06 Aug 2011

So, Whom Do You Believe?

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Reuters delivered the bad news.

The United States lost its top-tier AAA credit rating from Standard & Poor’s on Friday in an unprecedented blow to the world’s largest economy in the wake of a political battle that took the country to the brink of default.

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government’s budget deficit and rising debt burden. The action is likely to eventually raise borrowing costs for the American government, companies and consumers.

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Cornell Law Professor William A. Jacobson says:

Democrats own the downgrade. They fought Republicans and Tea Party supporters every step of they way, and forced a deal which was insufficient. They played class warfare and race politics against arguments that we needed to drastically change our spending habits.

This is Barack Obama and Harry Reid’s crowning achievement.

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Paul Krugman blames Tea Party Republicans.

[Y]es, 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.

Krugman then proceeds to argue that the S&P ratings agency has neither the right nor the authority to make ratings(!).

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SDD

Paul Krugman is to economics as Al Sharpton is to theology.
In the fantasy world in which Krugman lives, credit standing is determined by the editorial board of the NY Times and the Wise Men of Washington after careful consideration of the merits of the borrower’s intentions.
In the real world, credit standing is determined by investors based on their assessment of the risks of getting a return on the their funds.



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