S & P: Silly and Portentous or maybe Preposterous
Paul Krugman assesses the S & P downgrade, and reminds us of their track record:
“On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.
“On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?”
As with the sub-prime crisis, Krugman argues that they don’t have their numbers right. “In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.”
Very good points made by Krugman. On the other hand, there is something to be said by external reviewers with respect to fiscal policy as well as confidence in countries ability manage effectively.
Still, at the end of the day there was an increase to the debt ceiling, and there was reform to the debt so what is the substantive problem they have with the outcome.
I am not sure of the criteria they used to arrive at their decision but apparently some of it was evaluation of process and on that point i think they missed the boat.
There was a lot of debate and dissent but that is the nature of democracy and even though it is not pretty it should be celebrated not looked at as if people are being childish, government is dysfunctional, etc, etc. GROW UP. This is the nature of public life. The outcome is the important thing.
As critical as I am of the USA, I tend to be basically optimistic of their ability to rally and lead. And unlike the majority of people who tsk, tsk at the debate, I see it as a sign of a dynamic political system.
Again the outcome is the important thing and if you don’t like watching how the sausage is made – don’t watch.
George –
I wish I could be as optimistic as you are about the workings of the U.S Congress. Granted, S&P’s performance prior to 2008 was dreadful — it trusted the math of the financial institutions to predict what was probably going to happen, and they were all wrong. The math was accurate, but it was all still a matter of only probability, and sometimes what we think is probable doesn’t happen. But I don’t think you can accuse any of those financially unwise institutions of deliberately making the mistakes they did, and I think they did learn to be a bit circumspect.
It seems to me that S&P is just being realistic. No one should trust this particular American House to do what is rational. It has shot its bolt. And without a rational House our system cannot work at optimum levels.
This time, S&P got it right. There is no reason at this point to think that the politics of the country is any different today than it was a week ago, nor that the House is any wiser. When an stupid demagogue such as Michelle Bachman is taken seriously as a possible candidate for President, the country is in very, very deep trouble.
I used to fear the emergence of brilliant demagogues like Huey Long. Now I also fear the emergence of dumb ones.
Well, at least our sovereign debt is still investment grade, unlike poor Iceland.
Perhaps getting into too much detail, but several commentators, including Krugman, have pointed out an error in the S&P projection of U.S. debt as a proportion of GDP. Here is one analysis:
“BEHIND THE CURTAIN: By noon yesterday, rumors raged through Washington that S&P planned to downgrade the U.S. by day’s end. A little before 2 p.m. Friday, after month of increasingly tense back-and-forth between S&P and Treasury, the rating agency provided a draft analysis, ahead of a downgrade announcement that was planned after the markets closed. The draft had some striking headline numbers, and statements like: “We project the U.S. government’s debt will grow rapidly through the middle of the decade.” The draft said the U.S. government’s debt would reach 87 percent of gross domestic product by 2021, under the base case. The sharp eyes on Hamilton Place instantly saw something amiss in the numbers that made them wrong and misleading, and it didn’t take long for them to find where S&P had made the underlying mistake. As a result of an error in constructing discretionary spending levels underlying the analysis, the deficit was $2 trillion higher over 10 years than the Congressional Budget Office would estimate. Treasury flagged the discrepancy to S&P, which admitted a mistake. ….
“S&P MAKES HUGE SHIFT IN ITS RATIONALE: S&P revised its deficit estimate down by $2 trillion. The share of debt-to-GDP changed substantially due to the correction. In particular, the statement about debt growing as a share of GDP throughout the decade was no longer true. Deficits came down by a significant amount. The trajectory of debt as a share of GDP went from rising to relatively stable. The new document pegs the deficit as a share of GDP at around 79 percent at the end of 2021 – using estimates Treasury believes are conservative. (A goal of fiscal policy is a stable debt-to-GDP ratio.) A rating agency compares a sovereign to other countries, and looks at trajectories and the forward path. The administration argues that all that changed, with the correction that was made. The administration contends that S&P removed some of the numbers from the analysis, and the justification became largely political – a very difficult framework for credit analysts to base a rating on. The earlier draft was much more numerically grounded, and the later one was much more politically grounded — judgments about political climate. The administration will tell you there was NO ECONOMIC JUSTIFICATION for what S&P put out.”
