Politics & Policy

The Debt Ceiling and the Downgrade

For weeks, Democrats argued that a debt-ceiling deal would keep the ratings agencies happy.

In his remarks at the White House earlier today, President Obama said his administration “knew from the outset” that the nation was at risk of a credit-rating downgrade even in the event that Congress reached an agreement to raise the debt ceiling. If that’s the case, they managed to act fairly shocked when late last week, Standard and Poor’s brought that risk into reality. Since then, Democratic lawmakers and operatives have been engaged in the rhetorical gymnastics of downplaying the significance of the downgrade, while simultaneously condemning the Tea Party for causing such a calamitous event.

In reality, “from the outset” of this debate, the president and his allies rarely even mentioned the prospect of a ratings downgrade. They refused to believe that anything less than a national default could convince financial observers that the United States is not seriously committed to solving its out-of-control debt problem.

Treasury Secretary Tim Geithner, for example, told Fox Business back in April there was “no risk” that the United States would have its credit rating downgraded, because, he argued, congressional leaders would eventually reach a deal to raise the debt ceiling. Naturally, when asked by the New York Times’ John Harwood if the Obama administration’s policies were in any way responsible for the downgrade, Geithner said, “absolutely not.”

When Democrats did broach the topic of a downgrade, they presented it as an example of what would happen if those crazy tea-partiers got their way. “Congress is suggesting we may not vote to raise the debt ceiling,” Obama said at a Twitter town-hall meeting on July 6. “If we do not, then the Treasury will run out of money . . . and potentially the entire world capital markets could decide, you know what, the full faith and credit of the United States doesn’t mean anything. And so our credit could be downgraded.”

About a week later, S&P issued a report warning that the U.S. credit rating could be downgraded not only in the event of a default, but “unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.” That didn’t stop House Democratic leaders from holding a press conference the next day to call for a “clean” increase to the debt ceiling without any deficit-reduction measures attached. “It’s looking like default or a clean extension,” Rep. Peter Welch (D., Vt.) told Politico. “We’re absolutely intent that we’re keeping our AAA credit rating.”

President Obama, who professed to long for a “grand bargain” despite never having put forward an actual plan, did acknowledge S&P’s warning at times. He was willing to do very little about it, however. “If we can’t come up with a serious plan for actual deficit and debt reduction, and all we’re doing is extending the debt ceiling for another six, seven, eight months,” the president said in a July 22 speech, “then the probabilities of downgrading U.S. credit are increased, and that will be an additional cloud over the economy.” As the president repeatedly made clear during the debate, his “only bottom line” for an agreement was that it extend borrowing authority beyond the 2012 election.

And just five days after Obama’s speech, White House press secretary Jay Carney signaled his expectation that raising the debt ceiling would be sufficient to prevent a downgrade:

CARNEY: The rating agencies are obviously — they make their decisions. We’re not — a downgrade is a bad thing; a default is a catastrophic thing. We obviously — the focus we have to have is on the necessity of reaching an agreement that can pass both houses and be signed into law, that will extend our borrowing capacity to pay the bills we’ve already run up.

Q: Just to clarify, a downgrade is a bad thing but it’s not a serious thing – 

CARNEY: No, no, no. They are — a downgrade is obviously very serious. And if we take the — we don’t control what outside rating agencies do. We do control whether or not we default. Congress controls that. Congress can establish that we raise our debt ceiling. We’ve had the highest rating available for a hundred years, and we should maintain that if we just do the responsible thing.

Carney made a similar comment on August 1:

CARNEY: Our primary concern was that we reach an agreement, a compromise, a bipartisan deal that would ensure that we lift the cloud of uncertainty created by this debt crisis. We have done that, and that we would through that process ensure that we would have significant balanced deficit reduction. We’ve done that as well. We certainly hope that that sends the signal that Washington is getting its act together and dealing with these tough issues.

And again on August 3:

CARNEY: We focus on the things we can control, which is why we worked so hard with Congress to reach this compromise to avert a crisis that would have unquestionably resulted in bad news from the ratings agencies. So we believe that the measures we have taken to lift that cloud, to avert that crisis, to ensure that we have borrowing authority through 2012, should send a reassuring message around the world. And we believe that the deficit reduction that is embedded upfront within the compromise reached with Congress should send a positive message that Washington is beginning to get serious about this issue. . . . We have to focus on the things we can control, and assume that, if we do our work and we do it well that the rest, if you will, will take care of yourself.

As recently as July 31, some House Democrats were urging the president to invoke the 14th amendment and raise the debt ceiling unilaterally. Their actions would seem to validate the oft-invoked GOP criticism that Democrats were far more concerned about the debt-ceiling vote than about the actual debt.

President Obama himself, in a speech announcing the final deal, hailed the agreement as one that would allow the country to “avoid default and end the crisis that Washington imposed on the rest of America.” Time to move on to creating jobs through government stimulus, and so on.

Unfortunately for the administration, S&P’s decision is a reminder that last week’s agreement did not “end” the debt crisis in Washington, much as they would like you to believe it did. “Markets may rise and fall, but this is the United States of America,” Obama said Monday. “No matter what some agency says, the U.S. has always been and always will be a AAA country.”

— Andrew Stiles is a 2011 Franklin Fellow.

Andrew StilesAndrew Stiles is a political reporter for National Review Online. He previously worked at the Washington Free Beacon, and was an intern at The Hill newspaper. Stiles is a 2009 ...

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