Cutting Back on the United States Credit Rating
While most of us were enjoying the last few weeks of our warm summer, the United States’ economy took yet another hard blow. On Aug. 5, 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’. This marks the first time in our nation’s history that our credit rating has been downgraded from ‘AAA’, the highest rating available. This downgrade can be, in part, attributed to the failure of Congress to pass significant debt reduction plans to curb the growth of the federal deficit while still raising the debt ceiling.
In their rationale statement, S&P stated: “Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty” and that “we lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, is less likely than we previously assumed and will remain a contentious and fitful process.”
While all of this seems to obviously be negative for the large financial markets, investors, and multinational corporations, you may wonder how this credit downgrade could affect you.
For one, this downgrade will strike a blow to the already teetering housing market. For example, Fannie Mae’s and Freddie Mac’s losing their triple-A rating could lift borrowing costs, potentially making mortgages more expensive for consumers and adding stress to the already unstable U.S. housing market, possibly triggering a double-dip recession. And this quote from the Reuters article “Debt issuers brace for impact from U.S. downgrade” should hit especially close to home: “As a result of the U.S. debt downgrade, debt issued by AAA-rated universities and colleges with global reputations might raise their prices, said Evan Rourke, a portfolio manager, with Eaton Vance.”
Yet possibly worse than that scenario is the news out of the Federal Reserve. Fed chair Ben Bernanke stated after the downgrade that interest rates would be frozen for two years to avoid the type of instability that would otherwise be experienced. That sounds like a good harmless plan right? Wrong. This latest move by the Fed could lead to unnaturally low interest rates, encouraging Americans to buy new homes and take out new mortgages that they otherwise wouldn’t or couldn’t afford. Sound familiar? The ‘08 housing bubble was caused by banks giving out too many loans to people who could at best barely afford them. Same result, different cause. These mortgage owners will be fooled into believing they can afford their home, yet when the interest rate freeze expires, or the economy tanks, they will be left with a home loan they can’t afford, leading to another foreclosure epidemic.
All of this potential hardship, all of this uncertainty about our economy (especially for those who are just entering it, i.e., college grads) was caused by our government’s lack of common sense and responsibility. They have spent and spent while the world watched, and thought there would never be any consequences for it. Well, the first of those consequences has finally arrived in the form of a debt downgrade. Our government’s addiction to spending has sent our economy over the edge, and truly into “uncharted waters”. This downgrade by S&P was just the first wake up call for the United States. If we are to succeed as a nation in the future, we must cut our deficit and for once live within our means as a people and as a government.
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