Why the Downgrade Means Absolutely Nothing

If anything, it just makes us feel bad--about a decade too late.

down graph blog thumbnail1 Why the Downgrade Means Absolutely Nothing

If you thought the debt ceiling deal would forestall a taste of financial Armageddon, well, you obviously were wrong—but don’t beat yourself up. President Obama and lots of other smart people in Washington were of a similar mind.

The folks at Standard & Poor’s spent years giving their approval to all kinds of dubious practices in the financial industry. With the credibility of rating agencies at an all-time low thanks to the debt meltdown, S.&P. decided to get tough with the sovereign government of the United States, downgrading U.S. paper from a AAA rating to a AA-plus. You already know how the stock market reacted to this sudden burst of caution from S.&P.

There’s an argument to be made that the U.S. should have been called to task a long time ago for its unsustainable, highly leveraged spending spree over the past decade. We have fought wars we cannot afford, made promises we cannot keep and unveiled programs we cannot sustain. Through it all, S.&P. and the two other ratings agencies handed out their top ratings with few questions asked.

That, of course, was the pattern for nearly any paper issued by anybody during the subprime mortgage bubble. Ironically, S.&P. was probably the most responsible of the raters, but that’s not saying much.

There surely is a point to be made about Washington’s dangerous levels of debt. And that point has been made through the democratic process and through bipartisan negotiation. Critics of unfettered federal spending were sent to Washington last year and have succeeded in beginning a conversation not about growing government, but about cutting government and allowing market forces to grow faster and become more creative.

The debt crisis changed the conversation in Washington and brought needed attention to the country’s levels of spending and debt. For S.&P. to suddenly downgrade the country’s debt at such a moment was irresponsible.

S.&P. might well feel guilty about handing out sterling ratings to shady enterprises in the past. But now was not the time to express remorse. It has only made things worse.