Tuesday, July 26, 2011
Both Reid and Boehner's Debt Ceiling Plans Would Still Likely Result In a Credit Downgrade for the United States
The fight between Harry Reid and John Boehner's dueling debt plans is high melodrama.
But the fact is that both plans would likely result in a credit downgrade for the U.S.
Huffington Post notes:
CNN's Erin Burnett relayed word from her sources on Wall Street that the newest Republican plan would not satisfy the credit rating agencies, which have soured on the idea of a short-term solution to the debt ceiling debate....
"I think it is important to emphasize that most people think both of the plans are really Band-Aids and don't deal in any significant way with the spending and cost issues in the country," Burnett said. "The issue was that Speaker Boehner's plan does not cut enough spending right away. Harry Reid's plan would cut about $2.7 trillion. Just because it is bigger than Speaker Boehner's plan is really the reason the Boehner plan may still trigger a downgrade."
Burnett was far from equivocal. At one point she added that, per a conversation with an investor, "in the short material, either deal will probably be enough." But then she went back to waxing skeptically at the Boehner approach.
"Really interesting this afternoon, when I was talking to an investor who had met with the ratings agencies at Standard & Poor, talking about the potential of a downgrade -- which by the way could raise interest rates the same way a potential default could -- and they said the Boehner plan probably wouldn't hit the hurdle to prevent a downgrade," she added. "Even if that deal was reached, you could still get a downgrade. It is unclear whether that would happen for sure, but that would be a real possibility. Whereas the Reid plan, even though a lot of the parts of that are seen by many as gimmicks, probably would pass that hurdle and you wouldn't get that immediate downgrade. That's an interesting distinction."
In actuality, the distinction is rather bland. The crux of the difference between the Reid and Boehner approaches is that one would last through the 2012 election by counting the so-called peace-dividend while the other one would require another vote as well as a (likely-to-fail) vote on the balanced budget amendment. Beyond that, they are fairly similar -- each using the cuts agreed to during talks organized by Vice President Joseph Biden, each setting up a powerful congressional committee to find additional deficit-reduction measures.
Paul Craig Roberts - a true conservative, who was a Wall Street Journal editor and Assistant Secretary of the Treasury under Reagan - slams the Republican intransigence on the debt.
But the Democratic plan is no better.
As Fox News reports:
Senate Democrats' inclusion in their proposed debt package of $1 trillion in savings from the wars in Iraq and Afghanistan may not satisfy ratings agencies threatening a credit downgrade since the wars were expected to end with or without a debt deal.As Anti War points out:
A new memo from Goldman Sachs also suggests Congress could end up imperiling the U.S. credit rating by counting war savings.
The memo, provided to Fox News by a GOP aide, said that if the Senate plan and its supposed war savings passes without a follow-up process, "a ratings downgrade could ensue."
Nearly half of the deficit reduction in Reid's plan would come from phantom war savings, according to the Goldman memo.
"The (withdrawal of troops from Iraq and Afghanistan) would show up in official budget estimates as savings of about $1.2 trillion versus current law," the memo reads. "If this proposal were to prevail without a credible follow-on process, a ratings downgrade could ensue, since against most outside baseline budget estimates only the first portion of spending cuts, and not the war spending savings, would show up as deficit reduction."
The first portion was estimated to be worth just $1.5 trillion.
"That would leave the fiscal consolidation far short of the ~$4 trillion S&P has said it is looking for, with no catalyst for additional deficit reduction before 2013," Goldman warned.
Senate Democrats have issued a new “savings” plan that would nominally pare the projected deficit by over $1 trillion simply by assuming that the costs of the wars in Iraq and Afghanistan will eventually go away by virtue of those wars ending.
This has spawned a myriad of criticism, including a leaked Goldman Sachs memo warning that the nation faces a credit downgrade if it tries to use this sort of on-paper gimmick instead of actual cuts in spending.
And indeed, while politicians may be comfortable with the notion that the wars will end at some point in the next decade, it isn’t clear at all that this will be the case. Officials are already talking up continuing in Afghanistan long beyond 2014, while the war in Iraq seems set to be extended for “years to come.”
The memo noted that this war savings was only a problem “without a credible follow-on process,” which is to say an actual effort to end those wars. Given strong Democratic opposition to other efforts to end wars (including the ongoing war in Libya), it seems hard to believe officials are looking at doing anything credible about the seemingly endless conflicts.
In other words, the Democrats don't actually want to end the wars ... but want to get credit for reducing the debt by pretending that they are going to end them.
As I've noted for years our government leaders won't even talk about slashing the military-industrial complex, which is ruining our economy with unnecessary imperial adventures?