Was Standard & Poor's right to downgrade America's credit rating on Friday? We asked our readers this morning. They answered, by a convincing margin, yes.

It's hard to disagree. S&P's rationale for the downgrade is difficult to refute:

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.

Treasuries are, financially, still the safest form of debt in the world. The United States has the resources to pay its debt. This is not a question. What's worrisome is whether political leaders will threaten the viability of that debt to make a political point. And as last week showed, they are not only willing to, but they'll also do it again. As Sen. Mitch McConnell remarked, the debt-ceiling debate "set the template for the future" and added: "In the future... no president -- in the near future, maybe in the distant future -- is going to be able to get the debt ceiling increased without a re-ignition of the same discussion of how do we cut spending and get America headed in the right direction." That may be admirable in the mission to cut future deficits, but it's disastrous in the mission to remain creditworthy. That's why S&P issued a downgrade.

But there's more to the story. S&P's original report delivered to the Treasury on Friday contained a large math error. It doesn't dispute the mistake, and it quickly published a revised version, effectively claiming that the error was negligible in the grand scheme of things.

But as Ezra Klein of The Washington Post points out, the changes between the original and the revised report might not have been trivial. Says who? Well, says S&P itself:

In both versions of the report, Standard [&] Poor's say they would upgrade our outlook from "negative" to "stable" if the Bush tax cuts for income over $250,000 expire. That would net the Treasury about $900 billion over 10 years. So according to S&P, $900 billion is a big deal. And it's a big deal because of how much it would do to reduce the deficit.

In the original version, they say that $900 billion would mean net public debt drops from an estimated 93 percent of GDP in 2021 to 87 percent of GDP. But in the second version of the report -- the one they wrote after they discovered their $2 trillion mistake -- they revised their estimate for America's baseline debt path down to "74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021." In other words, S&P's technical correction improved our deficit outlook by more than letting the high-end tax cuts expire, which S&P had said would raise enough money to stabilize our rating. If the numbers mattered, then by S&P's own logic, that should have changed their opinion of our finances.

You don't have to agree with the logic of letting tax cuts expire. And S&P's final rationale for the credit cut -- political hostility -- remains as valid as ever. But the errors and updates bring a serious question to light: If S&P's math had been accurate the first time around, would it have gone through with the downgrade at all? By S&P's original analysis, one might believe the answer is no.

Today's stock market route showed how the downgrade affects nearly all of us, and potentially in huge, life-changing ways. Demanding that S&P's decision live up to its own standards isn't asking much.

What do you think? Share your thoughts in the comments section below.



At the time this article was published Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter, where he goes by @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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69 Comments

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GaryNPS

The people who should be listening to S&P are not. Those are the same people who refuse to allow the Bush tax cuts to expire. It's past time to end the tax sale. If they won't, we will have to, but getting them out of Congress. S&P certainly has it's problems historically. As an LLC they can get away with more mistakes without any repercussions, but I'm not sure it's a good idea to throw an LLC into the task of controlling America's politics, we may already have enough differing opinions in D.C.

August 09 2011 at 11:44 AM Report abuse rate up rate down Reply
evenfaster

Remember when the Securities and Exchange Commission was brought on the carpet for not doing it's job
properly as far as mortgage investments oversight? Now there will need to be some serious govt. oversight applied to S&P----
(private company or not) One company and two eggheads cannot have the power to destroy the markets with
an ill advised decision based on politics instead of finance They must also bee called to accountability if they
made a mistake. I think they made a political statement at the worst possible using terrible judgement and should
be fined a hefty sum for it.Their timing was conspiratory.

August 09 2011 at 10:51 AM Report abuse rate up rate down Reply
renaldo1949

so now some want to shoot the messenger. s&p made mistakes. but they pale compared to what our elected leaders have done, or not done.

we have lost millions of jobs. this affects revenues. we spend far more than we take in. how long does one think that can go on?

