Pigs fly, and I agree with Robert Reich, Daily Kos, and the Guardian: S&P and the AA+ rating
Last night—as you all must know by now unless you’ve been having a much more exciting weekend than I—the financial ratings agency Standard & Poor downgraded the US debt from AAA to AA+ for the very first time.
Now, AA+ may sound like a good grade, but that’s only if you’re in school. For national debt, it’s not so hot. For the US, it’s “unprecedented,” a word that occurs in many of the articles about the event.
When I started doing research for this post, I went back and read a bunch of articles about the debt negotiations, because S&P had issued a statement saying that the extended brouhaha had factored into their decision:
S&P said 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.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.
So it sounded as though the nature of the negotiations themselves had upset S&P as much as their outcome. This was odd to me because it seemed to be a political judgment and not a financial one. Was that not outside the realm of S&P’s duty and expertise? As nasty and confusing and stupid and downright depressing as those negotiations were, it was always pretty clear that the debt ceiling would be raised and that no default would occur (I went out on a limb and wrote as much in my very first piece on the subject, and never wavered from that position).
The debt ceiling negotiators themselves seem to have assumed that an agreement would be likely to stay S&P’s hand and avoid a downgrade of the debt:
Listen to a desperate Barack Obama, on 29 July: “If we don’t come to an agreement [on the debt] we could lose our country’s triple-A credit rating.” Or his Republican nemesis, House Speaker John Boehner, on 21 July: “We’ve got to act to prevent a default and to prevent a downgrade of our nation’s credit rating.”
And Tim Geitner (for what that’s worth) had said there was absolutely no risk of a downgrade.
Well they might have thought that coming to an agreement would be enough, since they were probably relying on the fact that an agreement would show willingness and ability to pay, at least in the short term. But S&P thought otherwise.
This is a good deal of power for one agency to have (I say “one” because the other two agencies charged with the same task, Moody’s and Fitch, have retained the AAA rating for the US). Such clout seems odd, especially if you recall that S&P did not exactly cover itself with glory in the leadup to the financial crisis that exploded in 2008.
On doing some more reading, I found I’m not alone in wondering what’s going on with S&P and its possible overreach. But I also found myself with strange bedfellows in doing so–and that’s where Reich, Bruce McF at Daily Kos, and the Guardian come in.
Here’s Reich:
S&P has downgraded the U.S. because it doesn’t think we’re on track to reduce the nation’s debt enough to satisfy S&P ”” and we’re not doing it in a way S&P prefers.
…Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?
If we pay our bills, we’re a good credit risk. If we don’t, or aren’t likely to, we’re a bad credit risk. When, how, and by how much we bring down the long term debt ”” or, more accurately, the ratio of debt to GDP ”” is none of S&P’s business.
S&P’s intrusion into American politics is also ironic because, as I pointed out recently, much of our current debt is directly or indirectly due to S&P’s failures (along with the failures of the two other major credit-rating agencies ”” Fitch and Moody’s) to do their jobs before the financial meltdown. Until the eve of the collapse S&P gave triple-A ratings to some of the Street’s riskiest packages of mortgage-backed securities and collateralized debt obligations.
And here’s McF at Kos:
Bottom line, though, S&P is still lying to people when it pretends that the rating is about “ability to pay”. Its only ever about willingness to pay for a government issuing debt in the currency it issues.
Last but not least, we have Mehdi Hasan at the Guardian yesterday:
In recent weeks, we have witnessed elected leaders in the world’s most powerful nation dancing to the tune of David Beers. He’s the moustachioed, chain-smoking head of sovereign credit ratings for S&P, the largest and arguably most influential member of the big three.
“You may have never heard of David Beers but every finance minister in the world knows of him,” noted Reuters in a recent ”“ and rare ”“ profile of the analyst, who doesn’t even have a Wikipedia page…
Three questions come to mind. First, who elected David Beers or his Moody’s and Fitch counterparts? By what right do they decide on the fate of governments, economies, debts and peoples?
Second, why should we care what Beers thinks? What credibility do he and his ilk have? The bipartisan Financial Crisis Inquiry Commission in the US has described the big three as “key enablers of the financial meltdown”.
Curiouser and curiouser.
Although it’s certainly bad news that the rating has been lowered, there is no consensus whatsoever on what that will mean. When Japan experienced a similar downgrade, the result was nothing much. Of course, the US is not Japan, and its effect on the economy of the world is far greater. But the financial reality is that there aren’t many good alternatives to investing in the US; nearly everybody’s hurting, and everybody knows it.
Hasan writes:
As the US economist and money manager Zachary Karabell wrote last week, “the best possible outcome would be for them to downgrade the US ”“ and for the world to shrug, with rates set by the multitude of buyers and sellers. That would at least demonstrate that these emperors, clothed though they are, wear very frayed robes.”
That would indeed be the best outcome, since S&P long ago proved that it cannot be trusted to rate accurately. This is not to absolve the US of guilt. The debt ceiling negotiations should never have dragged on the way they did. The Democrats should have passed legislation on it far earlier, when they had the power to do so. Obama should have led rather than punting for so long. And the Republicans shouldn’t have dragged it out till the final bell (no doubt many of you will disagree on that).
What has been learned? I don’t know if Congress is capable of learning. But it seems clear that the negotiations themselves were part of the problem, and gave the appearance of instability to the situation, whatever the reality may have been. And the deal itself seems to have satisfied no one. It was an agreement, but at the price of doing so little about the actual problem that it is virtually meaningless and profoundly unserious, a stopgap measure that merely postpones the day of reckoning.
[ADDENDUM: Here’s the text of the S&P statement, including their rationale for the downgrade.]
First, keep in mind that it was the LONG-TERM debt rating that S & P downgraded, not the short-term rating. In other words, they still expect the U.S. to keep up current payments, but our inability to seriously grapple with our long-term debt makes them wonder if we will go bankrupt in the near future. As Occam’s Beard and I noted in previous posts (8/4/11 Falling Stocks Rising Fear), it has to do with the ABILITY to pay, not the current payments.
That said, for you, I and normal businesses (even large mega-corporations) a ratings downgrade has fiscal consequences. For the U.S. it also will have fiscal consequences but in different ways. Why? Because the U.S. still remains a large market without precedent. Even if lenders refuse to purchase any future U.S. debt, where will they go? By the time other AAA rated countries debt is purchased, the lenders will still have cash left over and nowhere else to lend. There simply isn’t enought AAA debt to satsfy market demand without the U.S. participation.
Since this has never happened before (thank you Obama, Geithner, Summers ,Romer, Pelosi and Reid) no one really knows how this will shake out. At the very least it is a black eye for our administration and our economy. I compare it to having a hood ornament on a car. Many cars are designed w/out hood ornaments and they run just fine, but a car that had a hood ornament and lost it looks damaged and second-rate. This is now the reality our country must deal with.
With respect, I couldn’t disagree more with every point above.
No, I think S&P was referring to the outcome, not the nature, of the negotiations. In essence, the Democrats agreed to stop drinking, first thing tomorrow. The debt ceiling is and was totally irrelevant; it’s debt-to-GDP that relevant, debt ceiling notwithstanding. The bond ratings agencies said as much, in as many words.
Absolutely not – it’s totally appropriate for a rating agency to factor political judgment into their considerations. A wealthy nation with a shaky dictator in charge — think Iran, 1979 – might be sound financially but a huge credit risk nonetheless because any new government might well repudiate the debts of its predecessor.
Then Obama, Boehner, and Geithner are bigger idiots than even I thought. The most charitable assessment is that they hoped that S&P wouldn’t have the balls to downgrade our debt, even though it should. Oops.
Note the plain language of the S&P statement, which cites the need “to stabilize the government’s medium-term debt dynamics.” A guy coming out of a pawn shop counting cash might be OK in the short term, but clearly is a poor risk in the medium term or longer.
So far. next week is coming, and that right soon.
True, but that cuts two ways. They were inappropriately sanguine in 2008. It looks like they’d decided to go forth and sin no more.
Further proof, if any were needed, that Reich is of similar intellectual and physical stature. It’s the rating agencies job to render its opinion on entities’ debt. That’s what they’re there for. Apparently this detail has escaped Reich. Maybe someone put it on a high shelf.
Reich must be of below normal intelligence. Has he ever heard the phrase “quality of earnings?” Did he understand what it meant? The relevant consideration is not just whether you pay your bills, but how you pay them, and therefore the prospects that you can continue paying them. If you pay your bills this month by virtue of pawning everything you own, you’re a lousy credit risk, even though you paid your bills. Surely anyone with an IQ above room temperature would appreciate that fact, but apparently Reich needs it pointed out to him.
