Top tier emerges as GOP nomination race enters a defining phase

Reporting from Des Moines and Waterloo, Iowa— 

The new top tier of Republican presidential contenders has emerged to reset the 2012 race and raise new questions about exactly where an angry GOP base will take the party in next year's election.

The contest is now a three-way, multilayered match, withRick Perry and Michele Bachmann rising to challenge each other and national front-runner Mitt Romney, after the Texas governor formally declared his candidacy and the Minnesota congresswoman won the year's biggest organizing test.

Bachmann and Perry capitalized on their new prominence by appearing together for the first time at a party dinner in Waterloo, Iowa, late Sunday. The event opened a new and potentially defining phase of the nomination race: their head-to-head battle for the social and religious conservatives who dominate early-state caucuses and primaries.

Those tests, it seems increasingly clear, will be decided by an electorate fed up with Washington's dysfunction and deeply worried that the U.S. is in decline economically and as a world power.

Party activists in Iowa, in a warning to the establishment of both major parties, forced Tim Pawlenty to abruptly quit the race Sunday, by dealing him a weak third-place finish in a straw poll Saturday that boosted Bachmann to the head of the field in the leadoff caucus state.

Pawlenty said on ABC's "This Week" that voters were "looking for something different" from what he was offering as "a rational, established" two-term Minnesota governor with a "strong record of results, based on experience governing." Other Republicans said his low-key, guy-next-door image was no match for Bachmann's crowd-pleasing fire.

Bachmann said Republican voters were sending "a strong message to Washington." They "want us to get our house in order, financially speaking" and "they want someone who is going to fight for them," she said on CBS' "Face the Nation."

Candidates from the party's establishment wing who had been expected to challenge for the nomination have been faltering in the early going. Besides Pawlenty, former House Speaker Newt Gingrich and former Utah Gov. Jon Huntsman Jr. have failed to take off, though the latter two remain in the race.

Rep. Steve King, an Iowa Republican who is among Bachmann's closest friends in Congress, noted that establishment candidates fared poorly in the straw ballot, drawing only about 1 in 5 votes cast by nearly 17,000 Iowans.

That reflected, in part, a decision by Romney and Huntsman not to compete aggressively at the event. Still, Bachmann and others, including the second-place finisher, Rep. Ron Paul of Texas, are tapping a strong undercurrent of outrage over business as usual in Washington. And those taking part in the straw poll almost certainly represent the social and evangelical Christian conservatives who will be a majority at the caucuses next winter.

"The debt ceiling vote is part of the long continuum of Republicans not standing up to do the hard things necessary" to turn the country around, said King, one of the most conservative House members, criticizing GOP members who, unlike himself and Bachmann, agreed to raise the debt limit this month. Bachmann supporters "know she will do the hard things."

In Waterloo, both Perry and Bachmann played to outsider sentiment by defending "tea party"activists.

"The tea party has been the best antidote to the out-of-control spending we have seen," Bachmann said. "The tea party has done something else for us too. They pointed out the unbelievable level of debt we have."

Perry, making his first stop in Iowa, faulted those who say the tea party is "angry."

"We're indignant at the arrogance and audacity this administration is showing about the values that are important to the people of America. We're indignant about a government that borrows trillions of dollars because they don't have the courage to say no," he told Republicans gathered for a party fundraiser.

Neither candidate addressed the other; Bachmann arrived after Perry spoke, and when she concluded her speech Perry quickly left the building without shaking her hand.

At a campaign stop earlier Sunday in Manchester, N.H., Perry said that he was "one of those citizens in this country that is very frustrated with a federal government that does not listen."

The governor also took a swipe at Romney, telling New Hampshire's largest TV station that Texas' record of job growth under his leadership "doesn't need any propping up," an allusion to Massachusetts' low rate of job creation while Romney was governor.

That jab was an early illustration of Perry's intention to challenge Romney and Bachmann at the same time. If he succeeds, he could be well-positioned to build a substantial edge once the primaries begin, albeit at the risk of coming under a dual assault.

Perry's entry poses a difficult challenge for Romney, who has been skirting Iowa, where he lost to former Arkansas Gov. Mike Huckabee in 2008 despite an expensive, all-out effort.

The Texas governor will fill the void left by Pawlenty for "a serious candidate who could actually become president," said Tim Albrecht, communications director for Iowa Gov. Terry Branstad, a Republican.

Perry will likely have the financial resources that Pawlenty lacked, which finally drove him from the race, as well as the potential to build support among both evangelical Christians and fiscal conservatives.

Bachmann, alternately, could get the jump on the field if she can hold off Perry and transfer her success in Iowa to other early-voting states, especially South Carolina and Florida.

