By Scott S. Powell
What has been distinct about Barack Obama's presidency is his inclination to operate in continuous campaign mode, to deflect attention away from his policy failures and to undermine opposition by politicizing the issues and policy responses he chooses to take up. So now with the president's attorney general Eric Holder having just announced the filing of a $5 billion Department of Justice suit against Standard & Poor's—charging that fraudulent ratings were made on risky mortgage bonds that went into default during the financial crisis of 2008—one has to wonder what the political motivation might be.
First, why now? Why has it taken four years for the Obama Administration to bring this case? Second, why is it that S&P is singled out for alleged wrongdoing, when Moody's and Fitch did the very same things in assigning top ratings to similar classes of dodgy mortgage securities? The plausible answer is that it's all about political calculation on manipulating perception and outcome on the central issue of our time.
President Obama has been reminded from multiple quarters that the deficit spending and debt accumulation during his administration has the potential to undermine his legacy and precipitate a major financial crisis. Surely someone in the White House has paid attention to the various reports on the state of the U.S. Government debt rating, issued from all three credit rating agencies during the last few years.
A January 2011 Moody's report noted that the ratio of national debt to national tax revenue in the United States is the worst of all the AAA-rated countries in the world. While the European debt crisis got more news coverage than the one brewing at home in the last three years, the U.S. fiscal condition has deteriorated to the point where its debt to revenue ratio is nearly three times higher than the AAA median, and more than twice that of Germany, the U.K., the Netherlands, Switzerland and Canada.
Later in 2011 Moody's and Fitch hedged their AAA-ratings of U.S. Government debt—issuing negative outlooks. But it was S&P that took the heat in August of that year, being first to actually cut the nation's rating to AA+. At the time the Obama administration lashed out at S&P, launching an unprecedented attack, specifically accusing the agency of "misleading calculations."
Some now speculate that the Obama administration is merely getting revenge on S&P's downgrade by taking legal action against the rating agency. But it is also plausible that the Obama administration made a shrewd political calculation in taking this action. First, it wants to deflect attention away from its failed leadership on budgetary matters resulting in record deficits and alarming debt accumulation as the debate over the sequester and debt ceiling heats up. Second, and perhaps more important, the Obama Justice Department's suit puts Moody's and Fitch on notice that they had better behave and save Barack Obama from the historical ignominy of the one who lost America's AAA-rating.
Washington is increasingly defined by hubris, but in the end financial markets will overrule politics. Politically contrived AAA ratings on U.S. Government debt will no more hold up the markets for U.S. Treasury bonds and the dollar than did the falsely rated mortgage securities hold up the banking, housing and mortgage markets in 2008. Unfortunately the magnitude of this next crisis would make the previous look like a cakewalk.
Scott Powell is senior fellow at the Discovery Institute in Seattle.
The above originally appeared at The Project to Restore America and is republished with permission.