Right, S&P is responsible for the abject failure of Democrat policies, by not blowing the whistle on them in good time. It wasn’t the policies. Oh no. It was S&P’s failure to point out that the mortgage-backed securities were crap.
Because that’s their goddamned
, you nitwit. People ask them their opinions of creditworthiness; they give them. By what right does that doctor tell me I’m critically ill? Who the hell elected him?
This guy is an embarrassment to all higher primates. Why should “we” care? Because now we’re going to have to pay higher interest rates to service the debt, you moron. That is, we’re now even further behind the eight ball than we were before. Does he know what “quantitative easing” means? It means we buy our own debt. Why are we doing that? Because no lender will buy our debt at the offered return. In essence, the market had already downgraded our creditworthiness.
The ratings agencies are “enablers” of the financial meltdown?? The Democrats are the architects of it. But for their idiotic attempts to put the financially imprudent into houses they couldn’t afford, there would have been no financial meltdown. Can you say “affordable housing?” How about “no redlining?” Buraq himself was involved (the litigators sent him out for their Danishes) in litigation against Citibank to force the bank to make bad mortgage loans.
But let’s shoot the messenger. It’s Beers’ fault that Democrats are financially incompetent and unfit to govern. Sure. He also caused the fiscal crises in IL and CA. Democrat policies had nothing to do with it. OK.
Sorry, but this head in the sand/shoot the messenger approach is so typical of liberals, and really pisses me off.
THE DEBT CEILING IS AND WAS BESIDE THE POINT. IT’S MEDIUM AND LONG-TERM ABILITY TO PAY — WITHOUT INFLATING THE BEJESUS OUT OF THE CURRENCY — THAT IS THE ISSUE.
Occam’s Beard: I am referring to this sentence: “It [S&P] also blamed the weakened ‘effectiveness, stability, and predictability’ of U.S. policy making and political institutions at a time when challenges are mounting.” That’s about the way the negotiations went, not the outcome. It is a political statement.
And Reich wasn’t questioning S&P’s ability and right to make decisions of a financial nature on US debt. He was questioning their right to make decisions based on political projections; we’re not dealing with an inherently unstable government here or a dictator that will be overthrown.
At least, we’re probably not.
However, I agree that those who thought this wouldn’t happen were incorrect. There were plenty of signals that it would happen. Personally, I think S&P had made up its mind even before the negotiations were completed. But that’s just a guess; obviously, I don’t know.
And if S&P is being pessimistic now because it was too optimistic before, that’s faulty reasoning. I’m not saying their pessimism isn’t justified, mind you. I’m saying that if it’s based on trying to look tough now because they weren’t tough enough before, that’s a lousy reason.
And saying S&P was at fault for its role in the meltdown is certainly not saying it caused it. It did not; its role was relatively small compared to the role of others, but it most definitely had a role, and it did a rotten job in performing it (I disagree with the word “much” in Hasan’s piece). I lost trust in ratings agencies quite some time ago. We all know that Congress will do what it can in order to win politically, and that those in the financial business will try to maximize earnings. The go-go years were a bubble in which many participated. But S&P and other ratings agencies were charged with calling them on their faulty accounting and iffy financial assumptions, and they failed to do so. They’re not charged with evaluating their politics.
I am probably just as disgusted as you are with the failure of politicians to have done more about this in the past, and to find a solution now. But I think the rating downgrade is still premature; there will be time enough for that if there is a failure to adopt more long-term solutions when that committee gets going.
On Robert Reich
When Reich whines “Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how,” that’s like asking who gave Edmunds the right to determine what my used car is worth, who gave the real estate appraiser the right to determine what my house is worth and who gave anyone the right to determine how much a U.S. dollar is worth vs a British pound?
As for S & P, Fitch and Moody’s culpability in the financial meltdown, rmber the Bush administration tried to warn congress numerous times that this meltdown was pending and Barney Frank and Chris Dodd defended Fannie and Freddie. Now, all of a sudden, everyone should have seen it coming and it’s everyone’s fault except congress’ and the white house’s.
As for what business it is of S & P’s. This is precisely the business they’re in. Reich is being bone-crushingly disingenuous here.
Further he whines “If we pay our bills, we’re a good credit risk.” Sorry, he’s totally incorrect and he knows it; he’s just covering for a spendthrift administration. Imagine you make $50,000/yr, your debt service is $20,000/yr. You’re, therefore, only living on $30,000/yr before taxes because $20k is going to monthly debt payments. Now if you need $45,000 to make ends meet, you have to borrow the next $15,000. Year after year you borrow $15k per year. Eventually that borrowing is going to catch up with you and your entire income ($50,000/yr remember?) is going to go solely to making debt payments. At that point, you’re bankrupt. That’s what S & P is looking at and Reich knows it (or he’s totally incompetent).
As for Mehdi Hasan’s “why should we care what Beers thinks?” If you think S&P is unjustified and unimportant, then by all means, ignore them. Just see how THAT works out. They are in the business of rating business and finance and markets look to them as a benchmark for value. To say they are irrelevant because they don’t say what you want them to say is asking the first domino to fall. Where does this lead? Remember, we are not on the gold standard and the U.S. dollar is nothing more that the U.S. govt’s promise to pay (which has been universally accepted). Refuse to accept what S & P has to say? Eventually markets will begin to refuse the U.S. govt’s promise to pay. At that point, it’s the Weimar Republic all over again.
As to neoneocons observation “it seems clear that the negotiations themselves were part of the problem,” this is true, not because of the disagreement or acrimony, but because of the outcome. The debt reduction signed by Obama was NOT A REDUCTION OF DEBT, it was a reduction of the rate of borrowing. We’re still going to borrow (and increase the debt) but we’re just not going to borrow quite as much. Who in their right mind would lend any more to such a person who was already grossly overextended?
If interest rates go up as a result, it will not only greatly increase the near-term US deficit, it will also reduce the current value of long-term bonds that people now hold. That will hurt a lot of people and make people (and institutions) less willing to buy out long-term debt, which will make the near future even more uncertain.
There’s only one way out: kick the freespenders out and put deficit hawks in. And make sure that we get police and prosecutors who will go after the corrupt and violent union offiicials, thugs and agitators as well as the thugs busy intimidating voters.
Neo, the ability of a government to act effectively to implement financially prudent policies is a political consideration, but an absolutely appropriate one for a ratings agency. They would be derelict in their duties if they didn’t take it into account.
Consider the case of Belgium which hasn’t even had a government in a year or two now (IIRC). Should that fact not bear on Belgium’s creditworthiness? Of course it should.
First, we are dealing with an inherently unstable government here. Our government is not as unstable as some, but it’s not as stable as others. It’s unstable because it’s capricious, and unpredictable, as GM’s bondholders can tell you. The rule of law has already been abrogated for one set of bondholders. The Obama Administration is a flaky debtor that has already burned some creditors. That’s a relevant factor for a ratings agency to consider.
It was obvious that this was going to happen. It had to happen. S&P probably held off on downgrading us on the remote chance that real budget cutting might take place, but we were drinking in the Last Chance Saloon (and, characteristically, bought a round for everyone and put it on our tab). I don’t think that they’re trying to look tough now to make up for not doing so earlier.
My prediction: Moody’s and Fitch will downgrade us next week.
O.B., Great post.
For at least a few years the gold bugs have been saying that there is no way the U.S. can pay its huge long term debt. Either we will default (unlikely), or we will inflate the currency greatly to repay with cheap dollars. That is what the gold price is telling us. No doubt S&P understands this and is saying a long term bond may be a bit risky.
Occam’s Beard: see my response here.
S&P had (of course!) made up its mind before the outcome of the debt limit negotiations. The debt limit is not the problem. S&P is sending this message: “the debt is the problem.”
“we’re not dealing with an inherently unstable government here or a dictator that will be overthrown.
At least, we’re probably not”
Neoneocon, although Occam addressed this above, let me add that I agree with him; our govt IS unstable for exactly the reasons he points out. It is ECONOMICALLY unstable under the current administration because things are happening for the first time in history that effect economic activity. The GM bailout that Occam gives is an excellent example (turning accepted financial and bankruptcy law on its ear). The downgrade of U.S. credit is another. It is the direct result of political decisions made buy this administration (think Chicago politics, crony favoritism and incompetence) and will not cease as long as this administration is seated. Why shouldn’t S & P take this into account?
In a number of ways the various commentators asked Reich’s question “Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?”
It sees to me that S&P’s rating is a prediction about the ability of a corporation or government to pay its financial obligations. If that is so, then the only persons who will convey authority to S&P’s prediction are the potential lenders to the United States government.
If potential lenders take S&P’s prediction seriously, the lenders will have a great deal of impact by determining what interest rates they will be willing to accept. On the other hand, if they do not take S&P seriously, its predictions will be meaningless. S&P by itself can not set interest rates. It is only the lenders who will or will not give meaning and authority to S&P’s rating.
Therefore, it seems to me that those who are protesting that S&P has assumed unwarranted authority are, in their anxiety and anger, paradoxically adding to the influence, the authority,
that they feel S&P should not have.
Best wishes,
Jim
Fiscal hawks might have done differently, but since they were not in power now the only power they had was to say “no.” The result was a non-solution that merely kicked the can down the road. But that means (at least to my way of thinking) that, although S&P’s judgment that there is not much chance of a solution may be correct, it is nevertheless premature and the downgrade should not have happened until the committee was given a chance to come up with one and failed to do so.
You may think that S&P’s making a decision to downgrade now rather than later is a good one, because it’s a form of tough love and logical consequences that may motivate Congress to come up with a better solution sooner, out of fear. I don’t see that as likely. You may also think S&P’s downgrade might lead people to elect more deficit hawks in 2012. I don’t see that as a likely result either, although of course it’s possible. But it is just as possible that people will go for one of the solutions S&P explicitly mentioned, tax hikes (and/or letting the Bush tax cuts expire). That conclusion would lead people to vote Democratic.
Look for gold & silver to be going up,,,, high.
Neo,
Regarding tax hikes:
In my personal discussions I have alredy wondered how long it would take to have a liberal say “see, we told you we needed tax increasses to increase revenue.” Tax increases might still occur, but they won’t increase revenue.
I’ve noted before that, historically, tax revenues are remarkably stable at about 18.8% of GDP. Raise taxes and investors flee taxable investments reducing the amt of available taxable assets.
Thus, as economists will tell you (Krugman’s not an economist, by the way, he’s an ideologue) raising taxes will not increase revenue and have no effect on the S & P downgrade. It’s spending cuts, operating under the rule of law (normally called stability) and growing the GDP (to increase the size of the taxable pie) that will solve this problem.
Such will not happen in this administration’s lifetime.
Neo, sorry, but I gotta disagree again. The downgrade wasn’t premature — it was overdue. By a lot.
And if the extra-Constitutional Super Committee comes up with a great solution, then S&P can upgrade our rating again. And we can all get frequent flyer miles on Porcine Airways.
A ratings agency has to look at the forseeable future. The actions of a yet-to-be-constituted committee are not forseeable (and thus cannot be taken into consideration). Where things are going now is, unfortunately, only too forseeable. I don’t think the downgrade was tough love. I think it was a belated recognition of a grim reality.
Liberals obfuscate the issue by babbling about default. Default isn’t and wasn’t the threat. Galloping inflation — i.e., repaying debts in Monopoly money — was and is the threat.
Let me put it this way: who in his right mind would put his savings into Treasuries now?
T: the debt problem is a result of political decisions that have been made by both parties for quite some time. Each party has made bad decisions during the time it was in power.
Not that it’s equal; Obama and the last Congress have increased and multiplied the problem, of course, very much so. And he has especially increased the uncertainty factor. I yield to no one in my criticism of his policies. But unless I’m mistaken, there’s an election coming up in about a year that might put someone else in power, and change the makeup of Congress as well.
So the US is not unstable in the sense of the entire government being about to topple. There are some political machinations going on that meant there was a delay in raising the debt ceiling, but it happened, and the next step is to work on a more lasting solution; there is now more will to tackle this effectively than before, not less. If the next steps fail, that would be the time for S&P to downgrade its ratings.
I also think it is fairly clear that if Congress had merely voted to raise the debt ceiling without all the brouhaha, and in a timely fashion, S&P would not have done this. But the actual debt problem would not have changed in any respect from what it is now; in fact, it would have been worse. So why did S&P have to do this now?
1. Neo, thank you for setting aside your practice of light weekend blogging and preparing this lengthy post.
2. S&P acknowledged a $2T error in their initial bookkeeping but proceeded with the upgrade anyway. Afaic an error like that on a decision of this magnitude does call their decision making process and competence into question. Sounds like they’d made up their minds in the manner that bureaucracies do. NB: the foregoing is no way no how meant as a defense of America’s political class.
3. Afaic it is our entire leadership class that is at fault here. This isn’t a good guys vs bad guys situation. I’m not saying all parts of the political spectrum are equally at fault (the buck stops in the Oval Office); I’m saying that, with very few exceptions like Paul Ryan, the blame goes across the board.
4. Back to the $2T glitch. I saw a rumor that S&P had leaked the downgrade to Morgan Stanley, who in turn leaked it to people who were trading on it Friday. I didn’t take the rumor seriously enough to bookmark it; if not for the $2T mistake, I probably wouldn’t be repeating it.
5. I bet that as we speak, diligent people are researching the political activities of S&P executives.
6. An acquaintance in the finance industry holds Standard and Poors in low esteem. For example, he says that their products exploit America’s overly broad intellectual property laws. He considers them more rent seekers than value creators. (Actually, ‘rent seekers’ is a euphemism for what he calls them.) Fwiw.
S&P acknowledged a $2T error in their initial bookkeeping but proceeded with the upgrade anyway.
“upgrade” -> “downgrade” expletive deleted
While responsibility for the error is entirely mine, a preview button would be most welcome.
Occam’s Beard has this one nailed down tight. I was going to make a couple of his points, but there’s really no need to now.
So, instead I’ll say that I think neo-neocon’s criticism of the Republicans is unfair. They passed in the House the only bill that would be a permanent, long-term solution: Cut, Cap & Balance.
Harry Reid refused to offer any bill until the clock had been completely run out. He didn’t even bring CC&B up for debate in the Senate. And nobody asks him why. Or makes him explain what’s wrong with wanting to put the country’s finances on a path toward a balanced budget.
If CC&B had become law, instead of the turd that did pass, maybe S&P would not have downgraded us.
When the bedfellows look stange, maybe it’s time to change beds.
S&P is only a stern warning of what some already know. Our politicians are destroying our economy, and many refuse to realize it.
The folks that only want fiscal responsibility are called “terrorists”.
I received a refund from the IRS this tax season. I overpaid by more than 700 bucks. I conclude my refund came from borrowed money.
Neo,
You and I are in agreement in that neither of us believe that the U.S. govt will topple anytime soon.
That is not the issue. I repeat my point that this administration is ECONOMICALLY unstable. The downgrade comee 1) because of the gross overspending of this administration and 2) because congress is at loggerheads about what to do. The result, a “compropmise” that reduces (not eliminates) borrowing. Again, who in their right mind would lend to someone like that. It’s like loaning money to a drunken sailor and then expecting to remember the loan when he sobers up.
You are correct that their is blame on both sides of the aisle. Those Repubs who vote to spend money we don’t have are no better than Dems who do the same with larger amounts. Occam is correct that this downgrade was overdue, and as I wrote in an earlier post (8/4/11 Falling Stocks Rising Fear), thje Obama/Democratic spending machine fo the last two years may be the best thing that ever happened to the u.S. because it brought the problem into sharp focus at a time when something can still be done about it. You mention “more will” to tackle the problem and I agree. That is exactly what the downgrade does.
Dear Neo,
One of the first times i’ve beet in complete disagreement with one of your posts over several years. Not only the conclusions, but the arguments, most unusually, are uncharacteristically unsound. My guess is the sourcing.
T and OC have it right, not only was the downgrade due to the debt rather than the deficit, but the process was not the problem, the result was.
And the people you say agree with, each and all, are either being purposely disingenuous or really are dumb as posts.
If you go into a car dealer to purchase a car and inform him that you absolutely can make interest payments for 5 or 10 years but never, ever, plan to make good on the principal, will he consider you a good credit risk?
Neo,
You’d best hearken unto O.B.’s words and debate him less. It is fine for you to introduce your topic and thoughts thereon, but you seem a bit, just a leetle bit, Obamaesque in your reactions to his weighty and well-reasoned posts today. It may be you don’t know what you don’t know on this topic. A dollop of humility is advised.
I have the temerity to agree with Occam 100%. Thanks, Bearded One!
Thanks for the kind comments. I apologize for my asperity above. I slept fitfully last night from worrying about this (and, bleary eyed, sleptwalk to an 0 for 3 at the plate today, so now I’m really in a foul mood!).
Both parties have blame in this, to be sure, but the Dems own the vast majority of it because entitlements – pretty much a Dem preserve – constitute a sacrosanct two-thirds of our budget, and thus are the major driver of the debt problem.
What many people don’t inderstand is that future payments are built into the price of a security (that’s why a stock price can go down even if the company records a healthy profit but misses expectations. Those future expectations were built into the the present price of the security).
What that means regarding our credit downgrade is that even if there is a landslide Republican victory in 2012 such will not instantaneously restore our credit rating because the Republicans have yet to actually prove that they (as opposed to the Dems) have the presence of mind to tackle this problem. The world is waiting for action, not rhetoric.
That’s why the sabre rattling by the freshman congressmen and veterans like Michele Bachmann is so important. There is very little that they can actually do right now, but calling attention to the problem maintains a credibility of sorts because it shows that they do not want to acquiesce to current circumstances. That Bachman said she would not vote for the compromise was important for business and lenders to hear even athough a more effective policy was impossible at this time. Hearing that determination is a reason to elect more like-minded representatives in the house and the senate.
On the bright side, much of this wailing and gnashing of progressive teeth is good news. Libs usually defend failed progressive programs simply by saying that they weren’t implemented properly (the stimulus would have worked if it were larger).
That they are now reduced to name calling (tea party terrorists) and to denigrating rating agencies is a clear sign that they’ve run out of ammunition. Again see Walter Russel Mead’s essay opn the progresssive crisis:
http://blogs.the-american-interest.com/wrm/2011/08/02/the-progressive-crisis/
Absolutely right. Expectations factor into not just the prices of securities, but of commodities and indeed even labor. Those of us of a certain age (ahem) recall the sky-high interest rates of the early 1980s. Why did Volcker drive up the prime rate so high? Easy — because inflationary expectations of the Carter era were being built into union contracts, commodity prices, and the return expected on sovereign debt. (Italy has to pay a lot higher return on its debt than Germany, for example, for this reason.)
Volcker jacked up interest rates to the moon to wring inflationary expectations out of the economy. He showed lenders that the Federal Reserve (and by extension, the government) was willing to dish up strong medicine to fight inflation, even if people had to suffer. Lenders, realizing this, could be satisfied with lower returns. (And union leaders moderated wage demands; they didn’t need to price in inflation, and were grateful not to have more layoffs.) In essence, Volcker shifted us from the Italian plan to the German one, and thereby laid the foundation of the prosperity that followed.
We’re going to need that kind of pain — and worse — again to get out of this mess, and to prove to all and sundry that we can and will live within our means. God help us. The problem is that the media, being Red-infested, will howl to high heavens, and smear any grownup doing what needs to be done. Whoever grasps this nettle will be called a granny killer, and worse.
As with so many of our problems, the media are the key.
Mr Frank,
Above (4:40) you list two options default or inflation. There actually is a third alternative and it’s actually the best way to proceed.
Increase economic activity to increase the taxable asset base (more tax revenue to the govt). Simultaneously reduce govt spending to a balanced budget just as you and I must live. Then, you can begin using some of the increased tax revenue to actually pay down the debt.
What this does is: Reduce the importance of the outstanding debt; create a sense of comfort for bond holders that once again, the govt is on an economic growth binge and can make payments well into the future; and finally by paying down even a small part of the outstanding principal, the govt will show that is had turned the corner from a century of spending money that it doesn’t have.
As I said this would be the ideal scenario, but I’m not holding my breath.
Foreword — I happen to agree that the S&P downgrade was, in fact, overdue; but that does ^not^ negate the following sentiment vis-a-vis S&P from me . . .
The fact that S&P had rated all those bundled toxic mortgages AAA right up to the roof caving in in the 2008 financial debacle calls to mind this true story, directed today from me to S&P:
The monthly humor [using the word loosely] magazine at my college was admonished by a letter-writer to up their standards. Their response? “Up yours.”
I believed this was coming. The debt ceiling agreement was much too little in spending cutts. OB and T have covered the bases very well.
I’ll add a bit of liquid to the boiling pot. It is this quote from a financial guru named, John Mauldin, who has been called in to consult with a group of Senators.
“I flew to Washington and met with nine of them for about 90 minutes and Senator Cornyn (from Texas) privately beforehand for an hour. I offered him a copy of the book, but he said he was already reading it on the iPad he was carrying. I gave him one anyway. 😉
Evidently, Coats and Portman had worked the room, because nine guys showed up more or less on time. Two Democrats, six Republicans, and an independent (Lieberman). Jon Kyl was there, as well as Gang of Six member, Tom Coburn from Oklahoma. Also Corker, Lugar, Coats, Portman, and Mike Lee, the Tea Party senator from Utah, who took the most notes. But there were a lot of them taking notes. And asking questions, some rather pointed. Overall, I was very impressed with the level of knowledge in the room and the candor.”
(A long spiel about how Europe and Japan are in worse shape than we, but what is happening there is going to affect us. I cut it out as this is way too long anyway. Unfortunately, there is no link to this. It came in an e-mail.) continuing-
“All this to say is that our bond markets are going to get spooked sooner than we are prepared for. If the US does not show up with a credible deficit-reduction program by the end of 2013, we could see interest rates rising even in the face of a deflationary recession. If we do nothing, we become Greece.
We need $10-12 trillion in cuts over ten years, which I explained would put us into a slow-growth-at-best, muddle-through economy with high unemployment and tough tax policies. I pointedly showed Senator Mike Lee why we could not cut spending too fast (as the Tea Party wants) unless we want “Depression 2.0″ and 20% unemployment. It has to be my glide-path option. (This refers to holding spending level at 2011 levels while doing things to increase, or at least not stifle, economic activity.)
It was a very sober group as we ended the meeting. They all politely thanked me for coming and talking frankly. But the Senators made it clear that cutting spending in a meaningful way was going to be very hard, and would take real commitment from them to get us through this. They all noted that their mail was running 100 to 1 against cutting Medicare. Every one of them.”
Whew, talk about fear and fiscal stupidity reigning among the sheeple!
One of the problems in a representative government – if you want to be re-elected you heed what your constituents say. How do we educate so many fiscally uneducated people that there are basically only two alternatives?
1. Make the cuts now and tough it out.
or
2. Continue to put lipstick on the pig until it all goes in the crapper and we are all infinitely much worse off.
IMO, it comes down to whether enough of our representatives will put the best interests of the country over their own re-elections. Some of them may be surprised that doing the right thing may actually get them re-elected.
My thoughts on several aspects of all this:
1. I’m betting that after an initial reaction in the markets Sunday evening and Monday morning, the markets will pretty much yawn at this downgrade. Our financial situation here in the USA sucks but so do most other major countries’. We are the “youngest horse in the glue factory”.
2. Putting any credibility on S&P ratings of financial instruments is like putting a fox in charge of guarding the hen house or putting a Big Eight (are there still eight?) accounting firm in charge of auditing Enron. Almost all of the time, they are paid by the organization they are rating. What’s wrong with THAT picture?
3. We’ll never get our financial house in order until we make some structural changes in our political system. Several things that would help this would be:
a. Pass a balanced budget amendment. We can’t trust our elected officials to do what’s intelligent or right on their own accord.
b. Simplify the tax code greatly, getting rid of silly and complex loop holes and greatly reduce the rates of taxation. Make sure we don’t use the tax code to encourage any kinds of economic endeavors. Let the markets do that.
c. Institute a national value added or sales tax at a low rate to begin with and then increase it over a period of time as the income tax is cut to zero…nada. We should be encouraging productivity…not consumption. This would also mean that EVERYONE pays taxes (even illegal immigrants) and has some “skin in the game”.
These are only a few things we should do…there are others.
Occam,
We are in perfect sync up until now. Volker didn’t cause high rates, he inherited them. Rates were high in part because there was too much money in circulation. He began to restrict the money supply by requiring banks to keep larger reserves on hand. This removed some currency from circulation. As the money supply tightened up, the money that WAS in circulation became more valuable. As money becomes more valuable it creates dis-inflationary trends. This is what permitted unions to roll back inflation demands in contracts as you note above.
It’s also my memory that was about this time that margin requirements went to 50% (a margin reqmt is the amount of money one must pony up to buy an investment on credit); prior to that margin rqmts were much lower (25% if memory serves).
For all the caterwauling about speculators controlling the markets today, the solution is simple; increase margin rqmnts even more.
Now, one might ask “then why don’t we see rampant inflation now?” We do, it’s just not quite as visible. Gas has almost doubled in price since Obama was sworn in, and that inflation has worked its way into most items because, whether by plane, rail or truck, most items are delivered by a gasoline-powerd infrastructure. I’ve seen studies that peg the true inflation rate at about 10%. Orders for durable goods are down (supply/demand) because when one is out of work one postpones purchases. This has had a moderating effect on some items. I saw a study that noted auto purchases were down about 30% and conversely, used car prices have risen dramatically.
T, I defer to your greater knowledge. I was speaking from somewhat faulty recollection. Thank you for the correction.
