Market Plunge and the Blame Game

Wall Street experiences its worst day since the 2008 crisis.

Stocks plunged Monday, suffering their worst losses since December 2008, as Wall Street reacted to the news of the unprecedented U.S. credit downgrade assigned by Standard & Poor's (S&P) late last Friday. The Down Jones Industrial Average ended the day with a 634.76 point decline, the sixth-largest ever. Through various proxies, the Obama administration has been working vigorously to lay the blame on the Tea Party -- calling the debacle the "Tea Party downgrade" -- and even on S&P itself. The rhetoric, however, hardly matches reality.

“I believe this is, without question, the Tea Party downgrade,” said Sen. John F. Kerry (D-MA) on NBC’s “Meet the Press” Sunday. Not so coincidentally, David Axelrod, the president's former chief adviser, used the exact same phrase to describe what happened. The sentiment quickly reverberated through the media. This is despite the fact that David Beers, who heads S&P's government debt-rating department, pointed out that “Congress and the administration are jointly responsible for the conduct of fiscal policy. So, this is not really about either political party,” as he did on Fox News Sunday.

But it's clear that not all sectors of the Congress were equally responsible for the fiscal recklessness that precipitated the downgrade. Prior to the 2010 election, Democrats controlled both Houses of Congress and the White House. How fiscally responsible were they? In 2009, for the first time since 1974 when current budget rules were put in place, Democrats passed no budget at all. “It isn’t possible to debate and pass a realistic, long-term budget until we’ve considered the bipartisan commission’s deficit-reduction plan, which is expected in December,” said then-House Majority Leader Steny Hoyer (D-MD) in June of 2010.

The commission to which Mr. Hoyer referred was the Simpson Bowles Commission, which did release a report offering a path towards long-term debt reduction. One could have a reasonable debate regarding some of the recommendations, which were a combination of tax hikes and entitlement cuts aimed at reducing the debt by $4 trillion. Yet such debate was not to be. The report was completely ignored by Mr. Obama, despite the fact he commissioned it himself.

Speaking of debates, Republicans submitted three spending plans to Congress since April: the Paul Ryan-inspired "Path to Prosperity," the first debt ceiling debate budget known as "Cut, Cap and Balance" and the follow-up to that plan. The Ryan Plan was defeated by a 57-40 vote, and the other two were tabled, all without any debate at all. The Senate also held an April vote on the only substantive proposal -- as in the only one actually written down -- made by Mr. Obama. It was defeated 97-0, by the same Democratically-controlled Senate which still hasn't passed a budget in over two years.

A Tea Party downgrade? An absolute, unadulterated fantasy.

It isn't the only fantasy at work. It is precisely the delusion that the debt ceiling deal contains any immediate or substantive spending cuts that provided S&P with the rationale for its downgrade. And that includes any of the so-called spending cuts that will be enacted -- or triggered -- by the 12-member bipartisan committee tasked with the undertaking. Why? Because the federal government's accounting methods are calculated using baseline budgeting. Baseline budgeting presumes that any spending increases of a lesser nature than anticipated constitute a "cut" in government spending, despite the reality that the actual dollar amount of that spending increases.

Baseline budgeting is so pernicious that the Congressional Budget Office (CBO) would score an increase in spending of $8.5 trillion over the next decade as a $1 trillion cut, because the projected increase over that same period is scheduled to be $9.5 trillion. Furthermore, just as they are doing now with respect to the downgrade, Democrats would accuse Republicans in general and Tea Partiers in particular of budgetary "terrorism" for daring to resist the automatic increases.

This is precisely the point S&P is making with respect to the downgrade. Or is it? For months, the agency has been warning Washington that it faced a downgrade if lawmakers did not come up with $4 trillion in savings -- in projected deficits over the next ten years. The bet here is most Americans thought $4 trillion in savings would mean our now $16.7 trillion of debt would be reduced. And while the Obama administration and others are blaming S&P for making a $2 trillion error in its calculations, which is accurate, the chart here reveals that, error or not, America's debt as a percent of GDP will still increase. Inexorably.

Thus, the reality is that even S&P's reasons for the downgrade understate the seriousness of the problem. Whacking $4 trillion of projected deficits from $9.5 trillion of projected spending leaves $5.5 trillion of additional debt piled on top of that which the country has already accumulated, meaning we break the $20 trillion "ceiling" in less than ten years, even if the committee comes up with twice as much "savings" as anyone anticipates.

Yet that didn't stop S&P from taking heat. The Obama administration accused them of "amateurism." Treasury Secretary Tim Geithner said the agency showed "really terrible judgment" and a "stunning lack of knowledge about basic U.S. fiscal budget math." Not regular math. Fiscal budget math, which includes baseline budgeting.

Should S&P be hammered for lowering our credit rating? It might be more honest to say that the other two major ratings agencies, Moody's and Fitch, should be hammered for not following suit.

Yet if Republicans can't succeed in destroying the dual narratives of "Tea Party downgrade" and "S&P idiocy" -- and current polls suggest the narratives might be bearing fruit -- they are utterly hapless. It necessitates the complete suspension of logic to blame the Tea Party, currently the only political constituency in Washington dedicated to reducing the spending driving this nation into bankruptcy, for a credit downgrade based on that spending. And it takes an almost unfathomable level of denial to blame S&P for doing exactly what it is supposed to do when every calculation it makes, errors or not, leads to the indisputable reality of long-term fiscal impossibility.

To that end, S&P only appears to be becoming more serious with the profligate path the U.S. government is on. Also on Monday, mortgage giants Fannie Mae and Freddie Mac, along with farm lenders; long-term government-backed debt issued by 32 banks and credit unions; and three major clearinghouses used to execute trades of stocks, bonds and options, all had their credit ratings lowered from AAA to AA+ as well.

The president? Mr. Obama said nothing regarding Friday's announcement until mid-afternoon yesterday. Unfortunately, when he spoke, Mr. Obama said nothing new, reiterating the need for more government spending and making the same tired excuse that "partisan gridlock" caused the latest market turmoil and the ensuing credit downgrade. He also took a veiled swipe at S&P, saying America "will always be a AAA nation."

As the president spoke, the Dow dipped below 11,000 for the first time in ten months. During the day, gold soared to record levels. At the end of the day, Tim Geithner, who predicted the nation would never lose its AAA rating, remained Treasury Secretary. All in all, it was yet another demonstration of the president's abdication of anything resembling genuine leadership.

An abdication that can't possibly be blamed on the Tea Party or Standard & Poor's.