Here: http://www.politico.com/playbook/0811/playbook1502.html
The S & P downgrade appears to be more a statement of our political gridlock than one about the future of our debt. I suppose we’ll see what the markets make of it on Monday. The Republican presidential candidates appears to be making a BIG DEAL out of it.
The credit rating agencies’ analyses of sovereign credits borrowing in their own currencies (i.e., the US borrowing in dollars, Japan borrowing in yen) has always been horribly bad. Remember June 2002, when Moody’s downgraded Japan to a lower rating than Botswana and Estonia? Japanese bonds did not collapse as Moody’s expected. Instead, in the following 12 months, they enjoyed the most astonishing rally of all time, with 10-year yields falling to 0.5 per cent by mid-2003. History shows, in fact, that the sovereign bonds of leading economies rarely, if ever, respond to mushrooming fiscal deficits or to alleged credit risks.
Indeed, the previous record for the US deficit-to-GDP ratio was set in 1982-83 under Ronald Reagan, the year that marked the start of the biggest bond bull market in history.
Elizabeth Brown: Thanks for that history! Does raise further questions about what exactly S & P thinks it’s doing.
Elizabeth –
Thanks very much for the input. It makes me slightly less bearish than this morning. From what you say, the the leading economies seems to be playing in a somewhat different ball game with different rules from the games of the little guys. Hmm. Could be.
Yesterday a CNN pundit said that the value of U.S. bonds is partly determined relative to the values of the bonds of other nations. So I guess that so long as our bonds seem safer than, say, Germany’s and the rest, ours will remain the preferred ones anyway. It follows that ratings by the private rating agencies actually don’t matter very much. Would you agree?
I’m no economist or finance guy, but even I thought S&P went over the top in downgrading Uncle Sam’s credit rating in light of what Krugman has reminded us.
Kinda’ like the pot callin’ the kettle black (or whatever).
S&P can go to hell!
(And I invite Uncle Sam to “investigate the hell” out of S&P)
JJ: “(And I invite Uncle Sam to “investigate the hell” out of S&P).” A great idea! But which about-to-be-cut, under-staffed office will take that up: the SEC? the Comptroller of the Currency? Treasury? Or maybe the FBI; they have accountants and lawyers!
I agree with :
-Margaret: it’s a clarion call to end gridlock.
-Ann: there’s very little reason in the current congres to be sanguine about that.
You could have spent(wasted) an hour watching numerous talking heads parse this on CNN last night – but maybe interest rates wil go up, maybe they won’t; maybe the market wil go crazy Monday, maybe it won;t. maybe the Sunday morning talk shows wil be filled with new insights and promise, but probably they won’t.
Not a pretty picture IMO.
Margaret, I don’t know. I guess I was just a’ wishin’ or a’ dreamin’ or somethin’.
As a former federal HR guy, I’m reminded of the fact that we recruited people with the requisite qualifications (experience, education, training).
And where did we find these people?
(fortunately, i worked HR in healthcare, ammo testing, dod contracting — but not in the finance & related areas, and my time w/OPM never involved recruiting & examining for financial/regulatory agencies)
The phrase “revolving door” comes to mind here.
I think this shows the total ineptness of this congress. They can’t work together because they hate each other. The tea party and the arch conservatives were elected by their special interest(Koch brothers and others). No one in this congress has any interest in the people of America. They only serve their special interest that they feel will get them re-elected. They do not represent the amirican people. This whole debt ceiling was political posturing. It would have been totally avoided if the Bush tax cust had expired, but that was against special interest groups. I hate to say it, but the only solution seems to be the overthrow of this congress. They should all be forced to resign.
Congress: Do they even understand the consequences of their actions?
In the “Rationale” section of the S&P report:
“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”
The ratings agencies may lack credibility, but I agree with what S&P said above. A small minority in Congress was willing to play chicken with the economy and risk default in order to further a political agenda. I think everyone involved knew exactly what they were doing.
“S&P can go to hell!