Reich wrote:
It doesn’t appear that any commentor has mentioned it, but the answer is the federal and state governments. The federal government has regulations based on credit ratings (e.g, money-market funds have to hold only highly rated securities), and has regulations authorizing certain organizations (including S&P) to issue credit ratings that those regulations use. Many states also have regulations along those lines (e.g., cities or pension funds can only hold securities with some minimum rating). You can read the SEC’s report to Congress on this issue This is probably part of the cause of the financial crisis: these regulations drove demand for high rated securities which caused banks and brokers to create some through various means, including spitting mortgage backed securities into tranches.
What’s worse is that this state-authorized and required ratings has leaked into international law through the Basel Accords, where banks have to hold a certain minimum quantity of highly rated assets… which have to be rated by someone…
I also agree with OB. And if I ran a rating agency, I would have downgraded us when TARP was passed in 2008.
Sam,
A great clarification. Amazing isn’t it? Reich, as a progressive, is in support of a more powerful and invasive government until he isn’t.
Some part of the S&P action may be what sports referees call a “make up call.” You’ve made a bad call in the first half which you can’t undo. Later in the game you call one the other way to make up for it. The ratings agencies screwed up so badly with the housing bubble, they may be trying to exhibit extreme virtue now.
The basic need of S&P to protect their own interests is the reason why they downgraded our debt. Their viewpoint wasn’t one which said, “Well, they’re trying and next year, it’s bound to get better. I mean, after all, look, for the first time they’re talking about reduction.”
If you are backed up against a wall and a grizzly is charging you and someone gives you gun without bullets, will you say, “hey, thanks, now I’ve at least got a gun?”
If this is a message about the “way” the whole debacle was handled, good. The way often reflects the end and when you get nothing but lies, projection, and blackmail then the end doesn’t look promising.
S&P just backed up the tea party position, big time.
I’d have downgraded us at the time of the GM fiasco. No clearer indication of the regard in which the Administration held bondholders could be imagined.
I agree. We tend to think of the prices and prospects of securities as continuous variables, but the legal requirements regarding ratings can make them discrete variables. A ratings downgrade can force a “widows and orphans” investor to divest himself completely of a given security.
What I found remarkable was that Reich, who I assume knows better, spewed such utter nonsense in an effort to defend a Red agenda. That is, his intellectual integrity took a backseat to political expediency, that backseat being in a Zil, as befits an apparatchik.
Mr. Frank: exactly.
Occam,
You’re surprised that a progressive’s intellectual integrity took a backseat to political expediency?
You need to get out more!
I know I link to Market Ticker a lot, but Karl’s ticker for today is pertinent:
And So It Begins…..
Curtis: S&P did not back up the Tea Party position, big time, although what it said could be used by the Tea Party. It could also be used by those who oppose the Tea Party.
This is what I’m referring to: if you read the text of the S&P statement, it is agnostic on the subject. S&P couldn’t care less whether the reductions occur through cutting spending or raising taxes, it just wants the figures to come out right:
Naturally, if the US ends up making the reductions by proposing to reduce spending only, that approximates the Tea Party position. And if the US ends up making the reductions by proposing to raise taxes only and cutting nothing, that would approximate the most liberal position. But S&P itself does not take a stance, or recommend anything except that it somehow be done.
T Says:
August 6th, 2011 at 7:36 pm
…Volker didn’t cause high rates, he inherited them…
That’s not how I (vaguely) remember it although, yes, inflation was high when Volcker took over.
Paul Volcker chaired the Federal Reserve from 6 August 1979 to 11 August 1987. The fed funds rate was 10.72% on his first day and 6.47% on the day he left; on 22 July 1981, two years after he took over, it was 22.36%. Interest-rate time series are available here.
rickl,
I agree with the post with one exception his damning of the tea-party defections.
When you control only one-half of one-third of govt, and the tea party reps are yet a minority among that, there is realistically not much you can legislatively accomplish. Yes, the compromise stinks but nothing else was possible under the circumstances.
Furthermore, had it not passed, S & P would have downgraded our credit anyway. The Tea Party would have become the scapegoat and the reason why. The passage of the bill leaves Obama and the Dems exposed, and the Tea Perty reps continue to make noise, reminding all of us of the potential for change come November 2012.
Remember, 47% of voters didn’t vote for Obama the first time when he had no record. I suggest that none of those voters have been convinced to vote for him now. That means the Tea Party only has to convince 4% of voters to win the White House. That’s the brass ring, and by the consistent conniptions of the left and their media, I think there’s a good chance they grab that ring.
West:
You write “not only was the downgrade due to the debt rather than the deficit, but the process was not the problem, the result was.”
I refer you to the text of the S&P statement. It goes on for quite some time about the process. Here are a few relevant excerpts:
gs,
I don’t quibble w/ your time line, but I remember Volker being instrumental in reducing inflation, not aggravating it. There may have been more going on and/or perhaps I wasn’t paying close attention then. I will need to investigate more deeply here.
You’re surprised that a progressive’s intellectual integrity took a backseat to political expediency?
It was yet another triumph of hope over experience.
I don’t think the S&P downgrade was a makeup call by any stretch of imagination. That implies that there was no justification for the call except to redress past error. I think that, after having been burned on mortgage fiasco, the S&P decided that the powers that be would not/could not paper over the cracks any longer, and that to retain any shred of credibility they had to downgrade. It’s rather like the MSM finally telling at least a partial truth about the Dems. It’s that, or shuffle off to the tar pits (TARPits?).
T, maybe economic activity had adjusted to 10% inflation; maybe Volcker’s plan was to get interest rates so high that economic activity would fall, and inflation with it. That’s just my inference: I don’t claim to understand monetary policy.
I agreed with the rest of your remarks about Volcker. IMHO he hit inflation with every tool at his disposal, including interest rates.
Neo,
Several thoughts.
First, while I agree that what S & P wants is for umbers to come out correctly, they mention increasing revenues not increasing tax rates. Now the Dems will read that as tax “rates” but there are many more ways to increase revenues that just by increasing tax rates (the Dems have always been blinkered on this issue). Far more damning is the propsal to spread spending cuts over 10 years to solve a debt and deficit problem now. This is business as usual in Washington and it is why Tea Party purists are so upset. Raise taxes now and make cuts later–maybe. Still it’s to Boehner’s credit that he was able to cobble together an agreement that excluded tax cuts. He was fighting an oppositional senats and an opposition predsidency, and he succeeded. As I wrote to rickl above, this may have been the only possible outcome at this time.
Second it is not the “contentious and fitfull process” that S & P sees as the problem. The process has always been contentious and fitfull. The problem is that such a process is unlikely to reach a legislative conclusion (“Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge . . . .”).
The real kicker, however, is “. . . what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable. . . .” Uncertainty has always been a death-knell to markets. What they’re saying here is that they can’t predict where the Hell this administration is going with the economy.
T: I agree about the uncertainty factor, which I briefly discussed here.
In fact, for quite some time I have come to think that the uncertainty factor is a major driver of the continuing slump in the economy. And the failure to get any sort of effective agreement on the debt ceiling is certainly a big part of that, as well as the unpredictable nature of the Obama administration.
But when S&P discusses “revenue” it is certainly reasonable to assume that the statement can be used to argue that tax increases are the way to go. The text of the S&P statement does not favor one side or the other, really.
And of course S&P was also upset by the result of the process. But I maintain that, had that same result (or an even worse one: a raising of the debt ceiling without any cuts or other changes) come from a less contentious process—for example, if Congress had merely rubber-stamped the ceiling raise without much argument—S&P would not have yet downgraded the rating. There’s no way to prove that, but from reading their statement, and the timing of it, I am convinced that process was a big part of it.
Occam says, “I’d have downgraded us at the time of the GM fiasco. No clearer indication of the regard in which the Administration held bondholders could be imagined.”
That was the signal to all with eyes that see that BHO & gang were trying to take us down the road to ruin, aka a bankrupt socialist nanny state. Who in the private sector, in their right mind, will ever buy a GM (of Chrysler) bond ever again? This was blatant theft, circumventing all laws of bankruptcy, to favor the UAW.
As far as the flying pigs of the Kos kiddies, the Guardian twits, and pygmy Reich are concerned; they have not the slightest clue as to what looms on the horizon. But then, neither do 80+% of the population.
Wow, this is a hot potato.
It sure did bug me that S&P thought raising taxes was appropriate. But, from their point of view, they are just looking at money to pay the debt. What do they care if Americans have to become a bunch of slaves to do it.
I can’t follow all the loops and the thinking on this one. I just don’t have the time although I would like to.