GOP strategist Mike Murphy, a former Romney aide, said the Massachusetts governor faced "a tough call" in Iowa. Murphy said Romney might be able to eke out a caucus win if conservatives divide their votes among Bachmann, Perry and others. Or the populist anger spurred by economic distress could spread from activist events into the presidential primaries, with unpredictable results.

Obama, congressional leaders seek leverage from economic jolt

Reporting from Washington— 

The jolt to America's prestige as an economic superpower so far has only hardened positions in Washington, as President Obama and congressional leaders are seeking to use the downgrade in America's credit rating to gain leverage in the next round of the battle over the federal debt.

Obama spoke Monday at midday, as the Dow was skidding toward a 634-point drop, and portrayed Standard & Poor's decision to downgrade U.S. credit on Friday as proof that political paralysis "could do enormous damage to our economy and the world's."

In his first public comments since S&P cut America's coveted AAA credit rating to AA+, Obama said the nation could reduce its deficit and jump-start the economic recovery if there was "political will in Washington." He called upon the nation's political leadership to stop "drawing lines in the sand."

But by day's end, there was no indication that compromise was in the offing. Indeed, House Majority Leader Eric Cantor(R-Va.) sent a memo to House Republicans on Monday urging them to hang tough.

"There will be pressure to compromise on tax increases. We will be told that there is no other way forward. I respectfully disagree," Cantor wrote. Spending, he said, must be reduced: "This is why we were elected."

The No. 3 Democrat in the House, James E. Clyburn of South Carolina, made clear his party's view that a deficit reduction package must involve "shared sacrifice" — code for tax revenue increases.

Congressional leaders have until next week to appoint a "super committee" of 12 lawmakers — six from each party — to come up with a proposal to cut the federal deficit by at least $1.2 trillion by Nov. 23. If the new committee deadlocks, or if it makes recommendations that Congress fails to pass, 10 years of cuts in federal agency budgets would be triggered automatically, including a steep decline in Pentagon spending.

With differences over spending and taxes appearing unbridgeable, it may take the 2012 election to end the impasse. Voters may provide the answer to a question that has consumed Washington for months: Which side has the best approach to relieve the U.S. debt crisis?

A foreshadowing of the 2012 race may come Tuesday in Wisconsin as voters go to the polls: Half a dozen Republican state senators face a recall election that could put Democratsback in control of the upper chamber.

The contest in Wisconsin, an important swing state, is partly a referendum on the policies of Republican Gov. Scott Walker, who signed a bill this year stripping many public workers of collective bargaining rights. But both sides have also cast the fight as part of the larger, national struggle between Democratic and Republican approaches.

Obama, speaking from the White House State Dining Room, said he hoped the rating downgrade would prod both parties to seek a compromise. He also sought to reassure nervous investors that the U.S. remains a "AAA country."

People seem worried. A CNN poll released Monday found that 60% believed the U.S. remained in an economic downturn with conditions continuing to worsen. Only 36% believed that in April. Just 24% believed things are going well in the U.S., compared with 75% who believed things are going badly, the poll showed.

Both parties say they want to create jobs, but again, there is no consensus on how to go about it.

Obama reiterated his call for extending a payroll tax cut that expires at the end of the year. He also called for extending unemployment insurance benefits and reviving the hard-hit construction industry by rebuilding the nation's highways, bridges and ports.

Republicans already have dismissed some of the proposals this year. And GOP lawmakers have no appetite for anything that smacks of new spending.

"On job creation, we need to reduce the regulatory burden, prevent tax hikes and make it easier — not harder — for job creators to start hiring again," said Sen. Mitch McConnell of Kentucky, the Republican leader, in a statement after the president's remarks. "The country needs economic growth and fiscal responsibility, not higher taxes and new Washington spending and regulations."

Action will have to wait, though. Congress is in recess until after Labor Day, and Obama is not asking lawmakers to come back early.

Some wish he would take that step.

Robert Reich, who was Labor secretary under President Clinton, said in an interview: "For the good of the country and for his own political future, he's got to be seen as making jobs his first and major priority. And I fear he's not doing that."

United States loses prized AAA credit rating from S&P

(Reuters) - The United States lost its top-tier AAA credit rating from Standard & Poor's on Friday in an unprecedented blow to the world's largest economyin the wake of a political battle that took the country to the brink of default.

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficit and rising debt burden. The action is likely to eventually raise borrowing costs for the American government, companies and consumers.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.

The outlook on the new U.S. credit rating is "negative," S&P said in a statement, indicating another downgrade was possible in the next 12 to 18 months.

The move reflects the deterioration in the global economic standing of the United States, which has had a AAA credit rating from S&P since 1941, and it could have implications for the U.S. dollar's reserve currency status.

