Monday, August 8, 2011

Effects of the S&P Downgrade Continue

The S&P downgrade of US credit from AAA to AA+ continues to have major effects as investors sell off stocks, causing “market sectors most sensitive to the economy, such as banking and commodities” to be hit hard, “with the S&P materials index dropping 3.7 percent and the KBW Bank index slumping 4.7 percent.” So far US stocks have not done well as Dow Jones industrial average dropped 271 points, Standard & Poor's 500 dropped 36 points, and the Nasdaq dropped 79 points.
Things look like they are going to get worse as companies such as Freddie Mae and Fannie Mac were just downgraded by S&P. This lost of a triple-A credit rating may very well “lift borrowing costs, potentially making mortgages more expensive for consumers and adding to stress in the already unstable U.S. housing market.” Also, Moody’s stated that “the August 2 plan to cut deficits by $2.1 trillion was positive for the U.S. credit standing, but not enough to keep its rating on a stable outlook.” (emphasis added) However, this needs to be looked at from an objective standpoint. Some are arguing that this means that credit rating agencies want the US to cut spending, however, the overall problem that the credit agencies are worried about is if the US will be able to pay back its debt or not in the future. They are neither pushing for spending cuts nor tax increases; overall, the credit agencies want the US to be able to pay its debt on time.

This is credit downgrade is having a global impact, with one major example being that the Tel Aviv stock exchange “was temporarily halted on Sunday after share prices fell six percent at the open on news of a US credit rating downgrade.” The US needs to get its act together, not just for itself, but also for the world.
However, among all this discussion, the question must be bought up: Is S&P’s downgrade even credible? These are the same people who backed ultra-risky mortgages (see this as well) and they were even off by $2 trillion in their analysis of government finances. Thus, we must approach their downgrade with some skepticism.

Currently, in the US, both parties are blaming one another for causing the downgrade. However, the reality of the situation is that the Tea Partiers made the debt ceiling into an issue and refused to compromise while the Democrats were willing to make a deal. This brings up Republican hypocrisy. They readily wanted to make the debt ceiling a problem when Obama is in office; however, they defended a debt ceiling increase when Bush was in office.

Overall, the situation is not looking good and may very well get worse as time goes on.

No comments: