(From Economic and Political Weekly India's editorial)
The issuers of mortgage-backed securities (MBS) during the housing boom in the United States in the first few years of the 2000s paid the credit rating agencies – Moody’s, Standard & Poor’s (S&P), and Fitch – for the top ratings that the latter bestowed on those debt instruments. Thank heavens it was not the investors (in those securities) who had to compensate the credit rating agencies for the AAA credit ratings that they gave
the MBS shortly before the market collapsed and the securities defaulted. Now, on 5 August, one of them, S&P, became really audacious – it downgraded US Treasury securities, ignoring the
fact that, unlike in the case of the 17 countries in the European Monetary Union, the US Federal Reserve can sustain the government’s fiscal deficits and refinance the public debt by purchasing the Treasury’s securities. What may have provoked S&P into the act?
Can the turmoil on the financial markets since the downgrade be attributed to what S&P did? What may be the repercussions of “the deal” between the Barack Obama administration and the Republicans in Congress that permitted an enhancement of the ceiling on the US public debt based, of course, on the quid pro quo
of fiscal deficit reduction, a bargain that US finance capital was presumably not content with?
But, first, what about the settlement between President Obama and the Republicans? From the perspective of S&P’s credit rating, the question was one of sustainability of the public debt. Presumably, even after the agreement to reduce the projected fiscal deficit by $2.1 trillion over the next 10 years,
the projected public debt to gross domestic product (GDP) was rapidly rising from 2015 to 2021. S&P and US finance capital wanted double the cut in the fiscal deficit over the same period. But let us come to the expenditure reduction of $917 billion over the next 10 years that will permit a $1 trillion increase in the
debt ceiling. The many expenditure reductions that this will require have more to do with infrastructure, education, housing, community services, etc, than with defence and homeland security. And, a further $1.2 billion reduction in expenditure – again, more to do with entitlements than with defence – is on
the anvil, besides a balanced budget amendment. So severe cuts in social security, including Medicare, are very much on the agenda. In reality, it seems the Obama administration is not much at odds with the Republicans as regards these cuts, but, of course, the president is seeking another term in office, come November 2012, and so he could not have been able to meet finance capital’s demands to the full.
US public debt has risen rapidly since 2000, but the main reasons for this are the tax cuts for corporations and the rich, the wars in Iraq and Afghanistan (besides the otherwise huge increase in defence expenditure), the costly bailouts of banks, insurance companies and corporations such as the auto companies, and, of
course, the stimulus spending during the Great Recession. The deal with the Republicans will not affect the tax cuts, defence, and the bailouts. But more ominous is the fact of economic stagnation – the first and second quarter 2011 growth rates of 0.3% and 1.3% are dismal for an economy that is claimed to be recovering from the Great Recession. The cuts in government expenditure – coming at a time when additional private consumption and private investment are not forthcoming, and when the US cannot match
the neo-mercantilist powers like Germany and China – may, most likely, push the economy into another recession which will bring on even higher fiscal deficits. In fact, interest rates have declined
in the wake of S&P’s decision! And, of course, with the central banks of the 17 out of 27 countries of the European Union (EU) not allowed to sustain their respective governments’ fiscal deficits and refinance public debt by purchasing their governments’ securities, no solution of the eurozone’s debt crises is in sight.
Even as we look at S&P’s downgrading of US public debt, it might be worth a while to comment on the eurozone’s debt crisis, for the contrast may be enlightening. Here the problem has its roots in the EU’s Stability Pact which commits member states not to increase their fiscal deficits beyond 3% and their public debt to GDP beyond 60%. Countries that violate these stipulations are forced to borrow short-term on the private capital markets for their central banks are not permitted to sustain such fiscal deficits, and are
thus not allowed to refinance public debt by purchasing their government’s securities. The crucial link between monetary and fiscal policy is thus deliberately snapped. Now, besides Spain, Greece and Portugal, Italy too faces a public debt crisis that has its roots in such a financial architecture, and the people are forced
to bear the brunt of the draconian austerity measures imposed.
The United Kingdom (UK) would have also been in a similar boat if the eurozone criteria had applied to it. The financial markets would then have doubted the government’s ability to refinance the public debt because the link between the Treasury and the Bank of England would have been snapped.One might be thankful that the UK is not a part of the eurozone given the current social turmoil it is facing. Much of the eurozone countries’ mercantilist strategies have exacerbated the EU’s macroeconomic problems with their competitive drives to push down the wage relative to labour productivity, this, in the absence of a national currency whose value could have otherwise been depreciated.
Now, the US’ problems are not that of the eurozone but finance capital could not care less. It is trying to impose the eurozone’s fiscal responsibility standards on Washington, and, in this, S&P is its instrument. Finance capital will, after all, snatch as much of its share of the return on capital that it can, and, this, by any and all available means at its disposal, even if this robs the people at large of their very means of keeping body and soul together.