(And I invite Uncle Sam to “investigate the hell” out of S&P)”
Absolutely! Even better, we need to role back all these draconian regulations on the securities industry and financial institutions which force them to base their risk-based capital on agency ratings and thereby distort market forces.
“role back all these draconian regulations on the securities industry and financial institutions ”
Because that’s worked out so well to date?
While I agree with Krugman’s characterization of the rating agencies, I think he might have it upside down.
Rating agencies are only as good as their credibility. They all took a hit (unfortunately not enough to destroy them) in the sub-prime crisis. But what I think that S&P is doing is trying to re-establish their credibility. We should remember that an important part of what they do is in relation to their two competitors.
S&P is jumping out ahead of the other two agencies (Moody’s and Fitch) by coming up with a different prediction. They risk very little, because their prediction is in line with what most people seem to be thinking (whether they like the rating or not). The markets have already been tanking for a few days, so even a company as timid as S&P usually is really just going with herd on this. But by doing it first, they present themselves as pathfinders; and tough pathfinders since one thing the money guys value is the appearance of showing guts. No guts here of course, but even so, look how we are talking about them. Krugman is correct in that S&P should have little credibility at this point. But this move on their part re-establishes their credibility to a great extent. The other two rating agencies are now faced with either showing that they are tough and prudent by maintaining their AAA rating (while they hope and pray that S&P turns out to be premature in their forecasting) or they have to downgrade US credit too, which will only make S&P seem prescient. It’s a brilliant marketing move on S&P’s part, especially when one realizes that they are just selling bullshit to begin with.
But hasn’t their rating statement and the fracas with Treasury over their numbers ended with them rating our politics (about which they say nothing we don’t already know) rather than our financial future. This may be clever marketing, but the reactions (and not just at dotCommonweal) suggest that their bad reputation is well deserved and they will succeed in reinforcing it.
Get this: And if we all don’t shut up, they’ll downgrade again!
“A day after Standard & Poor’s took the unprecedented step of downgrading the creditworthiness of the United States government, the ratings agency offered a full-throated defense of its decision, calling the bitter stand-off between President Obama and Congress over raising the debt ceiling a “debacle,” and warning that further downgrades may lie ahead.”
http://www.nytimes.com/2011/08/07/business/a-rush-to-assess-standard-and-poors-downgrade-of-united-states-credit-rating.html?hp
Sounds a bit desperate, doesn’t it?
S&P claims to be in the business of selling information. They rate risk. A couple of days ago they were just one of three discredited rating agencies. People still used them, of course. But look at them today. Their credibility is up through the roof.
They should have been desperate. But now they look like they know something. And the beauty of it is that what they are claiming to “know” is what everyone else already thinks anyway. It’s the same shell game as before; the trading knuckleheads, without learning a single new thing, can now say “S&P agrees with me”. S&P, knowing their market for knuckleheads, can threaten to downgrade US credit even more. They don’t even have to actually downgrade it. People think the threat is credible and that’s all that matters, because the game is about credibility, not accuracy (just like it was during the bubble).
Regarding S&P rating our politics; if they are rating the credit of a nation, they damn well better be rating politics. What else is there?
I don’t think that they risk a thing by downgrading US debt. Nothing whatsoever changed with our political power structure when Congress finally got around to raising the debt ceiling. We are not one whit less dysfunctional than we were. On the job side of things, our economy is showing no signs of recovery. S&P is just trying to be the biggest bear in a massive herd of bears; only a sucker would be bullish in this environment.
You know how the GOP business/Wall Street types keep telling us that companies don’t hire , don’t expand, don’t invest etc because these poor companies don’t know what the government will do, the horrible uncertainly of it all.
Here is my free report. Government will no nothing, noda, zilch till Jan. 2013.
Unagidon… I’m bullish because the bears have proved they are stupid lately. . never bet on stupid.
I think stupid has already won, Ed.
Amazing, the amount of financial and economic expertise here. You’re all speaking with the President, yes?
No, I don’t worship at the same church he does.
We are all from Chicago, David, and we know what we know!!!
