Gerald Esptein, UMass Amherst economics professor and co-director of the Political Economy Research Institute, discusses the impact that the downgrading of the U.S. government’s credit rating may have on consumers in this Fox Business article. While the effects remain uncertain, if the move is perceived as an in risk, banks will likely charge more for loans but won’t pay more for deposits.
Epstein also warns that “The biggest long-term danger from the downgrade could be a bigger push for government austerity here and abroad, which could slow economic growth dramatically… ‘If (the ratings agencies) push each country individually to cut back on spending and cut their deficits, what they’re going to do is push the whole world economy down, cutting GDP all over the world,’ says Epstein. ‘It’s a self-defeating, self-feeding negative process.'” (FoxBusiness.com, 8/9/11)
Robert Pollin, UMass Amherst economics professor and co-director of the Political Economy Research Institute, says Standard & Poor’s decision to downgrade the U.S. government’s credit rating was based on a mathematical error – they pegged the national debt $2 trillion too high. He also says the ratings agency appears to be posturing, possibly in an effort to rehabilitate its reputation which was severely damaged by the mortgage meltdown where AAA ratings were routinely given to very risky investments. Pollin also predicted that a downgrade would have a negative impact on the stock market because investors often make decisions on incomplete or even inaccurate information. (The Nation, Huffington Post, 8/3/11; The Nation, Sun-Gazette[Williamsport, Pa.], 8/8/11)
The Standard & Poor’s analysis is all the more silly given the haphazard way in which they calculated the national debt, confusing two different analyses by the Congressional Budget Office and pegging the national debt $2 trillion too high. “This is like an undergrad student mistake,” Robert Pollin, a professor of economics at the University of Massachusetts and co-director of the school’s Political Economy Research Institute, told The Nation.
Nobody is laughing at the report’s collateral damage, however. Stocks continued to plunge Monday morning, in what Forbescalledthe “Standard & Poor’s stock market crash.” Pollin correctly predicted last week that a downgrade would likely not have an impact on Treasury bonds but could rattle stocks, because investors often “act on the basis of incomplete, or even inaccurate, information” and could “interpret the downgrade as evidence of a rising default risk.”
