The United States is coming off one of the most tumultuous weeks of stock trading since the 2008 Financial Crisis. Lawmakers achieved a deal to raise the debt ceiling, but it wasn’t enough to satisfy the ratings company, Standard and Poor’s (S&P). Not only was the S&P dissatisfied with the deal Washington came out with, but it was also dissatisfied with the deal-making process itself. S&P had warned, weeks earlier, that it wanted to see upwards of $4 trillion in federal spending cuts, however, lawmakers could only come to terms on just over $2 trillion. Therefore, the S&P decided to downgrade the United States from its triple-A rating.
Standard & Poor’s (S&P) downgrade of the creditworthiness of the U.S. is unprecedented. This is the first time in history we’ve lost our triple-A status and it means the ratings company, S&P, believes that the U.S. has extended its debt obligations too far and is facing a higher risk of default. S&P also says they downgraded the U.S. because lawmakers didn’t come up with a deficit reduction plan that goes far enough in spending cuts. All the credit rating agencies are independent agencies, but it is indeed notable that S&P is the only major ratings company that downgraded the U.S. The others, Moody’s and Fitch, maintain triple-A status for the U.S. That has a lot of people questioning the credibility of S&P’s move.
Everyone expected interest rates to spike if the U.S. got downgraded. Turns out, it was the stock market that became roiled. Interest rates have actually fallen since the downgrade because investors around the world still view U.S. debt as the safest and most secure place for their money. Keep in mind, even though the U.S. economy is limping along, we’re still in a lot better shape than Europe, which is struggling with its own sovereign debt crisis and even China, which has an economy at risk of overheating. Simply put, the U.S. is the best of the worst. And that’s helping mortgage rates, at least right now, which are flirting with historic lows. Bankers are telling us they’ve seen a significant increase in people seeking mortgages or looking to refinance.
The recent volatility in the markets correlates with the downgrade. The downgrade forced investors to reassess and ultimately lower their expectations on economic growth and job creation. And that was confirmed last week by the Federal Reserve, which announced that it would keep interest rates at these historic lows through 2013 and lowered its economic outlook.
It’s easy to compare the aftermath of the collapse of Lehman Brothers in late 2008 with the events that followed the downgrade. Markets fell sharply after both events, but the origins of the crises are very different. The 2008 financial crisis began in the mortgage market where people were scooping up cheap credit. Wall Street securitized those mortgages by slicing and dicing them and repackaging them… remember the CDO? Many of those defaulted and seized up the credit markets, which sparked a global stock selloff. This time around, the problem started as business and people hoarded cash because of lack of confidence in the economy and government policy and not spending or borrowing, thus, stalling job creation. Consumer spending makes up 70 percent of economic growth and it’s the all-powerful American spender who has brought the country back from nearly every economic downturn. If there’s a bright spot in all of this, it’s that people are paying down their debt and saving more. And for all of us lucky enough to live in Westchester, our home prices are holding up better than the national average and our public schools are still in very good shape.
After a few volatile sessions, investors keyed into some better economic data and markets have largely stabilized, at least for now. However, if we’re learned anything in recent years, it’s that this is a global marketplace and anything that rattles economies in any corner of the world, will have a ripple effect.
Lori Rothman is an anchor for the FOX Business Network (FBN) and an Edgemont resident. She hosts the 1 PM/ET news daily on FBN (Cabelvision, Channel 106).