White House: Downgrade Doesn’t Matter, Unless It’s The Tea Party’s Fault

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Fallout of U.S. Downgrade on States

Manhattan Institute Senior Fellow Steve Malanga argues that States now need to worry about borrowing at higher rates.

Team Obama Downplays Downgrade, But Blames Tea Party Too

“Look at the history of this – the fact of the matter is that this is essentially a Tea Party downgrade. The Tea Party brought us to the brink of a default.”

-- David Axelrod, top political consultant to President Obama, in an appearance on “Face the Nation.”

The decision by Standard and Poor’s to downgrade the rating of U.S. government debt is:

A) A meritless attack by a biased agency that can’t even do math.

B) The deserved result of the fiscal recklessness of a conservative cabal inside the Republican Party

C) Both A and B

For the Obama White House, the answer has been an emphatic, and sometimes confusing, C.

The administration and the president’s re-election campaign have taken a two-pronged counterattack on the credit-rating rip.

At first, the administration believed that they had turned back the downgrade by convincing the ratings house that its numbers crunchers had overestimated U.S. indebtedness by $2 trillion.

But S&P’s pulled the trigger anyway. Their essential point: When the world’s largest economy and only superpower is on track by 2020 to spend as much on debt interest as it does on defense, a political system that doesn’t allow reform must be very badly broken.

The debt ceiling deal reached last week shaves almost $1 trillion off of increases to projected spending over the next decade, but that still means that spending is projected to go up about $7 trillion over that timeframe.

S&P’s, though, should at least be happy that their rating prompted only claims of incompetence and bias by the Obama administration. When the agency and Moody’s torched Italy’s debt, listing it as quasi-junk last month, the Italian government staged a raid on the raters’ offices in Rome and is preparing a criminal prosecution.

And S&P’s pretty well had to say something about the U.S. Having issued platinum ratings for garbage-mortgage-backed securities in the last decade, the agency has taken a much tougher line of late. Admitting that a nation with a debt as large as its economy and is on track to borrow, on average, $1 trillion a year for the next decade has a debt problem was sort of the least it could do.

Moody’s tried to be more polite by retaining the AAA rating for U.S. debt but issuing a very dire forecast with a warning that unless politicians reach a politically impossible deal on debt soon, it too will downgrade the debt.

For those who choose to lend the U.S. money, like China and Japan (Social Security and Medicare contributors have no choice) this is no surprise. China downgraded U.S. debt sometime ago and S&P’s is hardly the first to discover that the American political system is kind of at a crossroads these days.

Interest rates have not gone through the roof, though, because we still look good compared to the rest of the planet. We’re AA+ in a junk-bond world.

The downgrade is really of psychological significance. It is a symbolic thing for Uncle Sam to get his first-ever downgrade. Coming as Europe is slipping under waves of red ink and the global economy sputters to a halt, the debt downgrade is just another reminder of how precarious the situation for the U.S. has become.

For President Obama, it has the danger of becoming his own version of Jimmy Carter’s Iranian hostage crisis.

He’s not chiefly to blame for the downgrade (it’s really the manifestation a 50-year-old problem), but Obama is vulnerable to Republican accusations of overspending and fiscal imprudence for the policies of his first two years. Carter wasn’t strictly to blame for the hostage takings either, but he was vulnerable to Republican charges that his foreign policy broadcast weakness and invited challenges abroad.

Neither debacle -- neither a rating met with a “Duh!” by U.S. lenders nor the Iranians holding 52 embassy workers for 444 days -- is important itself, but both have symbolic resonance because of their timing. Right now, investors and capitalists both small and large, already afraid of a slowdown and scads of uncertainty, have one more reason to hoard their cash and wait for brighter days. This is how bear markets and recessions work: bad omens beget bad news, which beget more bad news.

With America facing a backslide into recession and with no end in sight to a jobs drought, Obama is not interested in being known as “President Downgrade.” The administration, therefore, is making a tricky argument: The downgrade is meaningless, but if it isn’t, it’s not their fault. It’s the Tea Party.

S&P’s point is that the debt deal was a fleabite compared to the larger problem, not that there was a danger the U.S. would soon default. Their point is that if it takes a crisis and the threat of a government shutdown to get some trims to the projected increase in spending, Washington isn’t ready to tackle the problem – too much drama for too little reform.

But the administration wants to couple the downgrade with the debt ceiling, suggesting that the world fears Tea Party intransigence and federal failure. But there’s little doubt that had the Tea Party not steamed its way into the 2010 election, the deal would have had less spending control. The president wanted an unconditional debt increase, more stimulus spending and many establishment Republicans argued against fighting him too hard on the demand.

But, the administration will push on the notion that had Republicans been more receptive to compromise, a grand bargain would have been struck that would have satisfied creditors and credit raters. But there would have been no hope of a grand bargain had the pressure for a deal not existed in the first place.

With that narrative established, the administration is ready to fight its way through the pending super committee that will determine whether the debt ceiling goes up by $1.2 trillion paired with automatic, across-the-board cuts or $1.5 trillion in exchange for a bipartisan deal on future debt.

As Rep. Paul Ryan, R-Wis., pointed out to Chris Wallace on “FOX News Sunday,” the super committee isn’t designed to solve the future crisis but sort out the aftermath of the last one.

Few in Washington are optimistic about the committee and with the administration facing intense criticism from the left for being too accommodating to Republican “terrorists,” it looks unlikely that the president will be in much of a conciliatory mood when the time comes to deal on debt, again, after Thanksgiving or when the current law funding the government expires on Sept. 30.

Given his currently dire political situation – disdained by independents and facing increasing contempt from his base – Obama can be expected to head into the coming conflicts blazing with blame and indignation.

Afghan Crash Darkens Outlook on Drawdown

"The government can't protect the people, they are under Taliban threats. So the people have chosen Taliban for themselves and don't support or cooperate with government anymore."

-- Mohammad Hazrat Janan, the provincial council chief in Wardak, explaining to the Wall Street Journal how the Taliban reemerged after U.S. forces withdrew from his province, the site of a Saturday attack that killed 22 Navy SEALs.

House Speaker John Boehner called the killing of 30 U.S. troops aboard a Chinook helicopter shot down by Taliban insurgents in Afghanistan the “darkest day of a dark conflict.”

That’s significant because Boehner is generally hawkish and has been the key to holding together a congressional coalition to fund the unpopular war and President Obama’s two surges there. “Dark conflict” is not the kind of phrase one would normally expect from Boehner.

As Obama undertakes the drawdown of the second surge, he is asking the military use more of the techniques it used in the mission to kill Usama bin Laden – small, surgical strikes against high-value targets. But those missions are very risky and expose high-value U.S. assets in a way that even an under-equipped and backward enemy can exact huge casualties.

Ceding control of areas to the Taliban makes those efforts even more difficult.

As the U.S. attempts a slow transition in Afghanistan from a nation-building effort to a counterterrorism strikeforce, there will likely be other dark days. In time, that may mean an end to the bipartisan congressional coalition in support of Obama’s strategy.

**Who is to blame for the S&P's credit downgrade? Today’s “Power Play w/Chris Stirewalt,” looks into that question and FCC Commissioner Robert McDowell stops by to talk net neutrality and localism in an increasingly connected world. Plus the political scene in Iowa leading up to the Iowa Straw Poll and the Fox News, Washington Examiner GOP presidential debate. Don’t miss a minute of Power Play at 11:30 Eastern at http://live.foxnews.com**