President Obama addressed the nation on Tuesday afternoon as the world and U.S. financial markets continued their downward slide, which followed Standard & Poors downgrading of the United States' credit rating from AAA to AA+ on Friday. So far, Moody’s and Fitch rating services have not touched the U.S. credit rating, although that remains a possibility.
The thought was that the president chose the afternoon timeslot to calm the markets' nerves. In the end, his message seemed directed more toward the U.S. public than the markets. Whether it was due to the President's message or other factors, such as further global selloff, the Dow dropped 600 points, and fell below 11,000, which last occurred in November 2010.
“S&P downgraded the U.S. credit rating not because they doubt our ability to pay our debts,” Obama said, “But after a month of wrangling about our debt ceiling, they doubted our political system’s ability to act.
“We didn’t need a rating agency to tell us we need a balanced, long-term approach to deficit reduction or that the Washington gridlock has not been constructive, to say the least.”
He told Americans that the United States' financial challenges are solvable, and that along with the domestic and defense spending cuts outlined in last week’s debt ceiling agreement, two additional steps need to be incorporated to round out the effort. Those steps being:
- “Tax reform that will ask those who can afford it to pay their fair share,” Obama said.
- Modest “adjustments” to health-care programs, such as Medicare.
“These reforms do not require radical steps, but they do require commonsense and compromise,” he added.
Obama acknowledged that both Democrats and Republicans have presented “good proposals” along the way. He pointed to the “lack of political will in Washington” to negotiate, and the “insistence of drawing a line in the sand.” He further called out those who refuse “to put what’s best for the country ahead of self interest or party ideology—that’s what we need to change.”
Aware that the skepticism for future progress runs deep, Obama said his administration will present recommendations to the soon-to-be-formed Congressional “Super Committee” to get things moving. That group is charged with coming up with at least another $1.5 trillion in additional deficit reduction strategies—whether it involves spending cuts or revenue generation. However, the committee also could draw up bigger plans, which could help reassure markets and investors.
The president also addressed jobs, saying that Congress needs to extend the payroll tax credit, as well as address unemployment payments. Pointing to infrastructure, he cited roads, bridges, airports as being in need of repair and that such projects would put “thousands of workers back to work.” “These are not ‘big government’ proposals. There’s no reason we shouldn’t act on them now,” he said.
Of course, the United States is not the only country causing economic turmoil, Europe’s troubles are equal to or worse than the United States, and Japan is still dealing with earthquake recovery issues. While the market’s current trading is dramatic, it’s worth noting that the stock market is always a jittery place, with momentum-based speculative and computer trading. The debate is whether panic selling is driving the day or, given the slow decline over the past couple of weeks, that it’s a longer-term trend. Regardless, the reality for Americans is that personal investments have lost $1 trillion to $2 trillion total over the past couple of weeks.
“This is a major selloff, and we should take it seriously,” said Ali Velshi, CNN business correspondent. He points out that the bond market has not reacted to the S&P dropping the United States to AA+ status. “The debt downgrade is directly associated with bonds (and interest rates), but that market is holding steady,” he said. “The bond market reflects the United States’ ability to borrow money on the international market; yet it’s now easier and cheaper for it to borrow money than on Friday.”
So, America is still a “safer investment” than most places in the world, Velshi noted, and interest rates have not turned higher. Of course, that could change moving forward. What is really concerning everyone is whether the country will enter a second recession—to which analysts cite the prospect at 50/50.