The S&P Downgrade, One Crazy Year Later

August 01, 2012


DC Snubs S&P

Perhaps more interestingly, it seems the policymakers in Washington have woken up to the same reality.

How else can you explain what they did this week by thumbing their noses at the ratings agencies with another kick-the-can-down-the-road-style budgetary stopgap measure?

If you recall, some of the main concerns in the S&P downgrade were political fragmentation and the inability to resolve the “debt ceiling” debate.

In “agreeing” on a six-month plan, Congress effectively said to S&P: “Thanks for your opinion, but we kindly disagree.”

And who can blame them?

The all-knowing market refused to punish the U.S. for its profligacy, instead choosing to reward it with lower borrowing rates. With that type of validation, I’m surprised politicians in Washington, D.C. didn’t pass a two-year stopgap measure that kicks the can all the way off the highway embankment.

None of this is to say that the market’s reaction to the downgrade makes sense.

To be sure, the U.S. is still struggling economically, its structural problems remain and the two candidates applying for the job of running the country are content to quibble over tax returns and social issues.

In that way, the downgrade seems to have emboldened Treasury holders as well as elected officials. If that’s really the case, then those calling for a bursting of the bond bubble may have to wait at least another six months.

Then again, if the downgrade itself was a contrarian indicator for those willing to buy Treasurys, maybe this time the complacency on the part of the bond vigilantes and Congress is the opposite.

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