MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Later in the broadcast, tea time and we're not talking golf. It's Food Wednesday. But first, Wall Street issues a threat to Washington and state capitals around the country. The investors are getting anxious. Debt limit talks between the White House and Congressional leaders are stretching dangerously close to the August 2nd deadline.

MR. KOJO NNAMDIWith both sides playing to their bases and drawing lines in the sand, now despite some recent positive signs, major investment rating agencies are issuing their own threat, figure this out or kiss your coveted AAA bond ratings good-bye. It's a warning aimed at feuding parties in Washington, but yesterday, it was extended to Maryland and Virginia, even though Annapolis and Richmond are currently living within their means.

MR. KOJO NNAMDIBoth were told that their AAA rating was at risk because of their close ties to the federal government. Joining us to help explain and unravel all of this is James or Jim Angel. He's a professor in the McDonough School of Business at Georgetown University. Jim Angel, good to see you again.

MR. JAMES ANGELThank you, it's an honor to be here.

NNAMDIOn Tuesday, we saw interesting developments on this debt debate on a number of fronts in the Senate. A bipartisan group of senators known as the Gang of Six, announced that they have come up with a framework for possibly breaking the impasse over raising the debt limit, but at the same time, a major Wall Street investment ratings agency issued a threat to a handful of states, including Virginia and Maryland. What's going on?

ANGELWell, what's going on is that Virginia and Maryland are so economically connected with the federal government that if anything bad happens to the federal government, it will probably have a bad impact on Virginia and Maryland. We have a lot of government employees who live in these states and also a lot of businesses that do work with the federal government are located in Virginia and Maryland.

NNAMDISo the investment agencies are saying that because of this debate that's going on in Washington and because of your dependency on the federal government, we're looking at you a little differently now?

ANGELThat's correct. Because if the Armageddon scenario takes place and the government stops cutting checks, well, what's going to happen to the ability of all those workers who live in Virginia and Maryland to pay their bills and pay their taxes?

NNAMDI800-433-8850. Is it fair that dysfunction in Washington is affecting state governments in Richmond and Annapolis? You can call us now, 800-433-8850. Are the economies and governments of Virginia and Maryland too dependent on the federal government? You can also go to our website kojoshow.org, ask a question or make a comment. Send us a tweet @kojoshow or e-mail to kojo@wamu.org.

NNAMDIJim Angel, when we talk to state and county officials in the Washington region, they often talk about their AAA bond rating as a mark of pride, a symbol that they have their financial houses in order. At the national level, most people have taken our AAA rating as a given. Exactly what is a AAA bond rating and what does it mean?

ANGELWell, there are companies on Wall Street whose business is to grade bond issuers and the AAA rating is the highest possible grade. It says, of all the different kinds of bonds out there, you are in the top category. So if you have a AAA rating, what it means is you can borrow money at a lower interest rate. It's basically like having a really high FICO score. If you've got it, you can borrow cheaper.

NNAMDIThe United States is one of the only countries in the world with a quote/unquote debt limit. How do other countries deal with this and how do markets assess them?

ANGELWell, it does seem rather absurd for Congress to authorize the spending of money, but not authorizing where you're going to get the money from. And the -- how exactly other countries do this, I'll leave that for another time.

NNAMDIExactly. Leaders in Maryland and Virginia were quick to assert that they did not deserve to be put in the crosshairs by Moody's. Governor Robert McDonnell of Virginia was actually announcing a $300 million surplus yesterday when the news broke out. Does that not make a difference to the investment rating agencies? Or shouldn't it?

ANGELWell, the rating agencies have come in for a lot of criticism over the last few years. In the lead up to the financial crisis, they issued way to many AAA ratings on bonds that no longer turned out to really deserve a AAA rating. So it may be that they are now being excessively conservative in trying to show that they're not the easy marks they once were.

NNAMDIWho are these rating agencies and what is the significance of investor ratings? You already explained that it allows you to borrow money at a much lower rate. But who are the people who issue these investor ratings?

ANGELWell, there are three big companies. One is Standard and Poor's, the other is Moody's, the other is Fitch. And these companies have been in business for a century. And they built up a century of reputation of grading different issuers and up until the credit crisis, they actually had a good reputation. They seemed to know what they were doing.

