On April 19, Geithner evidently thought he had a criminal shakedown operation well in hand. Oops.


Just as the Y2K threat was overstated but nevertheless had unexpected, adverse intermediate term consequences, I doubt this chicanery will be cost free to the public at large. But the debt overhang that ideologues have used to whip the public into a funk is profoundly deflationary unless addressed head on, via writedowns and bankruptcies offset by fiscal stimulus. Deflation means that high quality bonds are the place to be, as the market action of last week confirmed, so Treasuries benefit from the very condition that S&P depicts as a disaster.

Thus the best outcome would be if the bond and currency markets shrug off the S&P action, which would reveal that the much feared downgrade was a paper tiger. But even if the marker response is underwhelming, it is hard to imagine that Obama will not take a political toll for his colossal miscalculation. It was he who stoked the debt ceiling phony crisis to implement a neoliberal agenda, who refused to reverse course and threaten to circumvent the debt limits when the process had clearly spun out of his control.

So even if S&P fails to land a body blow in the markets, its ploy has garnered press that seems certain to taint the Administration, and thus confirms the power of its reckless conduct. Thus the cost is not likely to show up in bond yields, but in something far more fundamental: in yet more destruction of the foundations of our society for short-term, selfish ends.

And now for the completely predictable:

TRENDING: GOP Candidates slam Obama after downgrade

One would think the Democrats would be out there saying that S&P’s timing is highly questionable, coming as it does right when the SEC is investigating them for their role in the mortgage meltdown. Especially since the Republicans on the House Financial Services Committee have been trying to free them from any liability.

Hello, McFly, can we have that photo again:  [cont’d.]

That’s S&P’s David Beers, the guy responsible for the US downgrade antics, meeting with House Republicans on July 21 in a closed door meeting. The same day that Republicans on the House Financial Services Committee pass a bill rolling back the part of Dodd-Frank that makes it easier for victims of the mortgage meltdown to sue the ratings agencies.

Instead, what does the Democratic party leadership do? Harry Reid and Nancy Pelosi are out there validating S&P’s role as arbiter of the situation, by saying the downgrade proves the Democrats were right in the debt ceiling fight.

You’ve got to give S&P credit. They rightly realized that if they threw something in there about the Republicans’ refusal to raise taxes (note: they don’t make any explicit value judgment as to whether this is good or bad), the Democrats would instantly be pumping their echo chamber full of partisan tripe which gave S&P instant validation on both sides of the aisle. Like sharks to chum, they just wouldn’t be able to resist.

But, the fish stinks from the head. And it was Geithner’s hubris in believing he was a player in the Masters of the Universe game back in April that lined everyone up for this. I can’t tell you whether he read the signals wrong, or thought he could play both sides, or simply placed a bad bet. But this morning here is PIMCO’s Mohammed El-Erian sending the message to the political class that the MOTU’s are tightening their grip, and will demand more extreme austerity measures in the future:

[T]here a sliver of a silver lining — and an important one. America’s downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country’s eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.

There is a risk, of course, that different political factions will use S&P’s action as a vindication of their prior beliefs. Democrats would argue that it is recent Republican political sabotage that pushed S&P over the edge while Republicans would argue that we are here due to irresponsible government spending by the Democrats.

For the sake of their country and the wider global economy, both parties should resist the urge to begin bickering. Instead they should seize this potential “Sputnik Moment” — a visible shock to the national psyche that can unify Americans around a common vision and a renewed sense of purpose — that of halting gradual secular decline by putting the country back on the path of high growth, job creation and financial soundness.

Well who could argue with that, right? Oh those bickering kids. And what is it that Pimco thinks they should be doing instead of bickering?

In his April commentary, [PIMCO founder and Managing Director Bill] Gross painted a grim picture of the federal budget outlook. He railed against “Washington’s inability to recognize the intractable: 75% of the budget is non-discretionary and entitlement based. Without attacking entitlements — Medicare, Medicaid and Social Security — we are smelling $1 trillion deficits as far as the nose can sniff.”

Unless entitlements are slashed, Gross said, the government will end up defaulting on its debts, though not in the standard way of halting interest or principal payments. Rather, he wrote, default would occur “surreptitiously via accelerating and unexpectedly higher inflation . . . deceptively via a declining dollar — currently taking place right in front of our noses . . . and stealthily via policy rates and Treasury yields far below historical levels — paying savers less on their money and hoping they won’t complain.”

That’s right, slash entitlements. With the plebes getting restless, El-Erian applauds the ability of the Super Congress to stand above the normal legislative process and do that.

Bill Gross was doing the interview circuit five days ago, saying that a downgrade of US credit was coming. Well I guess he would know — S&P has been giving private briefings to PIMCO that they did not disclose to the public. Good thing PIMCO has been shorting US Treasuries since early this year.

Anybody who is using these events to take partisan pot shots at Democrats or Republicans or liberals or the Tea Party is missing the forrest here. The Masters of the Universe are calling the shots. They stand above the law, and have no fear of it. They are politically and morally inert, and will happily work through any party and manipulate the sacred cows of any ideology in order to achieve their objectives. They are hoping that you get so wound up in tribal identification and waste your energies in an unrelenting fight against the “other” that you won’t notice the role they are playing, that of deus behind the machina.

In truth neither side has any “power” but what they are temporarily granted by the Masters of the Universe in order to achieve the objective of the moment. Geithner thought it was his turn to be “it.” Too bad for Tim, it wasn’t.

Other posts in this series:

Jane Hamsher

Jane Hamsher

Jane is the founder of Firedoglake.com. Her work has also appeared on the Huffington Post, Alternet and The American Prospect. She’s the author of the best selling book Killer Instinct and has produced such films Natural Born Killers and Permanent Midnight. She lives in Washington DC.
Subscribe in a reader