The Downgrade A Year Later

Remember the famous Standard and Poor’s downgrade of the U.S. federal government’s credit rating? You know, the incident a year ago that, depending on your point of view represented (a) a warning to gridlocked politicians in both parties to get their act together on long-range budget decisions, (b) a protest against a profligate government heading in the direction of debt-strapped Greece, or (c) a highly irresponsible act of partisanship by a rating agency with a really bad recent record.

Well, what’ s interesting a year later is how very un-prescient S&P turned out to be, as is noted by AP economics writer Paul Wiseman:

The downgrade of long-term U.S. Treasurys threatened to sow chaos in financial markets, driving up U.S. interest rates, pushing the dollar down, scaring investors away from stocks and into that traditional refuge for the fearful: gold. The Dow Jones industrials dropped 635 points in panicked selling the first day of trading after the S&P announcement.

A year later, S&P’s historic move looks like a non-event. Long-term interest rates are sharply lower, the Dow industrials reversed course and is now up more than 1,600 points. The dollar has rallied, and gold prices are down from where they were when S&P lowered the boom.

It is difficult to imagine a more decisive repudiation of S&P’s warning that the U.S. government might not be able to pay its bills.

Wiseman goes on to observe that many of the concerns that led S&P to take its perilous action may have been legitimate and haven’t gone away. But the fact remains the world markets believe in the U.S.–yes, even under the socialist Barack Obama–as the safest investment bet available. And more broadly, it’s worth remembering that much as politicized financial poohbahs would like to intimidate policymakers into doing their bidding via threats of credit downgrades and stock market panics, they like making money even more, and often have trouble sustaining their cries of wolf.

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Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.