NNAMDIWell, I'm glad you brought us up to the credit crisis because they previously had, it would seem, an unimpeachable record stretching back almost a century. But during the 1990s and the 2000s, they very famously gave AAA ratings to certain financial products that did not deserve them. In fact, many people say the ratings agencies contributed directly to the financial crisis that we are still recovering from. Do these agencies really have as much credibility on these issues anymore?

NNAMDIThere is, for instance, this tweet we got from Randy LaMonda "I keep asking this. Why do we care what Moody's says after its criminal behavior in the housing meltdown?"

ANGELWell said. They don't have the credibility they used to have, but a lot of investors still pay attention to them.

NNAMDIAnd the extent to which investors still pay attention to them is the extent to which local and state governments also have to pay attention to them.

ANGELYes, it has a direct impact on how much people pay when they have to borrow money.

NNAMDIAs we speak, there is a lot of uncertainty in Washington and even more uncertainty on Wall Street and in state capitals. You see three scenarios playing out in Washington which could have cascading effects throughout the country. I'd like to go through those three scenarios with you and tell me what you think. The first, Obama and the republicans come up with a deal?

ANGELYes, I mean -- and this is what everybody's expecting to happen. We've had these debt limit mud wrestling debates for decades in the past and we'll have them again in the future because it provides a good opportunity for the politicians to engage in lots of horse trading.

NNAMDI800-433-8850, do you care to predict how this will all end? Do you think that President Obama and the republicans will come up with a deal? You can also send us a tweet @kojoshow or e-mail to kojo@wamu.org. That's the first scenario. Scenario number two, no deal immerges, but President Obama and the head of the fed takes some sort of bold action.

ANGELYes. That's when you're in a situation where Congress passes laws that conflict with each other, then it generally winds up for the courts to sort it out. So Congress has authorized spending money, but not authorized where it's come from.

NNAMDIYeah.

ANGELSo in that gray area, President Obama can do all kinds of things and that will get...

NNAMDILike what?

ANGEL...well, he could just keep cutting the checks and lean on the banks not to let them bounce.

NNAMDIOkay.

ANGELAnother thing, since the federal reserve owns a large portion of the U.S. debt, what if they just cancel and forgive the debt, tear it up? You know, they've already printed the money to pay for it. That would bring us below the debt ceiling. You know, again, these are of, you know, doubtful legality but it would probably take some time for the courts to figure that out.

NNAMDIAnd the fed could, if it chose to, do that?

ANGELI don't know if they have the legal authority to, but...

NNAMDIBut we would find out if they did.

ANGELRight. And -- but then again, it would give the administration some time.

NNAMDINuclear option, nasty scenario, no deal.

ANGELOkay, the worst case scenario that everybody is really fearing is, okay, there's no deal and the government thinks that they can't cut anymore checks. That -- now exactly which payments -- now they still have money coming in so they can still make some payments and stay below the debt limit. So how would they triage it? Worst case scenario, they stop cutting checks all together. That, you know, they stop paying off the debt when it's due, they stop paying Social Security checks, stop paying federal workers, stop paying the troops and anyone who is dependent on any cash coming through the federal government is suddenly in a cash bind.

ANGELSo it would cause massive chaos throughout the economy, especially since people sort of know kind of who might be at risk, but there are going to be some big surprises.

NNAMDIWell, what kind of historical precedent is there for where we find ourselves right now?

ANGELWell, this has actually happened a couple of times before in our history. Because as not many people really remember, the federal reserve bank that prints our money...

NNAMDIYeah.

ANGEL...it's not our first central bank, it's not our second central bank, it's our third central bank. When Congress created the first two, they put a sunset feature in their charters. The idea is they'd come back after 20 years and look at them. Well, back when Andrew Jackson was president, he got into a political mud wrestling match with Nicholas Biddle who was the president of the central bank. And in the political wrangling that followed, they allowed its charter to expire so it's suddenly as if the fed were to disappear overnight.

NNAMDIAnd that's why we have Andrew Jackson on our $20 bill?

ANGELAmong other reasons.

