Wednesday, July 27, 2011

Frankly, I'm A Little Surprised It Hasn't Happened Already

Uncertainty is what drives interest rates in America. Let's be frank about that. If my credit rating is unreliable, I will pay more for my mortgage and credit card interest than you will if your credit is good. This is where the concept of the "prime rate" was born: a rate given to customers with stellar credit histories.
With the dog-and-pony debacle over the debt ceiling heading into the final innings, if I was the head of Moody's or Standard & Poor's, I'd be thinking about downgrading American bonds already. Why?
Simply put, today a lender is not looking for six days of interest, but months or even years. Next week, that interest *may* default. It doesn't matter that a bill *could* be passed between now and next week, or that it's possible an extension of payments beyond the August 2 deadline *could* be made.
Right now, the US is technically in default on its obligations past next Tuesday. Right now, there is uncertainty, and uncertainty demands a lowered credit rating.
There is nothing that prevents a ratings agency to immediately restore the AAA rating on American paper the minute a new deal is passed, but clearly the full faith and credit of the American government is non-existent. If this was you or I, if we had lost our job and the Fair Isaacs company found out (and they do,) our credit score would drop. That's just the facts, Jack.
It wouldn't matter if we had an interview or even a job lined up for next week, if FICO hears we're out of work, FICO re-evaluates the credit score. Why should a different standard be applied to a government?
A lowered credit rating would certainly be a blow to Obama and the GOP, to be sure, but it would also immediately affect you and I, which is why I think the agencies have shied away from prematurely downgrading the rating. Our mortgages would jump, our credit cards would become unsustainable, our economy would tank. Again. Jobs would be lost. Factories closed. Vital repairs to infrastructure and even private contracts would stop.
Mind you, this could happen anyway if the agencies think the debt limit bill is insufficient in either raising the debt ceiling or in effecting cuts to the budget to try to get out of this mess.
The Teabaggers have a match and a can of gasoline. What they DON'T have is a flame-retardant suit.