The big story of the weekend is Standard & Poor’s downgrading U.S. sovereign debt. Political reaction to that news and other headlines that caught my eye are after the jump.

Standard & Poor’s lowered its rating on U.S. sovereign debt from AAA to AA+ with a negative outlook on Friday. The credit rating agency’s press release faults the American political process as much as current fiscal conditions. Excerpt:

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. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. […]

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

The U.S. Treasury Department asserted that the S&P analysis was flawed because the agency assumed $2 trillion more in discretionary spending than the Congressional Budget Office estimate. But S&P stands by its decision to downgrade, saying in a statement, “The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook.”

Economist Robert Reich, a strong critic of the austerity policies S&P advocates, slammed the agency’s judgment:

Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?

If we pay our bills, we’re a good credit risk. If we don’t, or aren’t likely to, we’re a bad credit risk. When, how, and by how much we bring down the long term debt – or, more accurately, the ratio of debt to GDP – is none of S&P’s business.

S&P’s intrusion into American politics is also ironic because, as I pointed out recently, much of our current debt is directly or indirectly due to S&P’s failures (along with the failures of the two other major credit-rating agencies – Fitch and Moody’s) to do their jobs before the financial meltdown. Until the eve of the collapse S&P gave triple-A ratings to some of the Street’s riskiest packages of mortgage-backed securities and collateralized debt obligations.

Had S&P done its job and warned investors how much risk Wall Street was taking on, the housing and debt bubbles wouldn’t have become so large – and their bursts wouldn’t have brought down much of the economy.

A downgrade could raise borrowing costs for consumers as well as for government, but how markets will react to S&P’s action remains unclear. The other two major ratings agencies, Fitch and Moody’s, have kept the U.S. at the highest rating level. Yves Smith predicts that “the reaction in the Treasury market to the news [from S&P] will be underwhelming.” She also cites S&P’s “highly questionable conduct [and] the lack of any analytical process behind this ratings action” to argue that the downgrade “stinks to high heaven.” Like Reich, Smith points out the utter failure of the ratings agencies to downgrade packages of bad mortgages before the housing meltdown. Furthermore,

A country that controls its currency can always satisfy the IOUs it creates. The risk is inflation, not default. But ratings agencies assess credit ratings, not interest rate risk. Japan was downgraded to single A, yet that did not affect its ability to sell bonds at very low yields.

S&P has published criteria for sovereign ratings, but they are still vague and inconsistently applied. And no wonder. They aren’t paid to provide these ratings, and accordingly understaff the activity.

Democratic political reaction to the downgrade was mixed. Some commentators questioned the basis for the action, pointing out the $2 trillion calculation error, or the ratings’ agencies track record before the 2008 financial crisis. Others pointed to the S&P press release as proof that Republicans are hurting the country by reflexively blocking every revenue increase.

Republican reaction generally blamed President Barack Obama for presiding over U.S. decline. Several GOP presidential candidates quickly released statements faulting Obama’s economic policies. Representative Michele Bachmann still seems to be under the impression that the U.S. could get without raising the debt ceiling ever again, even though laws already approved by Congress make new borrowing necessary to pay all the federal government’s bills.

So far two Iowa members of Congress have released statements on S&P’s action. Democrat Leonard Boswell (IA-03) said,

“This is what happens when you play a game of chicken with the economy. As I said before, this manufactured crisis is an absolute disgrace. We need to have a balanced solution that reforms our revenue structure in addition to making sacrifices. The amnesia and fake ignorance that is the Republican and Tea Party position on this issue is astounding and pure partisan politics that is destroying jobs and the middle class. Make no mistake about it, they are coming after Social Security and Medicare next.”

Republican Tom Latham (IA-04) had this to say:

“Standard & Poor’s had been attempting to send Washington a wake-up call since April when they changed their outlook on U.S. Treasury securities from “stable” to “negative.” Friday’s credit downgrade is yet another alarm to warn us that our national debt and reckless spending has reached a point of crisis.  It reinforces my opposition to the recent debt ceiling agreement as it did not go far enough to put us on true path towards long term fiscal sustainability.”

“Washington must heed this warning and recognize that regardless of political differences, the simple truth is that we have a responsibility as a Congress and as a government to work together to find real solutions to these problems – to put people before politics and progress before partisanship. I am, as I have always been during my service to Iowans, committed and ready to work with any members of the House or Senate, regardless of political affiliation, who are willing to join me to move our country forward on the path to fiscal responsibility to save the American Dream for our children and grandchildren.”

Boswell and Latham will compete in the new third Congressional district in 2012. Both voted against the deal to raise the debt ceiling, but for very different reasons.

I find it frustrating that U.S. long-term debt continues to dominate political discourse, when yet another weak monthly employment report suggests policy-makers should be much more concerned about stimulating the economy. There will not be long-term deficit reduction if 9 to 10 percent unemployment becomes the new normal.

In news closer to home, the Missouri River level finally started dropping over the past week, but the Federal Emergency Management Agency denied the state of Iowa’s request for assistance to individuals affected by this summer’s flooding in Fremont, Harrison, Monona, Pottawattamie, and Woodbury counties. Governor Terry Branstad’s administration will appeal the decision. Iowa Homeland Security and Emergency Management Administrator Brigadier General Derek Hill commented,

“It is incredibly important to the citizens along the Missouri River that we are successful in this appeal. The aid provided in the Individual Assistance program is a major piece of the puzzle that is needed to help Iowans recover from this flood.”

The new IA-03 includes several western Iowa counties affected by Missouri River flooding, and both Latham and Boswell criticized FEMA’s decision. Latham formally asked FEMA Administrator Craig Fugate to reconsider. Boswell’s Congressional campaign released this statement on August 5:

Congressman Leonard Boswell is asking President Obama today to reconsider his denial of individual FEMA assistance to western Iowa counties that were devastated by flooding earlier this summer along the Missouri River. Boswell visited residents and city officials impacted by flooding last month when waters peaked.

“I am joining Governor Branstad in his call for an appeal of the FEMA decision to deny assistance to individuals in Fremont, Harrison, Monona, Pottawattamie, and Woodbury Counties,” said Boswell. “In my time serving this state, I have seen FEMA assistance extended for a lot less. Rural Iowans pay their taxes just like everyone else, and deserve access to disaster relief aid. If FEMA is denying homeowners help because they live in a smaller community and don’t meet its new threshold for number of dwellings destroyed that is outrageous and discriminatory.”

The FEMA Individual Assistance Program is made available to homeowners, renters and businesses and can include grants and low interest loans to help pay for temporary housing, home repairs and other disaster-related expenses not covered by insurance or other aid programs.

This is an open thread. What’s on your mind this weekend, Bleeding Heartland readers?