Rushing Toward Another Financial Cliff with 6th Graders Screaming in the Backseat

I’ll admit I’m a geek about economics, so I’m fascinated and appalled as another weekend went by as Congressional “leaders” continue to flirt with disaster on the debt ceiling. We’re rushing toward another financial cliff when we default on August 2, and politicians are acting like 6th graders screaming in the backseat. So I went into the weekend intent on getting a clearer picture about the way out, and what might happen if we don’t find it.

Mark Zandi, the chief economist at Moody’s (the credit rating agency that’s about to nuke US creditworthiness on August 3) had a great piece in WaPo on Friday that addressed both questions. A great roadmap to the needed cuts and revenue to get our fiscal house in order, and a very clear picture of what happens if we fail.

All three major credit rating agencies have now threatened the United States’ coveted status as the world’s most secure economy . Moody’s said that at least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade. Even if the parties agree to raise the debt ceiling, it may not be enough to avert a downgrade. The credit agencies are saying the US must implement a plan to reduce the annual budget deficit by roughly $4 trillion over 10 years, which makes the debt manageable long-term. Medicare and Medicaid will factor very heavily into those plans — see last week’s Wall Street Journal story on the subject. If global lenders lose faith that the U.S. government is the safest entity on Earth to lend money to, the fiscal situation would go from being a long-term challenge to a near-term crisis.

Let’s all hope these “leaders” on the Hill come to their collective senses this week.