comments_image Comments

Heckuva Job, Tea Party. GOP Put Us at Risk; What Happens Now?

 
 
Share
 
 
 

OK, so GOP recklessness has caused Standard & Poor's to downgrade our debt. Unhinged Republicans have called the stability of our political system into question, and played an incredibly dangerous game that put our willingness to pay our bills in doubt.

What happens now? Potentially, nothing of any real consequence.

[M]any analysts say the impact could be modest, in part because the other ratings agencies, Moody's and Fitch, have decided not to downgrade the government at this time.

The announcement came after markets closed for the weekend, but there was no evidence of any immediate disruption. A spokesman for the Federal Reserve said the decision would not affect the ability of banks to borrow money by pledging government debt as collateral, a statement that could set the tone for the reaction of the broader market. [...]

S.& P. is acting in the face of evidence that investors consider Treasuries among the safest investments in the world.... Experts say the fallout could be modest.

Or, as Dylan Matthews explained, the consequences could prove to be significant.

Bonds that are indirectly dependent on the federal government, such as those issued by hospitals that receive Medicare payments, or defense firms reliant on Pentagon contracts, could get downgraded as well. In addition, many everyday interest rates - such as those for mortgages, car loans, and credit cards - are pegged to US Treasuries, meaning that if a downgrade forces up interest rates on US debt (which is likely, but will depend on how the markets react) interest rates for those will shoot up as well. This would raise the cost of borrowing across the system, depressing the economy.

It would also lead to widespread uncertainty. As Ezra wrote the debt ceiling standoff threatened to force a downgrade, "The cornerstone of the global financial economy is the idea that Treasuries are risk-free." A downgrade would mean Treasuries are no longer risk-free, and thus shake up the whole system. [...]

Additionally, many institutional investors -- such as pension or money market funds -- are required to hold a certain amount of AAA debt, meaning that some might be forced to sell off U.S. debt in the event of a downgrade. Given that money market funds hold about $338 billion in U.S. debt, or almost half of short-term holdings, this would be an enormous selloff, which would raise interest rates still higher and greatly amplify the economic damage incurred due to a downgrade.

 

We can't say with any certainty, in part because it's never happened before. Since the dawn of the modern American financial system, we've never had a major party that's been quite this insane, causing quite this much anxiety about our national finances and political stability.

In April, House Speaker John Boehner (R-Ohio) reached out to financial industry leaders, asking how much time he'd have to screw around with the debt ceiling before doing serious, lasting damage to the United States. He was told that the exercise itself "could have grave consequences."

Congressional Republicans put us at risk, and now the punishment for all of us may be severe.

Thanks again, Tea Partiers. Heckuva job.

 

Washington Monthly / By Steve Benen | Sourced from

Posted at August 6, 2011, 6:49am

 
See more stories tagged with: