8/6/2011) Krugman’s criticisms are echoed a week later by an array of economists and private-sector financial leaders (see August 12, 2011).
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). (Garofalo 8/12/2011)
Joydeep Mukherji, the senior director for the credit firm Standard & Poor’s, says that one of the key reasons the US lost its AAA credit rating (see August 5, 2011) was because many Congressional figures expressed little worry about the consequences of a US credit default, and some even said that a credit default would not necessarily be a bad thing (see May 20, 2011). Politico notes that this position was “put forth by some Republicans.” Mukherji does not name either political party, but does say that the stability and effectiveness of American political institutions were undermined by the fact that “people in the political arena were even talking about a potential default. That a country even has such voices, albeit a minority, is something notable. This kind of rhetoric is not common amongst AAA sovereigns.” Since the US lost its AAA credit rating, many Republicans have sought to blame the Obama administration (see August 6-9, 2011), even though House Speaker John Boehner (R-OH) said that he and his fellow Republicans “got 98 percent” of what they wanted in the debt ceiling legislation whose passage led to the downgrade (see August 1, 2011). Representative Michele Bachmann (R-MN), running for the Republican presidential nomination in 2012, led many Republican “tea party” members in voting against raising the nation’s debt ceiling, and claimed that even if the US did not raise its debt ceiling, it would not go into default, a statement unsupported by either facts or observations by leading economists (see April 30, 2011, June 26, 2011, July 13, 2011, and July 14, 2011). “I want to state unequivocally for the world, as well as for the markets, as well as for the American people: I have no doubt that we will not lose the full faith and credit of the United States,” she said. Now, however, one of Bachmann’s colleagues, Representative Tom McClintock (R-CA), says that the media, and S&P, misinterpreted the Republican position. “No one said that would be acceptable,” McClintock says of a possible default. “What we said was in the event of a deadlock it was imperative that bondholders retain their confidence that loans made to the United States be repaid on schedule.” Treasury Secretary Timothy Geithner says of S&P’s response to the default crisis: “They, like many people, looked at this terrible debate we’ve had over the past few months, should the US default or not, really a remarkable thing for a country like the United States. And that was very damaging.” (Boak 8/11/2011) TPMDC reporter Brian Beutler recalls: “For weeks, high-profile conservative lawmakers practically welcomed the notion of exhausting the country’s borrowing authority, or even technically defaulting. Others brazenly dismissed the risks of doing so. And for a period of days, in an earlier stage of the debate, Republican leaders said technical default would be an acceptable consequence, if it meant the GOP walked away with massive entitlement cuts in the end.” He accuses McClintock of trying to “sweep the mess they’ve made down the memory hole” by lying about what he and fellow Republicans said in the days and weeks before the debt ceiling legislation was passed. Beutler notes statements made by House Budget Committee chairman Paul Ryan (R-WI) and House Majority Leader Eric Cantor (R-VA), where they either made light of the consequences of a possible credit default or said that a default was worthwhile if it, as Cantor said, triggered “real reform.” Representative Louis Gohmert (R-TX), one of the “tea party” members, accused the Obama administration of lying about the consequences of default; Beutler writes, “This was a fairly common view among conservative Republicans, particularly in the House” (see July 14, 2011). (Beutler 8/11/2011)
New Republic senior editor John Judis writes of his disappointment that the financial services firm Standard & Poor’s did not explicitly cite the actions of House Republicans as the reason why it issued its downgrade to the US credit rating (see August 5, 2011). One of the reasons why S&P issued its credit downgrade, it said, was because of the “political brinksmanship” waged by members of Congress, resulting in policymaking that has become “less stable, less effective, and less predictable.” Judis notes that while it is virtually indisputable that the firm was referring to the actions of House Republicans who worked furiously to block debt-ceiling legislation (see July 13, 2011 and August 11, 2011), “the statement was sufficiently vague that Republicans could take it as laying the blame on the Obama administration for not agreeing to their proposals for raising the debt ceiling. And, indeed, Mitt Romney and other Republican presidential candidates have blamed President Barack Obama for S&P’s decision” (see August 6-9, 2011). “[T]hose appearing to discount the danger of a default were right-wing Republicans like Representative Michelle Bachmann and Senator Pat Toomey, who are identified with the Tea Party,” Judis writes. Senior S&P director Joydeep Mukherji “acknowledged that a major factor driving the downgrade was the utter irresponsibility and ignorance of a significant minority of Republican legislators,” but refused to cite those Republican lawmakers as responsible for the downgrade. Judis writes: “Why didn’t S&P say this more clearly in the original statement? I suspect it was out of a desire to appear non-partisan, but the effect was to apportion the blame equally on both parties. That is a disservice to the country because it allows a deranged faction of the Republican Party to continue to run riot in the Congress and to undermine any possible of a constructive response to the economic crisis.” Judis concludes, “I stand second to no one in criticizing the White House for failing to fight the Republicans, but it is worth recalling here that the principal cause of our counterproductive fiscal policy is the Republican opposition.” (Judis 8/12/2011)
Business Insider reporter Zeke Miller says flatly that Representative Michele Bachmann (R-MN), a leading candidate for the 2012 Republican presidential nomination, is the reason why the US suffered a recent credit downgrade (see August 5, 2011). Yesterday, Bachmann insisted that the credit downgrade proved her argument against raising the US debt ceiling was correct (see August 11, 2011), but, Miller writes, the evidence, including statements by Standard & Poor’s, the agency that lowered the nation’s credit rating, shows that she and her fellow Congressional Republicans who fought to prevent Congress from authorizing the raising of the debt ceiling (see April 30, 2011, June 26, 2011, July 13, 2011, July 13, 2011, and July 14, 2011), are themselves responsible. S&P officials have said that Congress’s intransigence on raising revenues in any fashion is one of the central reasons why it lowered the US’s credit rating (see August 11, 2011). Bachmann led “tea party” Republicans in voting against every plan offered to raise the debt ceiling; she told reporters that the only way she would even consider voting for a raise in the debt ceiling was if the same legislation repealed entirely the health care reform act recently passed by Congress. Miller goes on to note that all eight Republican presidential candidates, including Bachmann, have said that they would not sign a bill into law that provided 10 times the amount of government spending cuts as it authorized tax and revenue increases. Miller concludes: “Bachmann’s statements on the debt ceiling come off either as stunningly uninformed about the issue, or deliberately misleading. Either way, this line of attack will only weaken her campaign with mainstream and business voters.” (Miller 8/12/2011)
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.” (Calmes 8/12/2011)
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