"No matter what some agency may say, we've always been and always will be a AAA country," President Obama said in his uninspiring speech on Monday, as the markets melted down.
Never mind that this is the sort of thing a coach tells Little Leaguers as they're about to get mercy-ruled. By heaping scorn on Standard & Poor's, President Obama, and the rest of official Washington, Monday violated Gross's Second Rule of Punditry: Don't Pick Down, Pick Up. When you engage in verbal fisticuffs with people below you on the pecking order, it only brings you down and raises them up to your level. Besides, this isn't an episode of Crossfire. We're well past the time for soundbites, catch phrases and discussions about having discussions.
Instead, we need declarations -- of policy, not of posture -- from all the parties who have contributed to the current mess. The markets crave certainty. And while no single entity can guarantee it, each of the key players can do a better job of providing certainty on where they stand.
First, Standard & Poor's. Critics have complained that the ratings agency's record is horrific and that the reasoning and analysis behind the downgrade are terribly flawed. All true. But with its ability to downgrade other entities whose bonds may not be as resilient as those issued by the U.S. government, S&P has an immense responsibility. Instead of responding to criticism with a few more kicks in the shins, like downgrading Fannie Mae and Freddie Mac, S&P should declare whether its business model has changed. Is it going into the punditry business? If a CEO and CFO fail to get along, will it downgrade a corporation's bonds?
And if it is going to ascribe the downgrade to specific political failures, S&P should lay out the specific successes that would cause it to upgrade. Precisely how much deficit reduction over what period of time is necessary? Would a balanced budget amendment do the trick? How about letting the Bush tax cuts expire? If a marker of $4 trillion over 10 years is laid out, would $3.9 trillion over 11 years do the trick? And if not, why not?
Next, President Obama. On Friday night, I gave a lot of grief to Republicans for creating the brinkmanship and refusing to do a deal. But President Obama could have avoided this entirely by pushing Democrats to just pass a debt reduction when they held both houses of Congress last year. And critics are right to argue that he never put out a detailed plan that he embraced and pushed. Monday's bromide-filled speech could just as easily have been given before the downgrade and before the loss of 1,000 points on the Dow. He spoke about the need to compromise and come together, and he promised to present recommendations to the newly formed Congressional supercommittee "over the coming weeks."
Great. The market (and S&P) have tired of the various gangs, commissions and committees that fail to produce results. And he continues to labor under the illusion that he has real partners in governing. If he's serious about long-term deficit reduction, he -- and Congressional Democrats -- should simply come up with one. This week. As he noted in his speech, it's not rocket science. Obama should offer up a menu of items that would be painful but necessary to close America's long-term fiscal gap while not unduly undermining the faltering economy. Let all the Bush tax cuts expire, tighten up tax loopholes, spend less on defense, attack entitlements. Whatever. Of course Republicans will reject it out of hand, but at least the voters, the markets and S&P will know where he stands.
Congressional Republicans: In contrast to President Obama, Congressional Republicans have no shortage of official plans. They're just all unworkable, unpassable and silly to different degrees. The House passed the Ryan Plan, which ends Medicare as currently constituted, calls for withering away of all non-defense discretionary spending and was based on incredible projections (unemployment of 2.9 percent?). Oh, and it would have added trillions of dollars of new debt. The calls for a balanced budget amendment and Cut, Cap, and Balance are plans -- to a point. Except they have no chance of passing and they don't really specify what will be cut.
If the long-term budget is to be brought in alignment through cuts alone, Republicans should declare their specifics. And while we know where the Tea Party Caucus stands on taxes, we need a declaration as to where Senators and House moderates stand. Is the Ryan Plan all you're offering? Can you ever contemplate a world in which the tax system brings in more revenue than it does today? Are you capable of making a deal with President Obama and Democrats that involves revenues? Is the plan just simply to wait until Mitt Romney is inaugurated as the nation's 45th president and work with him?
Finally, we need to hear from the Federal Reserve. The central bank, which holds its Federal Open Market Committee meeting Tuesday, is prone to speaking in roundabout, indirect language. Ben Bernanke carries a kazoo in his pocket, not a trumpet. But it is time for Bernanke to clear his throat and speak up. What's going on? In 2002, he declared that the Fed had learned the lessons and would not allow another Great Depression to happen. So if the economy threatens to do a repeat of the recession of 1937-1938, what will he do?
While the Fed has done a good job combating inflation, it has done a pretty poor job of meeting the other component of its dual mandate: promoting full employment. Is the Fed no longer in this business? Does Bernanke have some ideas as to how Congress and the White House could do so? What are the prospects for a third round of quantitative easing, and what would that be expected to accomplish? And, by the way, what does he think should be done to prevent a repeat of the debt-ceiling debacle?
Naturally, these declarations would be meaningless without action. And while markets generally like certainty, we should be careful of what we wish for. It's quite possible that many of the declarations would lead investors to further despair. If the most Washington can muster is a collective shrug and a few soundbites, then maybe it makes sense to readjust our expectations for growth and for the performance of various asset classes.
Daniel Gross is economics editor at Yahoo! Finance.
Email him at firstname.lastname@example.org.
- Fannie Mae and Freddie Mac
- discretionary spending
- Ben Bernanke
- balanced budget amendment
- the Bush tax cuts
- catch phrases
- full employment