Stocks plummet after U.S. credit downgrade

What happened

The U.S. stock market plunged to its lowest level in a year this week as panicked investors reacted to the first-ever downgrade of the country’s credit rating and growing worries about the stagnating economy. After Standard & Poor’s demoted its U.S. Treasury bonds rating from AAA to AA+, the Dow Jones Industrial Average nose-dived 635 points in a single day, or 5.6 percent—the steepest one-day decline since the financial crisis started in 2008. The Dow briefly regained most of that loss, but then plunged below 11,000 again. The Federal Reserve tried to calm investors by announcing that it would keep interest rates close to zero until at least 2013—which could encourage borrowing and economic growth.

Standard & Poor’s said in explaining its downgrade that “the gulf between the political parties” shown during the recent debt-ceiling debate had weakened the U.S. government’s “effectiveness, stability, and predictability.” Democratic Sen. John Kerry called the agency’s verdict a “Tea Party downgrade.” He and other Democrats blamed Tea Party–backed Republicans for refusing to agree to any new tax revenues, thereby scuttling a bipartisan plan to cut the deficit by $4 trillion. Republican Sen. John McCain said President Obama had caused the downgrade by failing to put a specific deficit-reduction plan on the table, and relying on Congress instead. “There was always the so-called leading from behind,” McCain said.

The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

What the editorials said

No need to panic, said the New York Post. Many investors who pulled their money out of the stock market pumped it straight back into U.S. securities, proof that government debt is still a safe bet. “S&P may no longer rate the nation AAA—but the market clearly does.” As for S&P’s credibility, let’s not forget that this is the same agency that gave “top-notch ratings” to the mortgage-backed securities that tanked in 2008, triggering a global economic collapse.

S&P was wrong then, but it’s right now, said The Washington Post. Government spending is too high, and revenues are too low. “And the rancorous political environment” that recently brought the U.S. close to default shows no sign of abating. “Democrats can rail all they want about the Tea Party,” said The Wall Street Journal, but Republicans have controlled the House for just seven months. Obama’s been president for more than two years, during which he’s done “historic spending damage.”

What the columnists said

Try reading the S&P report, said Jonathan Chait in TheNewRepublic.com. What alarmed the agency was the GOP’s threat to let the U.S. go into default, and its continued refusal to raise taxes to reduce the deficit. The U.S. was downgraded, in other words, solely because of “the existence of a Republican Party that theologically opposes higher revenue and is pledged to risk worldwide financial cataclysm on a regular basis in order to advance its agenda.” For the foreseeable future, the U.S. is fully capable of paying its bills through various financing mechanisms, said Eugene Robinson in The Washington Post. There was a crisis only because the GOP manufactured one. “It’s pretty simple: If you threaten not to pay your bills, people will—and should—take you seriously.”

That’s nothing but Democratic spin, said John Feehery in The Hill. The U.S. lost its AAA rating because “we spend too much as a nation” and “we don’t have the political will to stop spending.” Well, the Tea Party was founded to send just that message to Washington. Blaming the Tea Party for the downgrade is “like blaming the fire department for not putting out the blaze fast enough.”

Tired of this pointless bickering yet? said William Saletan in Slate.com. The reality, as the S&P pointed out, is that U.S. debt is currently out of control, and cannot be tamed until Washington approves both “higher taxes and deep entitlement cuts.” The math, and common sense, leave no other conclusion. If the millions of us in the political center want a sane, competent government, we have to boot the partisans out of Washington, and elect politicians “who put debt control before entitlements and tax cuts.”