Political India: Engaging America

When the approval rating of an institution is at an all-time low of nine per cent, one would think it would go out of its way to avoid any glaring failure in carrying out its duty.

Yet, even after the reputational debacle that the U.S.Congress suffered over the summer owing to its near-failure to reach a deal on a limit for the ballooning debt, it has again endangered its credibility in the eyes of voters.

In the months following those precipitous negotiations over the debt limit, the Congress' so-called deficit-reduction “supercommittee” failed to hammer out a deal on further public spending cuts before its Monday midnight deadline.

While rating agencies are closely watching these developments, the U.S. may have temporarily escaped an S&P-style downgrade since President Barack Obama's plan, approved by Congress, will now require automatic cuts across vast swathes of the budget, including the Republican-cherished area of defence expenditure.

Though $1.2 trillion in additional cuts was at stake, the committee could not reach a bipartisan consensus on where these cuts would be applied, with Republican intransigence on the continuation of the Bush-era tax cuts for millionaires and billionaires forming the bulwark of their opposition.

Democrats refused to sign off on deep cuts into Medicare, Medicaid and Social Security, welfare programmes aimed at the most vulnerable members of society.

With an unmistakable tenor of shame, the supercommittee co-chairs, Democratic Senator Patty Murray and Republican Congressman Jeb Hensarling, said in a statement, “After months of hard work and intense deliberations, we have come to the conclusion today that it will not be possible to make any bipartisan agreement available to the public before the committee's deadline.”

Mr. Obama, who may well mould the Republican blockades into a campaign plank for the presidential elections, struck a defiant note scarcely an hour after the passage of the deadline.

Broad agreement

“Despite the broad agreement that exists for such an approach, there's still too many Republicans in Congress who have refused to listen to the voices of reason and compromise that are coming from outside of Washington. They continue to insist on protecting $100 billion worth of tax cuts for the wealthiest two per cent of Americans at any cost, even if it means reducing the deficit with deep cuts to things like education and medical research,” said Mr. Obama.

Further warning his opposition against efforts to undermine the automatic cuts, which are expected to kick in by early 2013, he said, “My message to them is simple: No. I will veto any effort to get rid of those automatic spending cuts to domestic and defence spending,” adding, “There will be no easy off ramps on this one.”

When is a stimulus package not a stimulus package? When it's been paid for. At least that's what United States President Barack Obama hoped to underscore when he unveiled a $447-billion plan before the U.S. Congress, a combination of tax code and expenditure reforms aimed at creating an undefined number of jobs and jumpstarting the ailing U.S. economy.

“It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and if they hire, there will be customers for their products and services. You should pass this jobs plan right away,” the President said on Thursday night.

In a move that surely bolstered his centrist credentials, the President sought to woo his truculent Republican opposition in Congress through what the White House has labelled the American Jobs Act, a proposal that remained silent on actual job-creation projections and details of the financing mathematics.

What is known is that the plan, which was obviously forged in the cauldron of the 2012 presidential election, included a “centrepiece” $240-billion payroll tax cut for employers and employees; a $50-billion proposal to invest in highways, railroad and airport modernisation; a $10-billion infusion to Mr. Obama's idea of a national infrastructure bank; a $35-billion initiative to stem the layoffs of nearly 280,000 public sector workers; a $30-billion project to modernise 35,000 public schools; a $49-billion scheme to extend insurance payments for the long-term unemployed; and a “returning heroes” tax credit to “spur hiring of Iraq and Afghanistan war veterans”.

While he pleaded no fewer than 17 times that Congress should “pass this bill,” there was little doubt that Mr. Obama had deftly manoeuvred to put Republicans on back-foot.

His speech in the Capitol saw him concede to some of their demands such as expenditure reform in Democrat-favoured Medicare; yet he equally pressed them to yield ground on their top priority — blocking any form of tax hike on the wealthiest Americans.

Taking a dig at continuing partisan logjam on Capitol Hill, Mr. Obama also warned the U.S. Congress that it was short on time.

While some legislators may have decided that party differences could only be resolved them at the ballot box, he warned, “The next election is 14 months away... the people who hired us to work for them... don't have the luxury of waiting 14 months. Some of them are living week to week, paycheque to paycheque, even day to day. They need help, and they need it now.”

In particular Mr. Obama kept up the pressure on Republicans, presently under the sway of the fiscally ultra-conservative Tea Party, to stop insisting on tax loopholes for oil companies and tax breaks for millionaires and billionaires.

“This isn't political grandstanding... [or] class warfare. This is simple math... [and] these are real choices,” said Mr. Obama.

For all its bells and whistles, however, the American Jobs Act has received a lukewarm, mixed response from different constituents.

Republicans such as Senate Minority Leader Mitch McConnell called the initiative “a re-election plan,” saying, “It's time the President starts thinking less about how to describe his policies differently and more time thinking about devising new policies.”

Even liberal economist and Nobel laureate Paul Krugman criticised the scale of the proposals, arguing that the “lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the U.S. economy, and this plan... would fill only part of that hole.”

From The Hindu

Deven Sharma (55), Indian-American president of credit rating agency Standard & Poor's, has resigned less than three weeks after his company found itself at the receiving end of the Obama administration's ire following its downgrade of the United States' credit rating from AAA to AA+.