But, if it’s that complicated and takes that much time and doesn’t yield to simple rules, I’m suspicious that all the talk is a bunch of baloney. The reason that it proves the tea partiers right is a simple default position: the compromise didn’t prevent a debt downgrade. If the tea party position had forced more of a showdown, the S & P people would have believed there was a more serious position to pay off the debt with something more than printed dollars. S&P know they are about to get screwed and don’t TRUST our politicians. That’s what it is about. They trust the tea party politicians to cut government, grow the economy, cut regulations, and pay the debt.
T:
There was a thread at Ace of Spades a few days ago wondering if anyone who didn’t vote for Obama in 2008 would vote for him in 2012. The best comment I saw went something like, “My grandfather voted against Obama in 2008, but he died last year, so he’ll be voting Democrat from now on.”
Neo,
For the record, raising revenue can be accomplished by expanding the economy. It’s the old 10% of $1,000,000 vs 50% of $100,000. As I said above the Dems have been perennially blinkered on this because growing the economy de-centralizes power while raising taxes centralizes it.
You write that “I maintain that, had that same result (or an even worse one: a raising of the debt ceiling without any cuts or other changes) come from a less contentious process–for example, if Congress had merely rubber-stamped the ceiling raise without much argument–S&P would not have yet downgraded the rating.”
Here’s where you and I respectfully disagree. As you say, either way it is an unprovable thesis. Let me explain my reasoning.
IMO the ONLY way to avoid a credit downgrade at this juncture would have been a plan to make immediate spending cuts of significance and/or some tangible plan to begin to put the economy back on its feet (creating future revenue). Tax hikes would not have helped, because even substantial tax hikes would have been a drop in the bucket at current collection rates, and such hikes would have impaired any attempt to grow the economy. So tax rate increases to avoid a credit downgrade would have been revenue neutral at best and perhaps would even reduce potential revenue.
If we had continued to limp along adding a couple hundred billion to the debt year after year as we had been doing, perhaps then a credit downgrade could have been postponed (business as usual for both Washington and the S & P). Obama however, went “nuclear” and in two years increased the deficit and debt faster than it had been increased in the prior 235 years. At that rate and at that magnitude a response was called for from the S & P just to maintain credibility.
Let me put this in neighborly terms. Your neighbor lets their dog poop in your yard, you might overlook it even for several years just to keep peace. If, however, that neighbor comes over and burns your house down, you’ll take action.
Well, Obama burned the house down and S & P was faced with this dilemma: If we don’t down grade now, when will we ever?
The S & P is answering this investment question: Is it safe to invest in U.S. backed bonds and notes?
answer:
AAA rated absolutely
AA+ probably
AA+ negative outlook probably for now
I (once again) refer to my (and Occam’s) post on 8/4. It’s the ability to pay not the level of the debt that’s at issue here and when one raises a debt ceiling in the throes of a financial crisis, one creates uncertainty at the very least and at the worst, disaster.
Pile this uncertainty on top of the uncertainty of our economy and on top of the uncertainty of reachable compromise in Washington and a credit downgrade is a foregone conclusion.
rickl,
That’s funny (but true!).
And then there’s the fact that S&P did the math wrong, and relied on their flawed math as the main reason for the downgrade in their original report.
Then, when their math error was pointed out, they changed reasons.
Believe me, I’m as upset about the debt/deficit as the next person. I just don’t think much of S&P, or the process by which they made this decision.
And here’s more, including the controversy over how much time S&P took to reconsider its decision.
I find it very interesting that I seem to be more cynical about S&P than many of the commenters here. I’m probably just as cynical about Congress and Obama, though.
See the followjng link
Amilya Antonetti, Chair and CEO of AMA Productions
especially at the 35+ second mark
http://www.breitbart.tv/small-businesswomans-epic-rant-against-obamas-disastrous-economic-policies/
You go girl!
I find it very interesting that I seem to be more cynical about S&P than many of the commenters here.
I’m cynical about everybody. Here’s a dispute about facts, and who hit John. I apply the second eternal verity, after Occam’s Razor: cui bono?
How does misrepresenting the situation aid S&P? I honestly don’t see what motive they could possibly have. Quite the contrary, they would seem to have every reason to play ball. How misrepresentation aids the Obamanauts is obvious, since the Messiah’s chances of re-election hang in the balance, so that’s my zeroth order suspicion.
We’ll see what happens next week with the other ratings agencies.
Occam’s Beard: I am not accusing S&P of misrepresenting the situation. I happen to think they may be right about the unreliability of the US in dealing with this problem—unfortunately.
I think, however, that (a) S&P should have waited to see what the committee does (b) once their $2 trillion error was pointed out, they should have taken more time to make the decision, and (3) their motive to jump the gun on downgrading the debt might be to restore their own reputation as tough and hard-nosed rather than the softies who were not on the ball in the leadup to 2008.
Their other possible motive would be to put the fear of a further downgrade into Congress and the president, if those two entities don’t shape up and do something effective. And although that’s a laudable goal, I don’t think it’s part of their role as a ratings agency. They are not coaches.
Here’s a link to an excellent WSJ essay that details the negotiations. It primarily covers Eric Cantor’s (R-VA) role. Some details about the antipathy between him and Obama. Also, Obama’s inability to accept anything that isn’t redistributionist.
One thing stands out to me. The dems speak redistribution and the Rs speak balanced budgets and economic facts. Not a lot of actual communication going on. Thus, marginal gains are all that can be expected until the dems lose the Presidency and Senate. That is where we have to direct our efforts now.
http://tinyurl.com/3nxfhj8
(a) they should have waited to see what the committee does
Why? The committee probably isn’t going to do squat.
(b) once their $2 trillion error was pointed out, they should have taken more time to make the decision,
I haven’t had the time, and too fried right now, to investigate this in detail, but my impression is that this assertion of an error is subject to dispute.
and (3) their motive to jump the gun on downgrading the debt …
Begs the question.
… is to restore their reputation as tough and hard-nosed rather than the softies who were not on the ball in the leadup to 2008.
Or, having screwed the pooch in 2008, they decided to actually do their jobs properly, to save themselves from Arthur Andersen’s fate.
T,
Antonetti’s talking the same point I made in my letter to Obama. Confidence! It’s behind everything in a properly working financial system. Without it, things slow down or grind to a halt. The incredible thing is it could be instilled rather easily if Obama changed his tune.
T:
Actually, S&P does mention increasing taxes, not just revenues (and yes, I’m aware that “revenues” aren’t just taxes). Here are some quotes from the S&P statement (I have highlighted relevant references in bold):
If you read the statement, it seems fairly clear that S&P is thinking of taxes (or an end to the tax cuts, anyway) as a major way to raise revenue.
I should perhaps clarify a bit. I’m cynical about S&P, but with the opposite polarity. I suspect that they were slow to downgrade for fear of political repercussions, and that Fitch and Moody’s will now follow suit since S&P will be the Administration’s lightning rod for calumny.
“there are many more ways to increase revenues that just by increasing tax rates (the Dems have always been blinkered on this issue).”
Not *always*. JFK pushed through tax cuts on the confiscatory 90% top-bracket rates of the 1950s.
Slightly OT aside: on two issues near and dear to the hearts of the contemporary right JFK gets a big +1 on one (cutting taxes) and a big -1 on the other (he fostered the growth of public employee unions).
Wow! What a thread. I can only add a few points.
1) S&P’s credibility is suffering in Europe. Did you see Soeren Kern’s piece at PJM from this week? there is talk about creating a European rating agency. Remember, Europe will seek to blame someone else to distract from its own failure to check out Greek finances before accepting it in the Euro zone.
2) Bayer said today that it may be forced to move its production facilities from Germany to a place with lower energy costs. This is in response to Merkel’s panic attack in face of the Green-propagated public panic response to Fukushima. This sounds like a serious call for adult politicians to stop the pandering to utopian leftists.
3) While I appreciate the Bachmann attention to our spending problems, I don’t think she is going to come up with a trust-inspiring comprensive approach to stepwise entitlement reform, energy policy, and government regulation. Nor has she shown any appreciation of the difficulties of dealing with economic issues on the international level. We really need a grown-up who can juggle a lot of balls at once. We desperately need someone who can assemble a very competent administration that works toward the same goals. We can’t afford a team of rivals managed from the golf course and congo lines in Chicago. We also need someone who can talk to the people about what is needed so that they perceive more than the chaos of the current situation.
4) Ed Morrisey had a good piece at Hot Air about using the energy issue to move the economy. Obviously this is only a first step, but it would be highly visible and would increase public confidence. the possibilties coming from the Marcellus shale and the rare earth finds in Nebraska could remind help convince people that our best days need not be behind us.
5) “First thing we do, let’s kill all the lawyers.” We need to find a way to reign in civil rights, environmental, and medical malpractice suits that keep wrecking coherence in government. There probably is some possibility for tort reform, but ultimately an NGO lawyer has to assume his/her rightful social status, ie. somewhere lower on the scale than a good barrista.
