The political impact of the credit downgrade

The economic impacts of the credit downgrade immediately hit Wall Street with a thud – one that has continued to reverberate even through today. But that thud can be heard equally as loud in the halls of Congress, where a heated battle is raging between Democrats and Republicans on who is to blame for the mess.

Yesterday I chatted with SMU economics professor Dr. Nathan Balke about the economics effect of the credit downgrade, and today I finished up my chat with SMU political science professor Dr. Cal Jillson on the political impacts of the downgrade.

While Jillson recognizes Washington’s faults, he also said Standard & Poor is a “flawed messenger” given their role in the subprime mortgage crisis.

Since the 90s up until the burst, banks and mortgage companies continually lowered their standards for home loans, welcoming the all-to-well-known term subprime loans. Wall Street packaged bad loans with the good into mortgage backed securities. Here is where S&P comes into play.

S&P is a bond or securities rating agency and they rated these mortgage back securities – the ones containing the toxic loans – as AAA, the top rating, and these securities helped set off the financial crisis, Jillson said.

“So now, when S&P shows up to claim that U.S. government bonds should be downgraded many people are skeptical,” Jillson said.

But while S&P’s roles is indisputable, Jillson said the message they delivered about the state of the U.S. is true.

“Washington’s performance in the recent debt crisis debate was abysmal,” said Jillson, who agreed with public opinion polls that level most of the blame on the Tea Party wing of the GOP, but said most of the problem was in the House “for blocking a stronger start on resolving the nation’s deficit and debt problems.”

“Looking back, the agreement that Speaker Boehner and President Obama were working on before the Tea Party caucus jerked Boehner’s chain was far better than the smaller agreement they ultimately were able to achieve,” Jillson said. “It was a lost opportunity and there is only a slim possibility that it can be recovered in the coming congressional debates.”

This “slim possibility” is a sentiment carried forth onto the new so-called “super committee” pulled from both parties to cut $1.2 trillion dollars out of the deficit between now and Nov. 23, which few think will come up with an equally agreeable plan.

But with the economy tanking and gold and silver booming due to a lack of confidence in the stock market and others slamming Obama for mismanagement and predicting another downturn in the economy, its time for something to start working.

Posted by on August 10, 2011. Filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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