osewalrus (osewalrus) wrote,
osewalrus
osewalrus

Quick Gut Reaction to S&P Downgrade

I actually think this hurts the S&P and bond raters generally more than it does the U.S. It is one thing for the U.S. to default. It is another for bond raters to project a possible default some time in the future. The first causes panic. The second is ignored out of necessity. There is simply no good alternative for U.S. Treasuries at the moment, nor any way for the U.S. to cut its deficit in the short term.

Markets seem to be recovering a bit from their early panic. Further even a sharp sell of over the next few days (which is as much a function of other economic news) is relatively small beer compared to mass flight from U.S.-backed securities. What needs to be seen is who feels the pressure more, S&P (facing furious bondholders, world governments, and others impacted by the downgrade) or the U.S. government (which is sadly led by easily panicked financial chickens). Were I running the zoo, I would state that S&P is free to do as it likes, but the business of the President and the Congress is the good of the country. We pay our bills, as any country should, but when it comes to financial decisions for the economy that is not the realm of bond raters.

In any event if the financial world does not collapse, it will end up backfiring on S&P and their desired policy choices. No one will take them seriously going forward that the world will end with a downgrade, even though a default is a much more serious business.
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