Why S&P Looks Silly

I'm really pretty stunned by the S&P downgrade.  I know they had threatened it but I didn't really understand why.  Reading through their report, I get three potential reasons for the downgrade.

1.  The reduction in debt wasn't big enough ($2.1 trillion instead of $4.0 trillion).

2.  The process was ugly (right up to the wire, etc., etc.)

3.  The Republicans are intransigent on taxes and the Democrats are intransigent on entitlements.

Let me take these one at a time in an effort to show that there's really nothing new here

Let's start with number 3.  So the Republicans and Democrats both have strong preferences on different parts of the budget.  Hard to argue that but equally hard to argue that this is new news.  Any watcher of the US political system has known this virtually forever. 

In addition, the Republican intransigence is going to run right into a roadblock.  The Bush/Obama tax cuts end on 1/1/2013.  So the only way that government tax revenues don't increase dramatically in 2013 is if Congress votes to extend them.  In other words, Republican intransigence on tax cuts is irrelevant unless Democrats support continuing them as well.  Now personally, I believe there's a chance this might happen but I also think we could reduce the deficit even if it did.  In any event, intransigence on taxes isn't much of an argument, given where we are.

Now let's move on to number 2, concerns over process.  I came across this report today from the Congressional Research service.  It's a relatively short history of debt ceiling bills in the 2000s and pretty much shows that what we went through is nothing new in the scheme of life in terms of raising the debt ceiling at the last minute and sometimes by very small margins. 

Nor is it credible to believe that tying debt reduction to the debt ceiling increase would bother S&P.  Indeed, debt reduction is arguably all they care about.

This brings us back to number 1, that the reduction in debt wasn't big enough.  Again this simply fails the smell test.  When S&P issued its negative warning in April, it asked for a "meaningful" deal, not a $4 trillion deal.  Given US history, $2.1 trillion could easily have been seen as "meaningful" but S&P chose not to look at it that way.

S&P's stated reasons don't seem to be real and it's now out on an island (as Fitch and Moody's have confirmed their AAA equivalents).  Given the current global situation, it's pretty hard to see US interest rates shooting up and staying there on the news. 

Looks like a really bad decision by S&P to me.