Last summer, August 5 to be exact, Standard & Poor's dropped the rating of United States debt below AAA for the first time in history. This year, with our flippers and masks barely out of the pool equipment room, Moody's downgraded the ratings of fifteen mega banks, including major American institutions such as Goldman Sachs and J.P. Morgan Chase. Bank of America and Citigroup were downgraded to Baa2, just two ticks above "junk" status.
S&P cited as one of the major reasons for last summer's historic downgrade the "Bedtime for Bonzo" antics that went on in Congress in connection with, among other things, the once perfunctory act of raising the national debt limit. If you were otherwise engaged and missed the circus, don't worry, it will be coming back to town near election time this year.
Moody's, on the other hand, did not have to make reference to our political paralysis (yet), they simply underscored our "globalized" exposure to the financial chaos in the Eurozone, describing its actions as follows: "Moody's downgrades firms with global capital markets operations;" which, among other things was a not-so-subtle reference to the recent revelation that J.P. Morgan Chase had casually dropped another $2-3 billion in a "whaling adventure" that went awry, a fact that produced a flurry of congressional posturing — filled with sound and fury — that seemed to signify very little. Meanwhile a host of Washington conservatives are continuing their efforts to undermine Dodd-Frank by introducing a series of nine bills in the House and the Senate and launching litigation (with a willing co-conspirator — a bank in Texas) against the Consumer Financial Protection Bureau and select provisions of the law.
Looking at these two downgrades, both of which were telegraphed well in advance by the rating agencies, I suppose one can't blame Washington for everything… Scratch that — yeah, we pretty much can.
The S&P downgrade was a direct response to Congressional debt devilry, while the Moody's downgrade was considered by many to be an unspoken but pointed commentary on both globalization and the dismal performance of federal regulation of the banking industry as a whole. There are those who argue that that the banking industry is overregulated while others opine that it is under-regulated. However, it's very difficult to argue that given the history of financial events in the last few years, the banking industry is effectively regulated.
I recently read "Why Nations Fail" by Daron Acemoglu and James A. Robinson. The authors are Harvard professors and widely respected scholars on the subject of economic development. They argue that relative prosperity among nations is largely dependent on the nature of the institutions that have developed in a given society. Those Institutions can be either "inclusive" — prioritizing things like productivity, justice, education and technology for the benefit of the nation as a whole; or "extractive" — intent upon directing wealth and resources away from some elements of society to benefit others.
Although the authors were focused on analyzing the developing world, it struck me that our economy in general — and this Congress in particular — has become increasingly "extractive." Income disparity in the United States has been rising steadily, and in the last few years, dramatically. Steadfast refusals to raise taxes even on the willing Warren Buffets of this country can only exacerbate the problem. Attacks on Medicare, Social Security, and other programs designed to benefit the poor, the middle-class and the elderly are one way to increase the relative status of the "haves." Voter suppression initiatives and anti-union measures are supported in Congress even though many of these efforts are occurring in newly "extractive" state legislatures (Wisconsin, Michigan and Ohio to name a few). Finally, the Citizens United decision, which essentially put a "for-sale" sign on every American election, is likely to ensure that the next Congress will be even less "inclusive" than this one.
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To top it all off, the Washington Post recently reported that during the ugliest days of the of the financial crisis, 34 members of Congress on both sides of the aisle had reworked their own financial portfolios after having interacted with Hank Paulson, Ben Bernanke, or Timothy Geithner. As you might imagine, those legislators managed to catch an earlier "flight to safety" than most of us. It would be hard to imagine anything more "extractive" than that, wouldn't it?
Despite these individual acts of self-interest, it has been Congress' collective failing that is most notable. Dodd-Frank is a vast and essentially earnest attempt to reign in a financial system run amok, but in a number of respects it has been sufficiently watered down to leave many of the banking system's most serious systematic vulnerabilities intact. Congress' total inability to effectively regulate our financial system puts all of us at risk.
The downgrades in the credit ratings of those major banks mean very little to the average consumer, but the downgrade in the credibility of Congress and the mess we have made of our financial regulatory structure that at least in part fomented the ratings agencies' analyses should give us all pause.
This is not an easy fix to be sure. Our economy has become so complex many would argue that it can't be effectively regulated. Let's hope they're wrong and that our representatives will have an epiphany that lifts them from the tar pit of partisanship, election year or not, and makes them leaders, not slaves to ideology or Grover Norquist inspired oaths. They must screw up the courage to get this thing right. If they fail, once again, the consequences are far worse than winning or losing an election. Because if we don't fix this problem — how shall I put this delicately? — we're screwed.
I'll have a Pina Colada, please.
Adam Levin is chairman and cofounder of Credit.com. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.