Editorial: Downgrade should send message

Standard & Poor's stripped away America's AAA bond rating late Friday, and yesterday stocks fell all over the world -- including a drop of 5.6 percent in the Dow Jones industrials. But U.S. Treasury bonds rose.

Are investors crazy? Hardly. They recognize that, on this subject in particular, Standard & Poor's has no credibility, which is why they rushed into the very bonds that should have been degraded by the rating change. S&P, you'll remember, played a starring role in the financial crisis of 2007-8 by slapping AAA ratings on billions of dollars in risky securities backed by dubious home mortgages. Those bonds, spread far and wide, nearly blew up the global banking system.

So S&P and its bond-rating brethren failed in precisely the thing for which we need them most: shrewdly assessing the safety of countless obscure securities so that each and every investor needn't reinvent the wheel when considering a bond purchase.

When it comes to the debt of Uncle Sam, S&P matches ineptitude with irrelevance. U.S. Treasury securities aren't obscure; they are judged daily by a vast army of marketplace participants, and it's doubtful the rating agencies have any more insight on this subject than a well-informed reader of financial news. Indeed, S&P's track record of rating sovereign debt around the world is poor -- and Moody's retains its AAA rating on U.S. debt, at least for now.

But if investors sensibly place little faith in S&P, whose downgrade they anticipated, they have reason to share its view that gridlock in Washington undermines faith in our nation as a debtor as well as hopes for sensible action to get our economy growing strongly. So if the rating cut leads to more good sense in Washington, then the agency will have done the world a little good for a change.

Meanwhile, the essential dilemma remains. America, Europe and Japan are burdened by too much debt. Slow growth will make this debt burden harder to bear, and excessive debt will make slow growth harder to counteract. Politicians in all the relevant places seem to lack the will or the wherewithal to cope.

Investors are fleeing stocks for Treasuries because they see that these woes are likely to get worse before they get better. Europe faces a true crisis, and before it's over one or more countries may have to leave the euro, which is likely to be painful for all. A forthcoming default by Greece could trigger similar events in Portugal and Ireland, imperiling continental banks, while Spain and Italy face unsustainably high borrowing costs -- and are probably too big to bail out. Japan's problems are less urgent but more enduring: afflicted with slow-growth, mounting debt and dithering leadership for years, it presents a cautionary tale for our own country.

For now, at least, our problems are more manageable -- unless, of course, we mismanage them. If politicians in Washington stopped bickering long enough to focus on creating jobs and putting a long-term deficit reduction plan in place, we might at last get on the road to recovery. Let's hope S&P's downgrade, however misguided, will persuade our leaders to work together toward a solution. hN