J.J.,
But Obama will not change his tune because he believes his approach is correct and works. In local discussions, I’ve likened this to someone who has engine trouble and takes the car to a mechanic saying “this car ran really well when it was new, so make it jlook ust like a new car again. Paint it, polish it and reupholster the interior.”
The mechanic does that and when the owner picks up the car he’s astounded that it still runs poorly. “It looks like it should run really well, why doesn’t it? I know, we’ll reupholster the interior again, but this time we’ll use leather instead of vinyl.” (The stimulus just wasn’t big enough.)
This is Obama, you can’t convince him to let the mechanic work on the engine to fix the engine problem and he has no clue as to why his spending and policies don’t jump start the economy.
Remember it was in an interview with Charles Gibson(I believe) that he said he would raise the capital gains tax even though a loswer cap gain tax brought more revenue into the govt. When asked why, he said because it was fair.
He’s concerned with HIS assessment of fairness which is a redistributionist assessment. Liberalism is right because, well, it’s right. No other proof is necessary. That’s why this economy is going nowhere as long as his adminstration is in office.
Neo,
I wasn’t lecturing about revenues (at least I didn’t intend to). I realize you understand that, I was just repeating that point.
Thanks for the S & P citations. I will cede that point as I agreed with you above that thier primary concern is making the numbers come out right. I question the inclusion of taxes in the report, though, because these people are fully aware of the idea that one does not raise taxes in the middle of a recession. The point I do stand by is that under current circumstances, it’s a revenue neutral ploy at best. So I wonder why it’s there?
and Gary Rosen,
of course I will cede the JFK point as well. As we all know, though, the JFK of 1960-63 was closer in spirit to today’s Republicans that to today’s Dems.
“. First, who elected David Beers or his Moody’s and Fitch counterparts? By what right do they decide on the fate of governments, economies, debts and peoples?”
Of course, I’ve always wondered the same thing about The Fed, and the UN.
expat: I believe that in #3 you’re describing Paul Ryan.
Unfortunately, I don’t think there’s much chance he’ll be running this trip.
Sheesh! This was the last chance to turn around the ship. Nothing but icebergs are ahead from now on. I am loath to be a nay sayer, but there is no solution other than a sharp contraction. Its not a democrat or republican thing; it is simply reality. Stop listening to the pundits of the MSM, stop paying attention to the party prostitutes for all you get are lies piled upon lies.
There is only one solution; take the painful hit now or take a severe hit once the markets decide the USA is no longer willing to do what must be done. All who think there is a solution that does not involve great pain are fools.
Paint me Cassandra, but nonetheless, hard times (beyond the imagination of most) are ahead. Its all simple math, ignore it at your peril. If you are not short the USD, and equities, and bonds; you are going to be wiped out of all your paper wealth within 6 to 18 months.
Game over.
This just came up on the WaPo site. It sounds like the Young Guns are doing some serious behind-the-scenes work to change the base, and Ryan is very involved. Even if he is not the top of the ticket, he will be felt. And he has friends.
http://www.washingtonpost.com/business/economy/origins-of-the-debt-showdown/2011/08/03/gIQA9uqIzI_story.html?hpid=z1
Parker,
Yes hard times are ahead, but the crucial factor is how Americans respond. If the go into full victim mode, it’s bad. BUT if they remember where they came from and draw strength from their heritage, they can get through this. We have to convince the young that the masochism they have been taught all their lives is pathological and that there is a better way.
expat,
“BUT if they remember where they came from and draw strength from their heritage, they can get through this.”
I fervently hope your optimism is warranted, but IMO, that is wishful thinking.
“Wow, this is a hot potato.”
Wrap your mind around 100+ trillion in liabilities coming due within 10+ years ant then you will realize that today’s ‘hot potato’ is tomorrow’s cool cucumber.
Neo said:
“I find it very interesting that I seem to be more cynical about S&P than many of the commenters here. I’m probably just as cynical about Congress and Obama, though.”
texexec raises hand shouting “I’m cynical about S&P!” (Scroll back top my earlier comment.)
I’m also cynical about the ability of the American people’s ability to elect politicians who will solve this mess.
I’m a great believer in the wisdom of the markets. The markets are now implementing a sales tax on everyone via inflation. Unfortunately, it’s a tax on everyone’s 401k too.
So it’s a tax on consumption (good) AND a tax on those who previously produced (bad).
When your vessel’s draft exceeds the water’s depth, you are most assuredly, aground.
Victor Davis Hanson gives us a look at our future in this excellent article:
http://tinyurl.com/3uxn4m3
(Reminder to some who posted above – tinyurl.com is your friend.)
Neo-neo: I was going to explain what a debt rating was but previous comments made that unnecessary. You seem like a smart person but you obviously don’t even understand what a debt rating is about (any more than the idiots you quote—not to say you are an idiot). That is a big part of the problem facing our nation, even smart folks don’t get it.
Getting a new credit card does not mean you can pay your debts forever…you’re just able to borrow a little more and get yourself in deeper trouble…until you hit your credit limit again.
With regard to S & P’s “raising taxes” or “raising revenue,” I think S & P was only trying to avoid prescribing the details of a solution to the debt problem. I doubt that they actually favor raising taxes, but so long as the result is greater federal income (which raising taxes might not/probably would not provide) the finances can work out.
With regard to the effect of the debt ceiling foofaraw on S & P’s re-rating, I think what they are saying is that what they saw indicates that too many libs will obstruct the solutions. Their wording, of course, leaves open the interpretation that both sides are obstructive. Why should S & P say anything that has the clear appearance of taking a political position?
One might question S & P’s timing. The debt ceiling fiasco was predictable, and probably taught S & P nothing they did not already know. On the other hand, there was perhaps the faintest of possibilities that fiscal sanity would break out. Too bad it did not.
mechdoc: my reading of the S&P statement is that they would probably like Congress to allow the so-called “Bush” tax cuts to expire, although S&P is very careful not to explicitly say so for fear of being accused of telling the US government exactly what to do. So yes, they certainly do not say it in so many words; they are very careful.
GaryP: I believe I do generally understand what a debt rating is, although certainly not all its nuances (to use a fun word). I am basing what I said in this post and in the comments section not on the people I quoted in the original post (idiots or no), but on my reading of the S&P statement, which I’m beginning to think many people here have not read. I have included a link to it in the addendum to the post.
I believe the S&P statement makes it fairly clear that S&P based the timing of its downgrade of the debt rating on the political fighting and (in their words) “brinksmanship” involved in the recent debt ceiling battle, to a great extent. I realize these two things (a long-term debt rating, and a vote to raise the debt ceiling) are quite different. It is, as far as I can tell from reading their statement, S&P’s people who are basing their analysis of the long-term US debt on their fears about US politics generated by the short-term debt ceiling battle, which did not resolve the debt problem but deferred it to a (slightly) later day.
They say it very explicitly here:
They are welcome to base their evaluation on this, but I happen to think they should have waited for the next step to fail before taking such a (potentially) momentous action. In fact, the debt ceiling negotiations did end up raising the debt ceiling, and happened to include some spending reductions (although not enough, of course) and a recommendation for further reductions by a certain date, and the appointment of a committee. To my way of thinking, this means we are at least slightly closer to dealing with the debt than we were before the negotiations, but S&P disagrees. So far, the other 2 agencies that do similar work (Moody’s and Fitch) seem to agree with me, not with S&P—although of course that could change quite quickly and they could join S&P in downgrading sooner rather than later.
I also do not think much of S&P, based on past record, and also on their $2 trillion error in the present computations. I find the latter rather shocking, actually. That does not mean I think this country is going to resolve its debt problem within the designated time period. But I actually do think it is more possible now, post-debt-ceiling negotiations as compared to pre-debt-ceiling negotiations, that they will make a stronger effort to do so. Obviously, S&P disagrees with me.
Neo-neo,
Rating agencies have been threatening to lower the US rating for a while (months). A Chinese agency did so about a year ago.
IMO, S&P saw, as did many others, that the entire framing of the debt ceiling debate that there was no intention, no will, no ability to ever address deficit spending.
The effect of the “cuts” is really just to slow the INCREASE in deficit spending. Spending will not decrease below today’s spending, simply increase less than the baseline projected increases. In addition, essentially all the “cuts” come in the far out years (nearly a decade away) and most likely will never actually happen since future Congresses must actually make the cuts. Also, the growth rates and other assumptions used for future projections ensures that the deficit will be much higher than estimated in future years.
Why the US is still investment grade is the surprising thing. I think it is mainly fear on the part of rating agencies. After European downgrades governments started talking about destroying the rating agencies. That is happening here also.
Are rating agencies honest? NO.
