By Paul Smalera
All views expressed are his own.
The Washington debt ceiling debate over these past months was the throwing open of the doors to the democratic slaughterhouse — let‚Äôs please not ever complain again about not being able to watch the sausage get made. Though our media window onto the killing floor surely contributed to the S&P‚Äôs downgrade of U.S. debt, that‚Äôs not an entirely bad thing, as I‚Äôll explain in a moment.
The preemptive downgrade of U.S. debt breaks a disturbing ratings agency pattern: Too-late downgrades from S&P and the other ratings agencies in the cases of Bear Stearns, Lehman Brothers, AIG, Greece and Ireland among many others. In the econoblogosphere, reliably hind-sighted ratings-agency downgrades, whether of sovereign debt or a teetering company‚Äôs bonds, have come to be something of a dark joke. It‚Äôs overdue that S&P got itself back into predictive rather than reactive mode. Yet the company‚Äôs sovereign debt committee surely chose the wrong target in U.S. Treasuries and broke the late-downgrade pattern for all the wrong reasons.
The ratings agency‚Äôs decision reads like nothing other than a fit of pique towards the government institutions and American people that had come to blame it as a prime enabler of the global financial crisis. The agencies, as my colleague Christopher Whalen just wrote, ‚Äúprostituted themselves and their special position of trust with respect to mortgage-backed securities and exotic derivatives.‚ÄĚ To get a little more anatomical, executives at the ratings agencies churned out AAA ratings on CDOs and other risky debt — debt that their analysis should have shown to be junk-bond quality at best — because they risked losing business if they were too critical. (Call it the, ‚Äúevery John is the best lover ever‚ÄĚ theory of credit rating.)
The S&P‚Äôs biggest blunder here is that the U.S., thanks to the debt deal everyone hates, will continue never missing a debt payment. A close second is that even if the U.S. had run out of borrowing power, Timothy Geithner and the Treasury Department surely had a ‚ÄúPlan B‚ÄĚ that would‚Äôve prioritized debt payments to avoid a default, probably for at least a few more months before its cash-on-hand situation became truly dire.
But the real reason the S&P was wrong to downgrade the U.S. is because what we all just witnessed in D.C. was, as the famous quote goes, the sausage being made. It was an open, democratic process. The Tea Party Republicans who blocked more moderate debt ceiling legislation are duly-elected representatives who were fighting hard for their constituents and beliefs, however radical. It may frustrate moderate or liberal voters to no end that Tea Party governance appears to be little more than obstruction, but that‚Äôs been the prerogative of minorities in divided governments for centuries. In the end, as analysts conceded, they were brutally effective in swaying the Obama administration and Senate Democrats much closer to their preferred, fiscally constrictive debt ceiling deal. Since when are political compromises supposed to be pretty?
While Americans, and indeed the world, would‚Äôve surely preferred a smoother debt deal, our divided viewpoints on the country‚Äôs proper economic direction forward produced the only deal that all sides could begrudgingly sign onto. And that‚Äôs how democracy is supposed to work. What S&P downgraded then, as it admitted when it tossed out its own $2 trillion error and went full speed ahead, was the democratic political process and the representative form of government as it currently exists in the U.S. (Aside: Has the S&P boxed itself into reaffirming its rating based on the results of every national election from here on out?)
When investment banks and insurance companies presented unified fronts and financial pressure on ratings agencies in demanding AAA, the agencies willfully acquiesced. But when the U.S. government, in unprecedented fashion thanks to the 24×7 media climate, opened its doors on the strife, division and battling that goes into shaping the single largest component of the GDP, well, the ratings agencies would respectfully request that democracy get its PowerPoint slides in better shape next time.
While the debt ceiling debate was painful to watch, it was the delivering on of a promise that President Obama made as a candidate with regards to the health care debate. He promised to hold negotiations over that legislation in the clear light of day, and never did. In the debt ceiling debate, the political players had little choice but to throw open the slaughterhouse doors. If we didn‚Äôt like what we saw, it‚Äôs now up to us as voters to change things for next time. But sunlight has lit up the political process as never before. It‚Äôs no one‚Äôs fault but its own that the S&P seems to prefer the boardroom or the backroom to the family room when it comes to keeping the nasty bits of governance out of sight.
I‚Äôm reminded of Joel Salatin, a farmer chronicled by Michael Pollan in ‚ÄúThe Omnivore‚Äôs Dilemma.‚ÄĚ Salatin ¬†has a slaughterhouse on his radical, which is to say, highly traditional, farm. It‚Äôs an open-air shed — no walls, lots of sun, nowhere to hide what happens there. His customers can even come by and watch the proceedings. Government food regulators were extremely squeamish when it came to his methods — why not use a traditional slaughterhouse with a cow-sized hole at one end and an idling tractor-trailer at the other? Why grow meat outside the industrial system at all? In his own book, ‚ÄúEverything I Want To Do Is Illegal,‚ÄĚ Salatin writes, ‚ÄúThe stronger a culture, the less it fears the radical fringe. The more paranoid and precarious a culture, the less tolerance it offers.”
Not only have we seen the radical fringe of fiscal politics, we‚Äôve seen, in the S&P downgrade, the fear of the radical fringe of open, sincere dialogue around issues like the national debt. But thanks to debt ceiling debate, everyday Americans know more about the precariousness of our fiscal situation and the power of voting for their elected officials than ever before, and not a moment too soon. For that alone, the U.S. deserves a big upgrade.