Innovation/Global Crisis Blog

Three Cheers for David Beers… David Who?

By Shlomo Maital

 David Beers:  Last Honest Man?

 

Very few people have heard of David Beers.  He is the head of Standard & Poor’s sovereign bond rating department.   He makes the decision whether to, for instance, downgrade America’s Treasury bond rating from AAA to AA plus.   Which is just what he did last Friday, after the stock market closed in New York.  Both before and after his decision he was subject to pressures one can only imagine – including a claim by the U.S. Treasury Dept. that he and his team made a mistake amounting to $2 trillion, in estimating America’s debt burden.   (It turns out that $2 trillion, which is 14 per cent of US GDP, is insignificant; $15 trillion have to be cut from America’s budget in the next decade!).

   Former U.S. Assistant Treasury Secretary Larry Summers vilified Beers, recalling that S&P failed to downgrade mortgage-backed securities and hence directly helped cause the global financial crisis in 2007-9.   Thanks, Larry, we had forgotten that.  But, Larry, as you well know, Beers had nothing to do with that – that was another department in S&P.  Do you think the Republican and Democrat leaders, including the President, bear any responsibility, for an anemic  deficit-reduction plan that only cuts spending by $20 b. this year? 

    Here is the key fact that justifies Beers’ courageous decision, which fires a shot across the bow of America’s dysfunctional politicians. (From Bloomberg Business Week):

  “A June analysis by the Congressional Budget Office concluded that keeping the U.S.’s ratio of debt to gross domestic product at current levels until the year 2085 (to avoid scaring off investors) would require spending cuts, tax hikes, or a combination of both equal to 8.3 percent of GDP each year for the next 75 years, vs. the most likely (i.e. “alternative”) scenario. That translates to $15 trillion over the next decade—or more than three times what Obama and Boehner were considering.   You start to see why, absent signs of a serious commitment to deficit reduction, the rating services are warning they may downgrade the federal government’s triple-A rating even if Congress does meet the Aug. 2 deadline. Fortunately, our debt hole is escapable. But digging out requires that leaders of both parties come to terms with just how deep it is.  

   In other words, just to keep America from sinking deeper in debt,  American consumers, for instance, will have to lower their average standard of living by 12 per cent (lowering personal consumption from 70 per cent of GDP to 62.5 per cent – still far higher than in China, for instance).  This is not impossible, or even draconian.  It means giving up all eating out and entertainment, for example.  Has any American leader pointed out to Americans, that in order to dig the U.S. out of its hole, every American will have to stop eating out in restaurants and going to movies, forever (not just for a month or two)?  

    David Beers deserves praise.  All those attacking him deserve sharp criticism.  By attacking Beers, they are discrediting perhaps the last honest person in a position of authority in America, one willing to tell the truth.