Did they facilitate the housing bubble? YES. (it was caused by government actions).
However, in this case, the only question is why haven’t all the rating agencies already lowered the US several notches, not why did one of them take this action now.
After watching the debt debate, I decided we should all quit worrying and just enjoy the doom. The US will do nothing until our currency and economy collapses. Eat, drink, and be merry for tomorrow (or at least soon) we will die.
I suspect that ratings agencies asked about the creditworthiness of various governments were in the unenviable position of husbands whose wives ask if a dress makes them look fat – a question only the intrepid will even consider answering truthfully.
But now that Mrs. USA can’t fit through a turnstile, the harsh reality has to be faced.
Since Obama came on board, the world has lost its bearings and doesn’t know right from wrong. It is as simple as that. The argument is not rational but moral and it is immoral for the United States to inflate its money supply and pay back its debt with useless money. It is immoral to steal from those who have property in order to get elected. And finally, it is immoral to lie.
I *think* I agree with Neo that the debt ceiling debate and resolution of the issue was at least a small step in the right direction for the USA as compared with our past several decades. I do believe that and I think I’m in agreement with Neo but don’t wanna put words in her mouth.
I also believe that it was not nearly enough real cost savings. It was simply the best we could do with the present government.
The 2012 election will have to make the right things happen…if sane, informed, and intelligent people win. (Namely, elect a Republican Senate, House, and President.)
Hitler weighs in on the S&P downgrade.
This never gets old.
I am proud of our Neo’s capacity. Sheezzz!
I agree with one of the commenters above that the U.S. credit rating should have been downgraded when the U.S. government failed to protect GM bondholders.
That was the day that a big line was crossed. The U.S. government became a lawless entity.
“As nasty and confusing and stupid and downright depressing as those negotiations were, it was always pretty clear that the debt ceiling would be raised and that no default would occur ”
Or maybe default was never a serious issue (re: not really going to happen). Rather; just white house spin to prevent tougher negotiations which would result in serious cuts. The lack of serious cuts and the democrats political fight to prevent them might be what they meant… vs. the issue of default being serious.
Neo, Occam’s Beard, and T,
My thanks to each of you for interacting with each other in a way that led to an extended discussion that was very enjoyable and helpful to me.
Best wishes,
Jim
T,
My point in bringing up JFK wasn’t to try to shoehorn him into a 2011 political template but to suggest how issues shift over the years. Consider this: it is now longer since Reagan than it was between JFK and Reagan. Somewhere in between the two tax cuts became a “right-wing, Republican” policy. What changed? Probably the entitlement explosion from the Great Society which is one of the root causes of the issues we are discussing in this thread.
Jim Nicholas,
You’re welcome, and thank you for the kind words.
Gary Rosen,
I realize that. My response that JFK is more like today’s Republicans than today’s Democrats was an attrempt to make exactly that point; my how times have changed.
I believe you are correct about the “Great Society.” More direct is Margaret Thatcher’s quote (“The problem with socialism is that eventually you run out of other peoples money.”) The entitlement society was running ona credit card for the last 55 years, and now, because Obama Pelosi and Reid went “nuclear” they have accelerated the crisis and caused us to run out of other people’s money. I end this particular post where I began, this might be the bst thing that could have to happened to this country.
T,
I hope I didn’t come across as being hypercritical because I think we are in agreement on the larger points. Actually despite the back-and-forth in this thread I think we all are, the largest point being the urgent need to revamp and reduce the level of government spending. Ancillary issues, like the timing of the downgrade, will eventually fade in importance but that one won’t until it either is addressed or swamps us all.
Discussing the nuances of the S&P down grade is akin to arguing over the colors of the rainbow on a planet in a galaxy far away. We have missed our chance to begin the slow process of bringing sanity to the debt/deficit problem. Another 4 years of 1+ trillion deficits is in the works, The question is how long can this dangerous nonsense last? I contend 3 year max before a collapse, but I suspect the collapse may be only months away.
Sooner rather than later tulip mania approaches.
“Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?”
Everyone. I suppose in his ideal world, we’d take anyone’s word for their ability to repay debt. But we don’t. Everyone asks third parties: ‘do you think x can repay this debt?’
I for one think the each government should have an official ratings agency, headed by a relative of the tyrant/president/minister/secretary etc. That office would, of course, always rate its own debt ‘Maximum A.’
As a lover of the kiss principle (never having been the brightest crayon in any box) it is my belief from what I have been reading, that the U.S. Gov’t is spending a lot of money it does not have. 59% is from money flowing in from individuals and companies. The other 41% is borrowed.
If you are spending your entire 59 bucks a month to pay bills, and borrowing another 41 bucks to cover your bills 100%, aren’t you actually borrowing an additional 70% over your income? Don’t try this at home!
I honestly think someone needs to be fired.
br549,
That money isn’t just to pay bills. The most often cited expense is entitlement programs, but in addition to that are expenditures like foreign aid. Think about it, we could make the argument that we are borrowing money to turn around and GIVE it to foreign countries (in some cases, the very country we borrowed the money from in the first place).
Gary Rosen,
No, you didn’t come across as hypercritical, and I think you are correct; I, too, believe that we are all essentially on the same page here.
Slightly OT but for those still following this thread you might be interested in this video:
http://www.youtube.com/watch?v=uj6lRFXC5rA&feature=player_embedded
I have noted that the Laffer curve (tax revenues as a %-age of GDP) peaks at about 18.8%. The Rahn curve compares Govt expenditures (i.e., the size of govt) vs GDP and finds that govt and productivity are maximized when the govt is spending ~17.5% of GDP. More spending becomes wasteful, less spending becomes less than ideal; I find it especially interesting that the Rahn curve %-age is so close to the %-age of the Laffer curve.
This clearly calls for more research, but I was wondering if anyone here had any thoughts on the matter?
Gary Rosen,
Also, apropos of your mention of the Great Society as the cause of many of these ills, see Walter Russell Mead’s essay from yesterday (especially the 2nd half, The Crisis of the Great Society):
http://blogs.the-american-interest.com/wrm/2011/08/07/american-tinderbox/
Between the Great Society and the Vietnam conflict, Johnson decided against running again. I am convinced he knew full well what he had done.
I for one am stunned at the innate genius and insight of some of the esteemed commenters in this thread. It would seem that, if we were to cull this group carefully, we’d have enough brain power to unstick ourselves from this tar baby overnight. Never before have so few known so much about owing to so many.
“So it sounded as though the nature of the negotiations themselves had upset S&P as much as their outcome. This was odd to me because it seemed to be a political judgment and not a financial one. Was that not outside the realm of S&P’s duty and expertise?”
Sorry, but this is a naé¯ve comment. I deal with ratings agencies regularly and I can assure you they (very appropriately) take into account any relevant factor. Trust in management is a big issue — do they actually do what they say they will. The equivalent in government is the President and Congress — can their word be relied upon? Particularly, this President and Congress. It is utterly appropriate that S&P take suck non-financial matters into consideration. Whatever it takes to get a meaningful outcome.
Don’t forget the ratings agencies are rating on behalf of creditors, on the basis of the likelihood creditors will get repaid. For the USA this sounds easy — as government members and commentators regularly point out, the government will never default because they can simply print more money. But think it through, that isn’t really a case of creditors getting repaid in full: the accompanying devaluation process means they actually get repaid at a discount, and therefore end up out of pocket. That isn’t the deal they signed on for.
The President has made it very clear he does not wish to restrain spending (evidence: his own budget produced earlier this year). The Democrats, who control the Senate, have made it very clear they not only do not want to restrict spending, but they do not believe it is even possible to reduce spending, and they have made many announcements along those lines.
The Republicans have made it clear they do want to restrict government spending, but are divided between the long term “pragmatists” (who argue this needs to be a slower process) and the shorter term “realists” (who argue the situation is too dire to take too long, and want quicker action). While the two have the same ultimate goal, their differences divide them (and so many voted against the Boehner plan, even though it may have been the best plan doable at that time……or was it? ….and there is the dilemma), and in any case, they only control one house.
Based on just that quick analysis, and the expressed views of the various leaders and “leaders” involved, and the shenanigans of the debt ceiling negotiations (eg the refusal of the president and the Democrats to lay out a firm plan), one can safely conclude debt will continue to rise, and that at some point the US government will likely need to print money for the sole purpose of servicing debt, thereby devaluing the currency, thereby effectively reducing the repayment value to creditors therefore leaving them out-of-pocket. When that is a likely scenario, you are no linger AAA.
S&P basically no longer trusts the US Government to ethically manage its obligations to lenders.
“S&P basically no longer trusts the US Government to ethically manage its obligations to lenders.”
A few of us believed the same about 20 years ago. 🙁