NNAMDII also read recently about a mini default in the U.S. back in the late 1970s, when we apparently didn't pay certain bills on time and we did default on treasury bills. What happened then?

ANGELWell, it was kind of similar to the present. There was the political mud wrestling match over the debt limit and they came up with a last minute compromise. But the treasury couldn't get their act together. They had some computer problems and, you know, they were basically late, you know, paying off the debts that were due. You know, technically, that's a default because it means you haven't paid your debt on time. But they eventually cured the default and compensated people for having, you know, having had to wait.

NNAMDIThese ratings aren't something to which we are entitled. A lot of us think that our status in the world, we're the only remaining superpower, it was preordained and you say that's not necessarily the case.

ANGELWell, we've been very lucky. I mean, in the 20th century, after World War II, we were the only country left standing. And, you know, that gave us an amazing role in the global world. Now, it was inevitable that as Europe rebuilt itself, that once Russia and China threw off the shackles of communism, that once India and the other developing countries started to get their act together, you know, that they were going to rise in relative importance.

NNAMDIAnd that's what we're living in right now?

ANGELCorrect.

NNAMDIHere now is Eric in Salisbury, Md. Eric, you're on the air. Go ahead, please.

ERICHi there, guys. I have a question. I keep hearing a lot of different people say that if we were to go into the default, that one of the things that would not get paid out is the Social Security checks. And I was under the impression that Social Security is supposed to be a separate entity, that, you know, is safe and doesn't actually contribute to the debt. So is it true that the checks will go out or is it false that the checks won't go out? I'm asking because my grandfather is on Social Security and lives with me, so he's kind of dependent on the money. So he's unsure himself.

ANGELAnd the answer is, I don't know. That because in this kind of situation, there's going to be a lot of uncertainty and a lot will depend on the administrative decisions made by the administration. And, you know, if we look back in history, back when Andrew Jackson was destroying the second central bank of the United States, the veterans were amazed that this happened.

ANGELAnd they just couldn't believe that, you know, the general who had led them to victory in the Battle of New Orleans was the one responsible for the fact that they weren't getting their benefit checks. So, you know, the politicians may very well, again, in a worse case meltdown scenario, you know, want bad things like that to happen in the hopes of blaming it on the other party.

NNAMDIThank you very much for your call, Eric. And I suspect that if there is no deal, we'll be seeing a lot of marches coming in Washington and there's likely to be a march of seniors coming to Washington. Here's Paul in Rockville, Md. Paul, you're on the air. Go ahead, please.

PAULYes, the 14th Amendment to the Constitution, amongst other things, prohibits the United States from defaulting on its financial obligations. So couldn't the president just declare the debt limit unconstitutional?

NNAMDIIs that an option he has?

ANGELWell, I am not now nor have I ever been in an attorney so I won't pass a legal judgment on that. But, again, he'll be in a very legal gray area and he could do all kinds of things of that nature to see what the, you know, to get through the crisis.

NNAMDIThank you very much for your call. Finally we got a tweet from the -- from atthedobag (sp?) . "What kind of metrics do these bond rating companies use in assessing a rating?"

ANGELIt depends on what their rating. You know, if they're rating a corporation, they look at things like how much debt they have, how much profit they have relative to their interest expense. When they're looking at government agencies or rather government entities like, you know, the state of Maryland or the Commonwealth of Virginia, one of the things they've been looking at is what percentage of their employees are federal workers at the moment.

NNAMDIWhy do states float bonds in the first place?

ANGELStates borrow money for both good reasons and bad reasons. One good reason is to pay for long-term infrastructure. So if you're building a road that's going to be in service for 30 years, it makes sense to borrow the money and then have taxpayers pay for it over the next 30 years so the people who are alive and using it are paying for it. So that's what we call good debt. Bad debt is to just cover up a budget deficit and you don't have the political will to, you know, get this year's taxpayers to pay for it.

NNAMDIJim Angel is a professor in the McDonough School of Business at Georgetown University. Thank you so much for joining us.

ANGELThank you for having me.

NNAMDIWhen we come back, it's Food Wednesday, Tea Time. We're not talking golf here. I'm Kojo Nnamdi.