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Obama confident in spite of credit downgrade

August 8, 2011

During the worst day on Wall Street in more than a year, President Barack Obama stood by the nation’s credit reliability Monday as the U.S. stock market tanked, tumbling hundreds of points before closing at a more than 5 percent loss.

Another recession comparable to the one that began with a stock crisis in 2008 could happen if markets continue to plunge, MSU economists said — an aftereffect of last week’s debt ceiling crisis.

Despite Obama’s attempt at reassurance, Dow Jones industrial average losses totaled about 5.5 percent ­— more than 600 points — in what some are reporting was the worst day since the 2008 financial crisis.

The crash will touch nearly every aspect of the economy, including a variety of hurdles students will face in school and after graduation, such as the job and housing market, MSU economists said.

“Markets everywhere are going to be adversely affected,” said Doug Roberts, director of MSU’s Institute for Public Policy and Social Research. “This is a very serious issue.”

In his speech at the White House, Obama defended the U.S. credit rating, saying, “(the U.S.) always will be a AAA country,” even though it was downgraded for the first time in U.S. history on Friday by Standard & Poor’s Financial Services LLC, which in turn triggered Monday’s massive sell-off.

“We continue to have the best universities … and the most adventurous entrepreneurs on earth,” Obama said.

Standard & Poor’s, or S&P, is one of the largest financial research analysis firms in the world and is seen as an authority in institutions’ ability to pay back loans.

Still, some question the rating’s validity.

Mordechai Kreinin, a university distinguished economics professor, said he doesn’t think S&P’s ratings provide an accurate portrait of the federal government’s ability to pay back its debt, but noted the ratings have a large effect on markets, as investors place high stakes in them.

“There is a fair chance that we are going to be dragged into a second recession,” Kreinin said.

“I don’t think it’s a sure thing, but there’s a real probability.”
Roberts said the market plunge likely will affect Michigan even harder than other states, as its two main industries — cars and tourism — are expendable consumer items people often stop purchasing during times of economic hardship.

And he said it easily could get worse.

“Fear is running the show,” Roberts said.

Both Kreinin and Roberts said the credit downgrade itself has not driven up interest rates yet — good news so far for students taking out loans to pay for college.

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