The economic impacts of the credit downgrade immediately hit Wall Street with a thud – one that has continued to reverberate even through today.
But that thud can be heard equally as loud in the halls of Congress, where a heated battle is raging between Democrats and Republicans on who is to blame for the mess.
While SMU political science professor Cal Jillson recognizes Washington’s faults, he also said Standard & Poor is a “flawed messenger” given their role in the subprime mortgage crisis.
Since the ‘90s up until the burst, banks and mortgage companies continually lowered their standards for home loans. Wall Street packaged bad loans with the good into mortgage-backed securities.
S&P then rated these toxic mortgage-backed securities as AAA, the top rating, and these securities helped set off the financial crisis, Jillson said.
“So now, when S&P shows up to claim that U.S. government bonds should be downgraded many people are skeptical,” Jillson said.
But while S&P’s role is indisputable, Jillson said the message they delivered about the state of the U.S. is true.
“Washington’s performance in the recent debt crisis debate was abysmal,” said Jillson, who agreed with public opinion polls that level most of the blame on the Tea Party wing of the GOP, but said most of the problem was in the House “for blocking a stronger start on resolving the nation’s deficit and debt problems.”
“Looking back, the agreement that Speaker Boehner and President Obama were working on before the Tea Party caucus jerked Boehner’s chain was far better than the smaller agreement they ultimately were able to achieve,” Jillson said. “It was a lost opportunity and there is only a slim possibility that it can be recovered in the coming congressional debates.”
This “slim possibility” is a sentiment carried forth onto the new so-called “super committee” pulled from both parties to cut $1.2 trillion dollars out of the deficit between now and Nov. 23, which few think will come up with an equally agreeable plan.
In the mean time, the market continues to fluctuate because of the downgrade.
But this up and down behavior may not last long, said SMU economics professor Nathan Balke.
“Clearly the market is uneasy about future economic prospects which might portend an increased likelihood of a recession in the near future, but remember stock prices also fluctuate quite a bit so they are not necessarily a reliable indicator of future economic activity,” Balke said.
Balke said that while the markets “hate uncertainty” and stock prices reacted negatively due to the downgrade, the same uncertainty led investors to buy treasuries, driving yields lower.
The downgrade, along with weak economic growth and a fluctuating international economy because of debt in large European countries like Italy and Spain, has contributed to this uncertainty, said Balke.
Balke said is it hard to attempt what will happen in the future
because of how quickly the stock market can change, but that this may present an opportunity to purchase undervalued stocks.
In any case, Balke believes the crisis will probably be fleeting.
“After all, it is just one agency’s opinion, and the market was pretty well aware of economic and political situation before S&P made its downgrade,” Balke said.