August 09 2011 at 10:03 AM Report abuse rate up rate down Reply
J. R. Gilbert

The irony of all of this is that S & P had a large hand in our financial mess. They gave AAA ratings to the total junk bonds that were made up of toxic mortgages. Then they all came crying to Congress stating that if we didn't bail them out the economy would collaps. Then the CEO's put the money in their pockets and ran like hell.

Now they turn around and stick it to us again. I got out of the stock market before the previous crash. I got back in very gingerly and I got back in the panic mode last Monday and COMPLETELY got out again. I'll take my chances with Treasury Securities, Federal Money Markets and gold.

Everyone should know by now that big banks and Wall Street can't be trusted. They tell all of the small investors to "stay the course" while all of the major investors bail out. The BS of all of this is that if, in fact, all of the small investors would react like the major investors have, the market would collaps completely.

So, once again, the bigs guys get richer and the rest of us pay the bill. I hit retirement age last month. As such, I will not return to the stock market again under any condition.

I truly wish the rest of you well.

August 09 2011 at 9:47 AM Report abuse rate up rate down Reply
bravo8222

the worst part of this economy is yet to come.

August 09 2011 at 9:44 AM Report abuse rate up rate down Reply
bravo8222

the s&p was correct in its action.

August 09 2011 at 9:42 AM Report abuse rate up rate down Reply
johndson

If S & P could actually do its job, then the mortgage collapse, the housing collapse, the banking collapse, the now 7 year old tax cuts for the wealthy, the 2 wars financed wholly on borrowing, the Medicare prescription debacle also financed rather than paid for, and HUGE yearly budget exclusions representing actual debt that never appeared in any budget could have ALL been avoided. Where was S & P when bogus mortgage loans by the tens of thousands were being "securitized" and being sold all over the worls as AAA securities? THAT didn't affect their opinion!!?? This is a clear case of after the fact, ass covering. S & P has zero credibility! If you are a "watch dog" agency who's business is to rate economic stability, then WHERE THE HELL WERE YOU WHEN IT WAS HAPPENING YEAR AFTER YEAR? Get a clue S & P! Grow a pair! Your actions served no purpose, are about 7 years too late, and basically only inflamed a a situation that was going on right before your very eyes while you did and said ABSOLUTELY NOTHING! S & P didn't discover the problem they ARE a part of the problem.

August 09 2011 at 9:11 AM Report abuse rate up rate down Reply
1 reply to johndson's comment
maa2626

agreed, the first step in fixing a problem is acknowleding there is a problem. I would like to see s and p admit thier mistakes, but that will not happen because of liability. be happy that someone finally stood up to obama and said "NO", I am afraid that things are much worse than we are led to beleive, ie body english of obama and geitner.

August 09 2011 at 9:23 AM Report abuse +1 rate up rate down Reply
maa2626

count your blessings you could have been born in hati. each and every one of you that have posted a comment (including me) have contributed to this mess, and be honest with yourself. personally, I am happy standard and poor downgraded the us, now we can finally start to clean up the mess.

August 09 2011 at 9:07 AM Report abuse -2 rate up rate down Reply
HI JOHN

AN INDEPENDENT

Faulty math aside it should be a wake up call to our politicians. Let's get our financial house in order with a plan calling for shared sacrifice from all Americans. After all isn't that who we are, rich, poor, of all colors and nationalities. Knock the b***sh** off and do what is right for our nation. One last side note, I like what Ditto said about The S&P folks but would add let's see if any of our teaparty folks shorted the market or for that matter let's look at our republican and democratic representatives to see if they also shorted the market.

August 09 2011 at 7:18 AM Report abuse +1 rate up rate down Reply
Ditto

I wonder if anyone with S&P had shorted the market late last week.

August 09 2011 at 6:00 AM Report abuse +1 rate up rate down Reply
1 reply to Ditto's comment
BRUCE

Good point! I don't understand why S&P waited until the market tanked on Friday and then came out on Monday with the downgrade. That was putting gasoline on the fire. If they were going to downgrade the debit rating of the country they knew it well before Friday and Monday. S&P continues to be a contributor to the financial ruin of our economy.

August 09 2011 at 11:23 AM Report abuse +1 rate up rate down Reply