Standard and Poor’s downgrade of US debt rating by one notch from AAA to AA+ is a hugely important event.  Not that interest rates will sharply rise anytime soon, not that the U.S. will ever default on its bonds – no, those fears are unfounded. The move is a warning shot across our bough, a statement that we have veered off course and must change course to avoid a storm.  The American economic governance model, democracy, is showing cracks, and those cracks are causing tremors in its economic foundation.

The reaction of President Obama is inapposite. His remark that “American has always been an AAA country and will always be an AAA country” misses the salient point.  S&P, correct or wrong in its decision, widely lauded and chastised, was right on target in stating:

“The political brinkmanship of recent months highlights what we see as America’s governance and policy making becoming less stable, less effective and less predictable than what we previously believed.”

A strong, disrupting current of political discord has control of the American ship of state.  No one has the wheel.  The President, our captain, offers directives that are not followed.  The Senate first mate wants one course while the House second mate wants another course and there are divisions within those institutions.  The Tea Party crew would steer full sail into the storm and threaten to blow a hole in the hull and sink the ship if another more moderate course is chosen. 

 And what has been the reaction to S&P’s statement of concern?

• Senator Kerry:  “It’s a Tea Party downgrade.”
• Senator McCain: “A failure of President Obama to lead.”
• Representative Bachmann: “It happened under your watch, Mr. President.”
• V. President Biden:  “The Tea Party are terrorists.” Ironically, al Qaeda protested Biden referring to the Tea Party as terrorists.
• Treasury Secretary Geithner:  “Congress holds the power of the purse.” 

Guys and gals, don’t you get it?  The blame game is the problem, it is not the solution; it is no longer a tenable game.  We are on a self-destructive path, not because we cannot pay our debts.  We have the natural resources, talents, population and innovative spirit to solve our budget problems; rather, we may fail because we lack the will to pay our debts, to put aside our petty grievances and inflexible ideologies and govern as our predecessors have governed: bargaining hard and compromising for good of country. Compromising is not reaching a consensus, it is not giving up cherished principals; it is simply recognizing as mature adults must that sinking the ship is not a solution, but an end to all solutions.

The panic on Wall Street flows from uncertainty about what will happen and the knowledge that Wall Street has been riding a wave of desire for returns, in a low safe return environment. Corporate profits have come from overseas sales, cutting costs and accounting changes but domestic revenues are flat because consumers, who once had created 70% of domestic GDP, are paralyzed.  High unemployment  continues to plague and housing remains mired in the aftereffects of the subprime mess: tight lending, low demand for debt and a flood of forced sales not based on fair market valuation principles. These factors are keeping consumers on the sidelines.  So, where is scared money flowing? Well, it is flowing into Treasury Bills and Bonds, not surprisingly, still thought by investors to be the safest bet in the world, an investment easily bought and sold.  Fools money is spilling disproportionately into gold thought to have some magical property of value that is insulated from risk.  For those with a large risk capacity the strategy of diversifying prudently into commodities is wise; for, those with a small dollar portfolio, it is highly questionable, especially for those with a short time horizon or who imbalance disproportionately towards commodities.

At the turn of the century Theodore Roosevelt perceived structural problems in our capitalist system.  The industrial revolution had exploded wealth for the few and relegated the masses, including children, to slave-like working conditions.  The system needed structural reform and Roosevelt’s Progressive Movement answered the bell.  Business eventually went along with reforms propelled by “enlightened self interest” as productivity improved with more humane working conditions. Business trusts were busted fostering competition.  Today our system, service, not manufacturing based, again needs structural reform.  There has developed a breach between compensation derived from and value offered to the system. The robber barons took risks and built industries. Today bankers and Wall Street traders earn huge bonuses playing monopoly with other people’s money, taking on no personal risk.  Traditional banking and traditional investment banking have given way to hedging and gambling on credit default swaps with speculative not insurance motives.  Much of this trading adds no value to the system. Dodd Frank would scale back this activity but there are strong lobbies working furiously to avert its impact.  President Obama has not risen to the occasion.  He’s allowed himself to become sullied by muckrake that has diminished his political power.  We are at a fork in the road. We need confident, consistent leadership which has to date been lacking.  I am disappointed because I believe in the man. But, hope springs eternal and I am hopeful that he will yet come into his own as a leader, at least with regard to domestic governance.  I am not addressing foreign policy, which is another matter altogether.

So, the end game of these tumultuous events of the past days is that the reputation of America has been severely tarnished and the world’s belief in our system damaged.  We stand on the soapbox telling the world to adopt our system.  Today, for many in the world, China, Russia, the Middle East, that is perhaps a laughable suggestion. Perhaps now many are thinking “I would prefer more stability and a little less freedom of speech that includes the freedom to disrupt and disrespect military funerals, to scream in the face of those with whom we disagree or to publish pernicious almost insanely violent diatribes against order.  Perhaps, I would prefer a system a little less fractious, one in which decisions are made, not forever deferred, where actions are taken, not endlessly debated superficially with media sound-bites instead of reasoned arguments.”  If we Americans want to retain our role as the world’s leader, and I believe for the sake of the world we must, what is corrupting our system today, we sorely need to find the resolve to correct. 

© 2011 by Robert S. Steinberg

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