The S&P Downgrade Market Plunge Myth

The Wall Street crew that wants to cut your Social Security and Medicare benefits are sensing that victory is in sight. They have managed to knock jobs completely off the agenda and have made deficit reduction the near exclusive focus of economic policy in Washington. They are now setting the stage to have the Congressional "super committee" produce a deal that will mean large cuts in both programs.

The backdrop for these cuts is that the country is in crisis and that we have no choice. A central part of this story is that the stock market crashed last week in response to the Standard & Poor's (S&P) downgrade of US government debt. The Wall Street crew and their allies in the media and Congress will tell the country that if we don't have the cuts in Social Security and Medicare demanded by S&P then we run the risk of further downgrades. This raises the prospect of further market panics and the complete wreckage of the economy.

This story has as much credibility as John Edwards' tales of marital bliss during his presidential campaign. First, every informed investor knows S&P's sterling track record of missing everything in sight. It gave top investment grade ratings to hundreds of billions of dollars of subprime mortgage-backed securities, to Lehman until its bankruptcy, to AIG until its collapse, to Enron until just before its collapse. They know about its $2 trillion arithmetic error in assessing US indebtedness.

They also know that S&P, like the other credit rating companies, is very concerned about the final wording of rules that are being written as part of the Dodd-Frank financial reform bill. That is why it is far more likely that the downgrade was done with the hope of currying favor from powerful political figures than out of the belief that the government will be unable to pay its debt.

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