Is This Standard & Poor’s America, or Alexander Hamilton’s America?
I write this on a Monday morning as the world reacts to the astonishingly blasé decision by Standard & Poor’s to downgrade the creditworthiness of the United States of America. The move was reckless and irresponsible. Say what you will about the problems in Washington, the United States is still a nation so committed to paying its bills that the only real worry expressed in Washington about a failure to increase the debt ceiling in August had entirely to do with what would happen to domestic and defense spending. It was a given in all quarters that the government of the United States would see to its debt obligations before anything else. Even those Tea Partiers who thought the ceiling should not be raised were excited at the prospect of a fiscal crisis because of its effect on domestic government spending they didn’t like—which meant they assumed as a matter of course that America was obliged above all to pay its bills first and foremost.
That sense of obligation is built into the national DNA; in the early years of the republic, Alexander Hamilton won a fight against more populist Founding Fathers who thought some of the nation’s creditors, who had bought debt and were trading in it, should not be made fully whole because they were dishonorable. Hamilton’s victory in that fight established the financial character of the United States as an entirely reliable and responsible customer and creditor in the global market, and that character was in evidence throughout the debt-ceiling fight.
Now, to be sure, the debt-ceiling accord reached at the beginning of August was and is problematic, especially when it comes to the national defense. But a deal was struck, and the deal was based on the principle that the federal deficit had to be reduced dollar for dollar as the debt ceiling was increased. This was a necessary first step on the road to fiscal responsibility in relation to the nation’s indebtedness.
Considering all that—the nation’s history of creditworthiness, the intrinsically responsible expectation during the debt-ceiling debate that creditors would be paid no matter what, and the virtue of the debt-ceiling deal itself—S&P’s insistence on declaring the U.S. downgraded was especially peculiar. In doing so, the firm was making a political judgment about the future that was no more or less worthy than anyone’s on Twitter, while claiming it was issuing an unimpeachable macroeconomic judgment.
I make political calls every day—all of us who express our opinions for a living do—but my judgments do not have the power to evaporate trillions of dollars in market value. I can say for a certainty that if they did, I would have been a great deal more careful in rendering mine than S&P was.
But here’s what’s interesting about the S&P decision: the response to it was mostly disbelief, rather than humiliated resignation, and not just from the Obama administration. The overall counterattack was ferocious. The decision by S&P to interpose itself unilaterally in the domestic political process (and the world markets) was noted with a surprising degree of scorn even by those who share the firm’s concern about the unsustainable trajectory of the federal government’s growth and borrowing habits.
George Will is certainly no friend of the administration and has, moreover, been warning about the ticking time bomb of U.S. budgetary policy for decades. But even he called S&P’s published analysis “a kind of half-baked political analysis criticizing the American system of government and how it works.” He continued, “Now, they’re entitled to their opinion on politics, but their opinion isn’t entitled to any particular respect.” He also spoke stingingly about how cavalier S&P had been in rating mortgage-backed instruments only a few years ago: “Standard & Poor’s would have forfeited its good reputation, if it had a good reputation to forfeit these days.”
I’m not sure anyone would have dared say such a thing of Standard & Poor’s before the 2008 meltdown. In the 1860s, Henry Varnum Poor had basically invented the idea that there should be independent information available about the business habits and behaviors of publicly traded companies. The company that grew from his original studies was one of those institutions that seemed utterly beyond reproach. It was an impartial analyst. It crunched numbers and studied data and made judgments without fear or favor. People spoke of S&P the way they might have spoken of the North Star.
Then we discovered, as the crisis of 2007–2008 unfolded, that S&P’s sterling reputation had been used as little more than a marketing ploy, as cover for a pusillanimous business model in which the firm got hired by banks and others to rate their risky debt instruments—and lo and behold, be judged hale and hearty and worth three golden A’s.
Amazingly, S&P began defending itself in the wake of the criticism by claiming the division that rates sovereign debt is different from the division that rates bonds—and thus their work product should be judged differently. However, the sheer incoherence displayed by S&P’s David Beers in defending the downgrade on CNBC and NPR was so blazingly incompetent that I might be inclined to trust the work product of those who helped bring about the market meltdown before I would trust his.
All in all, S&P has done so much to call its bona fides into sufficient question, including the cavalier way it released and defended its decision, that it may have damaged a worthy message: without structural reforms in Washington, the United States government may become, over a considerable period of time, an untrustworthy place to invest. As a result, S&P has itself been downgraded—yet another major institution that has behaved in a way that threatens to delegitimize itself.
It did so with its conduct in the mortgage mess, with its compliant eagerness to satisfy the desires of those paying for its services, and now it has done so with its airy insistence that it cannot assure anyone the United States will be as able to meet its obligations as it has been since its founding.
The story of the last half century in the United States is in part a story of great institutions delegitimizing themselves. Almost every august body that was once generally considered deserving of the highest respect—universities, the medical establishment, Wall Street, the clergy, serious newspapers, and, of course, Washington wise men—has lost its standing and become the object of a degree of distrust and even outright scorn in some quarters. Such disrespect would have been unimaginable in more reticent days before the 1960s came along and introduced egalitarianism and antinomianism into American life. The only remaining institution that seems to earn nearly universal respect is the military, and that has only happened in the wake of 9/11.
The loss of faith in mediating institutions is a serious problem for the United States; at their best, these bodies serve as social pillars and, more important, as bulwarks against the concentration of state power. But such pillars have crumbled in whole or in part because the only thing that held them up was how carefully they husbanded their own good names.
The United States is on a long-term path to insolvency. But the key words here are “long-term.” We have a more responsive and flexible political system than many people assume. The United States has a history of addressing enormous difficulties and changing unworkable policy. We reversed course in the early 1980s when it came to inflation and interest rates and taxation. We reversed course in the 1990s when it came to welfare, and to our approach to the national crime spiral. In all these cases, change seemed unimaginable until it seemed inescapable. The difficulties we face in changing our entitlement system in particular seem insuperable now. But this is still Alexander Hamilton’s nation. We pay our debts. And we will get our house in order.