At a moment of renewed financial market turmoil, a historic downgrade of US government debt and gathering signs that the recovery has stalled, the capacity of Washington to act with deliberation has seemingly collapsed. This convergence is no accident. Washington’s performance in recent months – reaching its nadir in the phoney resolution of the debt-ceiling fiasco – is one reason why confidence is so depressed. Can this circle of anxiety and incapacity be broken? Yes. Bad as the position may seem, it is not hopeless.
In a way it will be puzzling if the S&P downgrade–despite all the blather about its historic significance–changes anything at all. Certainly, the news should not have come as a surprise: the agency has been talking about it for weeks and the rating for US government debt had been under formal negative review before the announcement. If there is a surprise, it is mainly that the agency had the nerve to go through with it.
More fundamentally, what new information did the downgrade and the analysis supporting it provide? None. After their performance of the past few years, rating agency analysts have, or should have, little credibility in any case. Reports of the initial $2 trillion misunderstanding in S&P’s examination of the Treasury’s books (they used the wrong CBO baseline) lend a tragicomic note, and run their reputational capital down even further. And all this would be true even if US Treasuries were arcane instruments that few investors could afford to monitor carefully, forcing them to rely on the agencies for lack of anything better. In fact, of course, US Treasuries are the most widely and intensely analyzed obligations on the planet. What does S&P know about them that you and I don’t? The informational content of the downgrade is precisely zero.
The global beating shares just took had many causes, no doubt. Still disgusted by the US debt-ceiling fiasco, I am apt to give that masterclass in malice and incompetence more of the blame than it really deserves: the talk in markets today was more about signs of stalling growth in the US and mounting anxieties over Europe than about US fiscal impotence. Still, it can’t help to know at such a time that the US government is clueless and paralysed–or that any US fiscal policies one might recommend (extended payroll-tax relief and unemployment benefits) would have to be taken up by the US Congress. Once it gets back from vacation.
That leaves the Fed and quantitative easing. Weeks ago I said I thought the case for QE3 was strong. At that point, there seemed little chance of it: inflation hawks on the FOMC were asserting themselves. The bad growth numbers for the first half surely ought to be changing their minds. QE3 looks like necessary insurance against a second dip and possible deflation. Now, unlike then, you can accept most of the inflation hawks’ way of thinking and still be in favour of QE3. The facts have changed, sir.
Perhaps today’s financial-market news has put you in mind of the need to square accounts with your Maker. Or perhaps not. In any case, I warmly recommend Religion in America: A Political History by Denis Lacorne. The author is French and his book, as I explain in this FT review, is a dual history. Its main theme is religion’s role in American politics and culture, but Lacorne is also very interested in the way the French have considered that question over the centuries. Don’t think this makes the book too academic: Lacorne’s approach is illuminating and entertaining. From my review:
The French don’t know whether to find the US admirable or appalling; dementedly religious or godlessly devoted to mammon; a modern secular democracy or a backward Anglo-Protestant theocracy. It was ever thus. Lacorne finds the roots of the confusion in two rival narratives of America’s national identity.
The first comes down from the Enlightenment, the Founding Fathers, and the founding documents of the American project: the Declaration of Independence, the Constitution, and the Federalist Papers. This is the creation story (forgive the expression) of a secular republic that self-consciously overthrew established religion, and built a “wall of separation” between church and state.
The second narrative, which Lacorne calls “Neopuritan”, denies the radical break and sees the American project as “the climax of a continuous progression of freedom starting with the Reformation and culminating with the first New England Puritan colonies”. This is America as the “City upon a Hill” – a biblical phrase used in a sermon by John Winthrop to the first Massachusetts colonists, and co-opted by John F. Kennedy and then by Ronald Reagan more than three centuries later. It sees the American creed as an indissoluble blend of Protestant and republican values.
Then again, Kennedy was a Catholic and Reagan was not religious. Lacorne’s point – and it is surely correct – is that both stories are true. This is what makes America so perplexing, not just to Voltaire and Sartre, but to Americans as well.
It’s a splendid book.
The United States’ fiscal emergency will not be over until a bill to raise the debt ceiling has passed both House and Senate and President Barack Obama has signed it. This can still be done by Tuesday’s deadline. As this column went to press, a deal looked within reach.