"The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of America's AAA," said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co which oversees $1.2 trillion in assets.

The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government's debt burden and allow its statutory borrowing limit to be raised.

On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.

The political gridlock in Washington over addressing the long-term fiscal problems facing the United States came against the backdrop of slowing U.S. economic growth and led to the worst week in the U.S. stock market in two years.

The S&P 500 stock index fell 10.8 percent in the past 10 trading days on concerns that the U.S. economy may be heading into another recession and because the European debt crisis has worsened.

Treasury bonds, once indisputably seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.

U.S. TREASURY QUESTIONS CALCULATION

Obama was briefed earlier in the day regarding S&P's intentions, but discussions only took place with Treasury officials and did not include the White House, a source familiar with the discussions told Reuters.

Late on Friday, the Treasury said the rating agency's debt calculations were wrong by some $2 trillion.

S&P confirmed it changed its economic assumptions after discussion with the Treasury Department but said it did not affect its decision to downgrade.

"We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isn't where we believe it should be, it's our duty to make that call," David Beers, head of sovereign ratings at S&P, told Reuters.

The theme running throughout S&P's analysis is the breakdown in the ability of the Democratic and Republican parties to govern effectively.

The agency said that policymaking and political institutions had weakened in the past few months "to a degree more than we envisioned." This has major implications for the nation's budget and debt problems.

For example, S&P now assumes that tax cuts brought in under President George W. Bush in 2001 and 2003 would not, as planned, expire by 2012 because of staunch Republican opposition to any measure that would raise revenues.

The compromise reached by Republicans and Democrats this week calls for creation of a bipartisan congressional committee to find $1.5 trillion of deficit cuts by late November, beyond the $917 billion already identified.

'DAUNTING' IMPLICATIONS

While the downgrade is a blow to U.S. prestige, it was largely expected and may not have a big impact on trading of U.S. Treasuries and other assets when markets reopen in Asia on Monday.

In fact, Treasuries have rallied this week, driving the yield on the benchmark 10-year note to 2.34 percent, its lowest level in about 10 months. This reflects a belief among investors that U.S. government debt is still a safe bet at a time when prices of stocks and commodities are falling on concern about slowing global economic growth.

"To some extent, I would expect when Tokyo opens on Sunday, that we will see an initial knee-jerk sell-off (in Treasuries) followed by a rally," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

But the downgrade has implications for the country's financial sector, ranging from insurance companies to government-related firms such as housing financiers Fannie Mae and Freddie Mac.

"At least initially, the impact on the market will be negative because there will some forced liquidation of U.S. assets," said Boris Schlossberg, GFT director of currency research.

The downgrade could add up to 0.7 of a percentage point to Treasuries' yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a U.S. securities industry trade group.

The Federal Reserve and other bank regulators moved on Friday to reassure global markets that the downgrade would not mean that additional capital would be needed by banks and other institutions holding Treasury securities.

The Fed also said the cut would not impact the operation of its emergency lending window for banks, nor its buying and selling of Treasury securities to conduct monetary policy.

The impact of S&P's move was tempered by Moody's Investors Service's decision earlier this week confirming, for now, the U.S. Aaa rating. Fitch Ratings said it was still reviewing its AAA rating and would issue its opinion by the end of the month.

S&P's move is also likely to concern foreign creditors especially China, which holds more than $1 trillion of U.S. debt. Beijing has repeatedly urged Washington to protect its U.S. dollar investments by addressing its budget problems.

"China will be forced to consider other investments for its reserves. U.S. Treasuries aren't as safe anymore," said Li Jie, a director at the reserves research institute at the Central University of Finance and Economics.

One currency strategist, however, did not think there would be wholesale selling by foreigners.

"One of the reasons we don't really think foreign investors will start selling U.S. Treasuries aggressively is because there are still few alternatives to the Treasury market in terms of depth and liquidity," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

He said there was likely to be weakness in the U.S. dollar but a sharp sell-off was unlikely.

S&P had already placed the U.S. credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the fiscal deficit of about $1.4 trillion this year, about 9.0 percent of gross domestic product, one of the highest since World War II.

But Obama administration officials grew increasingly frustrated with the rating agency during the debt limit debate and accused S&P of moving the goal posts in its downgrade warnings, sources familiar with talks between the administration and the agency have said.

The downgrade was immediately pounced on by candidates vying for the Republican presidential nomination. Mitt Romney said the move was "a deeply troubling indicator of our country's decline under President Obama," while Jon Huntsman said it was due to spreading of a "cancerous debt afflicting our nation."

The downgrade, 15 months before the next presidential election, and debt will be top campaign issues..

Americans wonder where the misery will end

(Reuters) - America is on the fritz.