S&P's announcement, that Mr. Sharma would be stepping down immediately and leaving the company at the end of the year, also follows reports last week that the U.S. Justice Department had initiated an investigation into the mortgage securities ratings allocation process at the McGraw-Hill subsidiary. In particular, authorities were said to be examining whether S&P “improperly rated dozens of mortgage securities in the years leading up to the financial crisis.”

S&P's downgrade of the U.S.' debt from AAA to AA+ on August 5, based on its perception that the deficit reduction measures agreed by the administration were insufficient to stabilise national debt, saw further market turmoil in its wake as the downgrade triggered a massive global sell-off.

Credit ratings allocation, which yielded enormous profits in the boom years to the major agencies including S&P, Moody's and Fitch, have come under fire from regulators for their role in fuelling the financial markets collapse in 2008. The U.S. Congress and White House have both challenged S&P's “secretive process, its credibility and the competence of its analysts.”

In this week's announcement, S&P said Douglas Peterson (53), chief operating officer of Citibank N.A., would be its next President effective September 12, while Mr. Sharma “will take on a special assignment working on the Company's strategic portfolio review,” until the year's end.

Mr. Sharma's resignation also marks intensifying woes faced by the McGraw-Hill Group internally, with activist investors demanding stridently to break up the media conglomerate into four parts including splitting up the S&P into its indexes operations and ratings and financial business, reports said.

In announcing the change, Harold McGraw III, Chairman, President and CEO of the McGraw-Hill Companies said, “I particularly want to thank Deven for his dedicated leadership of S&P. Four years ago, in one of the most difficult times facing S&P in the midst of the financial crisis, I turned to Deven whose background as head of S&P's Investment Services, head of McGraw-Hill's Global Strategy and as a partner at Booz Allen & Company, brought the right kind of skills to address the situation.”

Mr. Sharma was however known for his outspoken views on imbalances in the market, for example saying last month to members of the House of Representatives Committee On Financial Services that, “The independence of rating agencies to develop their own methodologies, rather than be pushed by regulation toward a common methodology, mitigates the systemic risk that ratings could become indistinguishable from agency to agency.”

He had further warned that it was critical that new regulations preserved the ability of credit rating agencies “to make their own analytical decisions without fear that those decisions will later be second-guessed if the future does not turn out as anticipated or that, in publishing a potentially controversial view, they will expose themselves to regulatory retaliation.”

From The Hindu

The United States Government has launched a sweeping investigation into the mortgage securities ratings process at Standard & Poor’s, the credit rating agency that found itself in the eye of a storm less than two weeks ago after it downgraded the U.S.’ cherished AAA rating.

The U.S. Justice Department was said to be looking into the specific question of whether S&P “improperly rated dozens of mortgage securities in the years leading up to the financial crisis... [and] was asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S&P business managers,” according to the New York Times.

Quoting unnamed sources who were reportedly questioned by government officials on the matter ,the report said that the current investigation however began before S&P cut the U.S.’ credit rating.

Nevertheless, news of the latest inquiry comes on the back of sharp criticism of S&P in the U.S. Congress and White House, both of which have challenged the “agency’s secretive process, its credibility and the competence of its analysts”.

While there was no information on whether the other two top credit rating agencies, Moody’s and Fitch, were also involved in the investigation, the rating agency industry as a whole has been attacked for making record profits during the boom years even as they failed to predict the onset of mortgage security defaults that culminated in the collapse of the financial system.

S&P’s downgrade of the U.S.’ debt from AAA to AA+ earlier this month, based on its perception that the deficit reduction measures agreed by the administration were insufficient to stabilise national debt, saw further market turmoil in its wake as the downgrade triggered a massive global sell-off.

While the Justice Department declined to comment on the reported investigation of S&P, the New York Times quoted S&P spokesman Ed Sweeney as saying, “S&P has received several requests from different government agencies over the last few years. We continue to cooperate with these requests. We do not prevent such agencies from speaking with current or former employees.”

From The Hindu

The U.S. Federal Reserve has promised to hold U.S. interest rates at “exceptionally low levels” until the middle of 2013, in the wake of the worst market turmoil last week, since the financial meltdown of 2008.
Walking a tightrope between panicking investors further and appearing unresponsive to the market turbulence that wiped off over a trillion dollars of wealth from the bourses, the Fed said that it anticipated low rates of resource utilisation and a subdued outlook for inflation for the next two years.

“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today [Tuesday] to keep the target range for the federal funds rate at 0 to 0.25 per cent,” the Fed said in a split decision that was however backed by its Chairman, Ben Bernanke.

Seven members of the rate-setting Federal Open Market Committee voted for the decision to hold rates at such low levels while three members, including Indian-American Narayana Kocherlakota, dissented.

The dissenters “would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period,” the Fed said in a statement.

The central bank's unusual statement appeared to achieve the desired short-term effect as stock markets round the world rallied with the U.S. Dow Jones index closing the day up 429 points and London's FTSE 100 climbing 64 points in early trading on Wednesday, following Tuesday's gain of 96 points.

However, the Federal Reserve continued to emphasise that significant downside risks remained.

In a statement it said, “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually”.

While the FOMC said that it expected that inflation would settle over the coming quarters, at levels at or below those consistent with the Committee's dual mandate [to foster maximum employment and price stability], it added that it would “continue to assess the economic outlook in light of incoming information and is prepared to employ [a range of policy] tools as appropriate.”