From today’s New York Post:

The White House narrative on how the country lost its triple-A rating and began a descent toward Third World status goes something like this:

Standard & Poors woke up Friday morning and out of the blue decided to downgrade Uncle Sam’s debt despite the administration’s best efforts to show the wrong-headedness of the S&P analysis.

Don’t buy it.

Yes, last Friday saw lots of meetings in Washington with Treasury Secretary Tim Geithner & Co. haranguing S&P executives with phony evidence that they’re getting a handle on the nation’s $14 trillion and rising debt, and the rotten economy that has squeezed tax revenues. But the fact remains, federal debt is set to grow for the foreseeable future, even with the spending cuts imposed in the recent debt-ceiling deal.

More important, the downgrade should hardly have been a surprise for the administration — it was among the most telegraphed in the history of downgrades.

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Standard & Poor’s government-credit-ratings guru David Beers played his cards close to the vest on the topic of a U.S. downgrade in our CNBC interview this week. However, this head of S&P’s global sovereign-ratings business — with a staff of 80 covering 126 countries — issued three strong warnings to the debt-ceiling negotiators in Washington.

Beers avoided direct comments on any of the key debt-limit plans. But when I asked him about joint congressional committees that would report back with additional budget savings at the end of the year, he said, “Well, naturally, it’s going to raise questions . . . we would have to look at the balance of incentives and disincentives that might increase or decrease the probability of that type of approach being effective.”

In other words, both the Harry Reid plan and the John Boehner plan could contribute to a downgrade this summer since it’s uncertain whether joint committees will get the necessary votes for large-scale budget cuts and deficit reduction by year-end. There are no guarantees.

I then asked Beers about a two-step debt increase. This is part of Speaker Boehner’s plan — a roughly $1 trillion debt-ceiling hike now and a roughly $1.8 trillion increase next year. Beers has a problem with that.

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It was sad to watch Federal Reserve Chairman Ben Bernanke being forced to hold a political press conference for the first time in the Fed’s 102 year history. Bernanke nervously defended the merit of the Fed subsidizing $3 trillion in Congressional deficit spending and $2 trillion in Wall Street bail-outs; but he looked tired and defeated. He should have just apologized that the Fed’s policies had the unintended consequences of exporting American jobs, igniting world-wide inflation, impoverishing seniors and now threatening the destruction of the AAA credit rating of the United States. Perhaps then he could he could have honestly asked Americans: “Please allow Congress to raise the debt ceiling, so we can continue to spend money.”

Bernanke was a Princeton academic before serving as a Governor of Fed from 2002 to 2005, where he gained notoriety for developing the “Bernanke Doctrine”. The professor theorized the world had entered a period of “Great Moderation” where brilliant economists, like himself, could reduce fluctuations such as industrial production, unemployment, and GDP by “1) improved government economic stabilization policy, 2) financial innovation and global integration, 3) improved inventory control and supply chain management, and 4) and economic good luck.”

After the “9-11” terrorist attack in New York, Ben Bernanke gave a speech that reassured bankers and hedge funds the Fed could manage any shock to the economy titled: “Deflation: Making Sure “It” Doesn’t Happen Here.” The professor stated the Fed “has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief”. He stated that “recession, rising unemployment, and financial stress” could be countered by:

1) increase the money supply through the “printing press”;
2) “print money and distribute it willy-nilly”;
3) lower interest rates – all the way down to 0 per cent to “be able to generate inflation”;
4) control corporate bond yields by lending to banks at 0% and accepting bonds as collateral;
5) “devaluation and the rapid increase in money supply”
6) buy foreign currencies on a massive scale to depreciate the dollar;
7) finance the Treasury’s purchase of U.S. companies with “newly created money”.

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Just a year ago, the Obama Administration was on the verge of converting America into a European style social-welfare state. The President had pushed up federal, state and local deficit spending to 41% of our gross-domestic-product (GDP), a level not seen since World War II. He passed healthcare legislation nationalizing 1/6 of the American economy and his Congressional majority was on the threshold of enacting labor and environmental regulations that would have collectivized broad swaths of American production and employment.

Then Greece and a number of other European nations suffered credit rating down-grades, soon followed by debt defaults and economic collapse. Today America stands at the precipice of its own collapse; either halt deficit spending or risk the financial collapse of our nation.

Barak Obama, during his Presidential bid, campaigned across Europe to symbolically express his solidarity with their economic social-welfare model by stating: “In America, there’s a failure to appreciate Europe’s leading role in the world.” Once elected, President Obama partnered with European nations on a multi-trillion dollar government spending initiative in hopes of generating a multiple of economic growth.

Unfortunately for America, Greece and the other deficit spenders, the spending was squandered on bureaucratic overhead and crony projects. Now that lenders are demanding repayment, many countries are being forced to default on payment.

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We will never know how many, if any, of the major banks would have failed without the TARP bailout package passed a year ago. Several banks were strong-armed into taking the money. We can be reasonably sure that Citigroup and Bank of America wouldn’t be the institutions they are today without some government hand-holding—actually, it is more like continuous CPR while giving blood and donating a kidney.

However, while we can’t know the counterfactual, we can assess how the liquidity infusions have decreased credit risk, lowering the cost of capital, and compare these savings to profits. And the stunning numbers show that up to nearly half of all profits from the top 18 banks are the result of Uncle Sam subsidizing the cost of credit.

Every day financial firms borrow money to conduct business. Just like with individuals and families, there is a cost to the credit in the form of an interest payment or fee. However, with a virtual government guarantee of security, the big financial institutions have been able to borrow at artificially reduced rates. Lenders to financial institutions know Uncle Sam has the back of the big boys on Wall Street. They’re sure to get their money back, based on current White House and Fed policy.

The problem is that this gives large financial institutions a competitive advantage over smaller business. Those smaller firms have to pay more for their credit. They don’t have the government guarantee. They are more risky. And while it is true that smaller firms will always have to pay more money to borrow than the larger firms, the government guarantee has widened the gap between the cost of credit for the smalls and bigs.

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