From Times Square to St. Petersburg, Florida, and Portland, Oregon, people are trying to understand how the downgrading of America's AAA credit rating by Standard and Poor's agency caused a stock market crash and torpedoed their economic prospects so badly again.

Out of work, unable to sell their homes and with bills piling up, many wonder how they will make ends meet.

"My fridge is on the fritz, my washing machine is on the fritz, my oven is on the fritz, my roof is on the fritz," said Maria Thuy of Jenkintown a suburb of Philadelphia, who lost her job as a director of a non-profit a few weeks ago and wonders how she will stop her house falling down around her.

Like many, Thuy looked on in horror as the stock market crashed on Monday and she fears for her retirement savings.

Barbara Barak, 32, has a job selling cosmetics in an Orlando, Florida mall. But working largely on commission and with business "nonexistent," she may resign.

"People are afraid to spend money," she said.

Since her husband lost his steel industry job at the start of the 2008 recession and took a job with an ice cream maker, their annual income has fallen by $50,000. She could care less about the stock market because she has no savings.

Her financial plan? "Just survive."

On Monday, panicked selling resulted in the S&P 500's worst day since December 2008, down more than 6 percent with every stock in the benchmark index ending in negative territory.

PSYCHOLOGICAL IMPACT

Concern that Washington can't control rising debts or create enough jobs to spur growth contributed to the crash as did the loss of America's pristine AAA credit rating. Rising fears about Europe's debt woes made matters worse.

The S&P 500 is down 17.9 percent from its late April peak.

Consumer spending makes up about 70 percent of the U.S. economy and economists fear steep stock declines will have a psychological impact on households, causing them to cut spending, and force businesses to defer hiring and spending.

Miami store clerk Antonio del Valle said he blamed former President George W. Bush for the current woes. "If he hadn't wasted all that money on the wars in Iraq and Afghanistan, we wouldn't be discussing the debt ceiling," he said.

A decade of war in Afghanistan and eight years in Iraq have hurt the national budget and the 2008 financial crisis, with its resulting bailouts to stop a global financial collapse, led to less aid flowing from Washington to U.S. states.

As a result, working Americans were squeezed as U.S. states and municipalities hiked charges on everything from water to property taxes. Meanwhile, with inflation low and unemployment high, employers cut jobs, kept pay raises to a minimum and passed on soaring health insurance costs to employees.

Sammy Rubin, a 64-year-old electrical contractor in Birmingham, Alabama, blames politicians. A self-described conservative, he said he was angry at recent political fighting over the debt ceiling.

"If I had the power, I would freeze every congressman's bank account ... and make them go get a job, to see what it's like out here. And I wouldn't care if the whole government shut down, except for the military," he said.

The debt debate in Congress has strengthened the case of those who think the two-party system is failing. According to a CNN poll last week, 77 percent of Americans say that elected officials in Washington have behaved "like spoiled children" in the tug-of-war over raising the debt ceiling.

Josh Greenwood, a 24-year-old, who moved from California to New York and is working as a bartender, urged President Barack Obama to end partisan fighting in Washington.

"Obama needs to use his power and influence to get everyone on the same page," he said.

Susan Knight-Allen, a 55 year-old medical social worker, was getting her hair cut at a salon in the Hollywood neighborhood of Portland, Oregon.

"Maybe this time it is not going to correct," she said of the stock market. She and her partner put their money into cash two years ago and now she wonders if she can help, perhaps by getting some backyard work done.

"We have the money and somebody could probably really use that job," she said.

"HANGING ON"

Rachelle Markley, 48, worked at her nearby store Second Glance Books. The second-hand book store is cozy but, she says, "I am hanging on by the skin of my teeth."

As well as a weak economy, her business is suffering as sales shift to e-books. After an employee left in January, she left the job unfilled, leaving her overworked and alone.

Antoine Sykes, a 37-year-old security officer and doorman on Chicago's west side said he fears for his financial security and plans to save what he can, but doesn't trust the banks. "I'm leaving it under my bed or in my grandmother's closet."

Matthew Tavares, 43, and his wife Julia, 31, want to sell their home in the beach community of Marshfield, south of Boston. On the market for a year already, they worry they will have to drop the price more to sell it and will have to use their savings to cover their eventual losses.

The country's latest financial woes have also compounded the concerns of 51-year-old Harry Crown, a commercial painter in St. Petersburg, Florida. He says he lives paycheck to paycheck and expects to get laid off soon due to lack of work.

"It's scary," said Crown, nursing a pitcher of Miller beer at a bar. "You can't get ahead. You live to survive."

Another customer, 65-year-old Roger Dyke agreed. "The country's in a mess," he said. "I don't know any way of fixing it."