Moody’s Warning: U.S. On Notice For Downgrade

…and rightfully so!

The situation the federal government is in right now is much like a person who cannot help but spend, spend, spend until his money is all gone.  Then he applies for a new credit card and repeats the process.  Personal finance guru Dave Ramsey has built a thriving business around helping individuals who have dug themselves into an abyss of debt.  The common sense phrase “Act Your Wage!” sums up much of what Ramsey teaches.  That is do not spend more than you you make and pay off what debt you owe as quickly as possible!

I would enjoy seeing Ramsey testify in front of Congress to give our lawmakers suggestions on what they need to do to get the government’s financial mess in order.  I have no idea how he falls politically, but I bet he would have a sharp message that would send a cold chill down the spines of both Republicans and Democrats.

Credit agencies have been warning the United States about the possibility that it could lose it’s precious AAA credit rating if it did not make aggressive changes to its budget problems.  In January S&P rang the warning bells.  Moody’s has been taking a slightly more toned-down approach to the issue. – until today!  From Bloomberg:

Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stall, adding to concern that political gridlock will lead to a default.

The Aaa ratings of financial institutions directly linked to the U.S. government, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks, were also put on review for cuts, Moody’s said in a statement today.

The U.S., rated Aaa since 1917, was put on review for the first time since 1995. Even a temporary default by the U.S. would likely have “large systemic effects” on the economy and Treasury finances by disrupting money funds, the repurchase- agreement market and foreign investor willingness buy the government’s debt, JPMorgan Chase & Co. said in a report.

“A U.S. government default is something the markets aren’t prepared to deal with,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “It’s hard to get 535 people to agree on anything, much less something as contentious as trillions of dollars of spending and taxes.”

There is no doubt that the approaching deadline will have drastic consequences if nothing is done.  Even if dramatic changes are passed (which as McConnell stated is not possible with Obama in the White House) there will likely be shocking short-term market effects.  Of course Congress can pass a watered down solution that kicks the can down the road a few months or years as it has grown so accustomed to doing, but the government seems to be nearing the end of its rope on that option.

To me there is only one true long-term solution Congress should go forward with and that is a drastic long-term spending/debt reduction budget plan AND not raising the debt ceiling.  If the government could be trusted to actually make good on its promise to reduce spending and that if the debt ceiling was raised they will not spend it all (again) then I’d say go for it.  However, like a spendaholic they do not have an ounce of self-control.  Just as it is foolish to give an alcoholic a case of beer to tide them over for a little while it is foolish to give a spendaholic government more credit to charge up.  The buck must stop here!

  • celia

    this is a great article.