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A US of Hurt

July 21, 2011

As everybody in Washington tap dances in any number of debt ceiling minefields, Kevin Williams asks an interesting question:

How many U.S. banks and insurance companies do you think will remain rated AAA if the U.S. government gets downgraded?

Hmmm, say more, oh sage of sarcastic economics:

Standard & Poor currently gives AAA ratings to six major insurance companies: New York Life, Northwestern Mutual, etc. Those companies already are on the watch-list for a downgrade, simply because of their extensive holdings of U.S. Treasury securities — regardless of the fact that Treasuries themselves have not yet been downgraded.

Many banks could find themselves downgraded as well, just because of all the U.S. government debt on their balance sheets. One of our old friends from the bailout days, the AAA-rated Temporary Liquidity Guarantee Program, could get downgraded as well, along with Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and, critically, the FDIC…

So, um, we’re not talking about the government bonds being downgraded, we’re talking about anything that has a major connection to government bonds or debt… ouch.

So, obviously, we have to just raise the debt ceiling to get this out of the way, right?  Ah, here’s the most relevant point, and one that I think people constant miss in this very complex crisis:

The United States is not on a downgrade watch because the markets fear we won’t raise the debt ceiling in time to avoid a default; the United States is on a downgrade watch because the markets believe the debt-ceiling debate presents the last real opportunity for the government to enact a meaningful fiscal-reform program before it is well and truly too late to avoid a national crisis.

And that’s what really matters.  The Republicans seem to be holding ground so firmly (at least in the House) because they’re closer to realizing that this is about a long-term emphasis on getting spiraling debt out of control.  It seems to me that most of the House Republicans are even more focused on the debt than on getting re-elected.  Meanwhile, it seems more like the R’s in the Senate as well as the D’s and the Obama administration are more interested in near-term political points.  The primary reason (to me) that the  President wants a long-term deal is that he doesn’t want this as a campaign topic next year when he’s running for re-election.

So what’ s more important?  A job or the shareholder equity?  This is a dilemma that plagues pretty much every corporation, and it appears that the government isn’t all that immune to the discussion as well.  I tend to find that employees worry about the cube first before they worry about the people that own the building.  In the case of American debt, that’s not a positive attitude.

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