Back when bankers knew customers personally, they would engage in a quaint bit of business known as "character lending."
Clients known for integrity and good faith could borrow even if they were down on their luck or lacking the usual collateral. Fair dealing and diligence made them good risks even though the numbers might not be everything a loan officer would have liked.
Conversely, the starch-collared banker would eye some customers askance even if they possessed large incomes and massive trust funds. A reputation for louche living, a willingness to take risks, a disregard for duty and promises — these could doom a loan application from the fattest of cats.
The United States of America has just received its character-lending warning from Standard & Poor's. The community's leading citizen and most prominent borrower has been observed engaging in intemperate behavior, running up bar tabs at the Elks lodge and requiring police visits for domestic disputes. The credit officers are getting worried.
S&P's decision Friday to downgrade America from the top AAA rating to AA+ for the first time is about our willingness to pay, about whether we possess the mettle to do what is necessary and show we deserve the world's confidence.
The U.S. political process is "becoming less stable, less effective and less predictable," S&P said in its stunning announcement. Decisions on whether or not to honor solemn debt obligations are "becoming political bargaining chips." S&P's analysts "have changed our view on the difficulty in bridging the gulf between political parties over fiscal policy, which makes us pessimistic" about any improvement in the country's credit posture.
The move probably carries more symbolic than practical weight. The dollar is still the global reserve currency. The euro's troubles mean it's not a candidate to take over. Central banks and investors of the world have few other places to park their money.
Early reports indicate that the downgrade will not substantially disqualify long-term Treasuries as capital for banks or an investment for conservative institutional investors. The two other main rating agencies, Moody's and Fitch, still give long-term Treasuries their highest score. S&P's move does not affect the short-term Treasury obligations held by numerous money-market mutual funds.
But if some investors start selling off U.S. debt as a result of S&P's move, it could raise costs not just for the government but for consumers. When bond prices fall, interest rates rise. Rates for mortgages and other consumer loans tend to move up and down along with those of Treasuries.
S&P's downgrade is a character issue for the United States because the country can well afford to pay its debts. We're still the richest nation. Even after World War II, when the national debt as a portion of the economy was far larger than now, S&P had no problem giving the United States its top, AAA rating.
Some initial reports gave the impression that S&P's only problem with last week's debt-ceiling deal was the inadequacy of the spending cuts agreed to by Congress. But S&P made it clear that the downgrade might have been avoided if Congress had agreed to tax increases or some other kind of revenue increase.
"Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing," said S&P in the downgrade report. The agency notes disapprovingly that the debt-ceiling deal "contains no measures to raise taxes or otherwise enhance revenues." And, S&P observes, "The majority of Republicans in Congress continue to resist any measure that would raise revenues."
Republicans heavily contributed to the country's $14.6 trillion in debt, starting a disastrous, unnecessary war in Iraq and minting an expensive new social program in the form of Medicare pharmaceutical benefits. Democrats added an expensive fiscal stimulus in 2009.
But now the bills are piling up in the mailbox. They say "United States of America" in the cellophane window. And tea party Republicans have suggested that it's more important to avoid any new taxes — even years from now — than for the country to ensure it won't default on its obligations. This even though the top personal-income tax bracket is lower than it was during most of the presidency of Ronald Reagan, a Republican.
S&P, which badly misread the impending housing meltdown and made an embarrassing error in Friday's downgrade report, is not the perfect messenger. But that doesn't mean the message won't resonate. On Saturday the agency expanded on why it was so disturbed about America's direction.
"The debacle over the debt ceiling continued until almost the midnight hour," John Chambers, head of S&P's sovereign ratings committee, told reporters.
That, he seemed to be saying, does not become the world's wealthiest, most powerful country. That, he seemed to say, is a character problem.