**They can’t work together because they hate each other.**
______________
Yes, that would include the animus and knee-jerk hate from the left, as exemplified here in this combox.
Perhaps Drew Weston has it right when he blames this gutless president who is turning into Jimmy Carter before our eyes. So many people are hurting, struggling while Obama seeks the center. FDR and Teddy R did not seek the center because it is a fable. What center is there when one percent have all the money, power and influence? FDR created the middle class. The GI bill created more of the same. This president does not know who he is.
http://www.nytimes.com/2011/08/07/opinion/sunday/what-happened-to-obamas-passion.html?_r=1&ref=opinion
And to add to Unagidon’s analysis, there is this in Sunday’s Times: “The tension between Congress and the ratings agencies could have tangible results on the companies’ futures if it speeds up new rules that lessen their roles in the market. As part of the financial reform bill passed last summer, regulators are supposed to write rules designed to reduce the heavy reliance on credit ratings by banks and other buyers of debt securities, a policy that has its roots in the 1930s.
“Federal bank regulators have not yet created these rules and a Congressional committee held a hearing on July 27 on the slow pace of regulators’ implementation of this part of the law. Fierce debate broke out at the hearing about whether it was appropriate for the ratings agencies — companies regulated by the federal government — to be rating United States debt at all.
“The pushback against S.& P. echoes the complaints of other governments that have had their debt downgraded and responded with cries of unfairness.”
http://www.nytimes.com/2011/08/07/business/economy/standard-poors-downgrade-evokes-anger-in-washington.html?_r=1&hp
And here’s a brief account of the action so far:
http://topics.nytimes.com/topics/news/business/companies/standard_and_poors/index.html
It’s hard to tell in a current political climate where some want the economy to admit a partial failure and some don’t, whether all this noise coming from Washington is just sour grapes or not.
The theory behind the credit rating agencies is that they are independent entities who, through proprietary means, establish the credit worthiness of other institutions. When a credit agency makes a rating, it is supposed to be an accurate expression of the institution’s underlying financial condition.
But the recent sub-prime mortgage crisis showed us that this formula had been upside down for a long time. Institutions that were bad risks were judged good risks by the market because the credit rating agencies said they were. The credit rating agencies’ proprietary systems failed, utterly. They traded on their status as independent auditors to create a fantasy world of finance within which investment decisions were made that almost destroyed the economy.
We should remember that the power of the ratings agencies rests only on how accurate their analyses (and forecasts) are. Deserved or not historically, the ratings agencies had built their reputations on this, and it was their reputations that gave all this credibility to their outlooks. The basis of their reputations as resting upon their knowledge is now shot. If they continue to assert their authority they are simply trading upon a reputation they no longer have. In other words, they have become too powerful.
Unfortunately, the credit rating agencies play two roles in our society. They are not only the sources of market information. They also act as the depositories of responsibility. They allow people to pretend that there are independent institutions out there that objectively rate credit worthiness. This allows people to shift responsibility from themselves for investment and political decisions. The credit rating agencies create a financial reference point that is not considered to be arbitrary, even though their recent actual performance gives us every reason to think that it is. In short, the credit rating agencies play a moral role in the economy that is now independent of their former role as objective analysts.
The government is sort of caught, because while it may whine and moan, there is not a ready substitute for the credit rating agencies. On what basis would we create new ones? New regulations might work, since one of the functions of regulation is to create institutions anew and at least create the appearance that old problems have been remedied. But until that happens (and it probably won’t in a political climate where the dominant party in Congress wants the credit rating of the US to be downgraded— at least a little bit) what we are looking at is one credit rating agency trying to rebuild its credibility against its two competitors. In a capitalist market, we might think that this is good in that the best man will win.
But I think we are more in the position of a person who has three physicians, all of whom have fine reputations. One day the person comes down with a cough. Two of the physicians tell him that they don’t know where this cough is going, but not to worry. The third physician, with no more information than the other two have, tells the person he might be dying. Which one is the person going to really listen to?
U: Credit rating agencies “allow people to pretend that there are independent institutions out there that objectively rate credit worthiness. This allows people to shift responsibility from themselves for investment and political decisions. The credit rating agencies create a financial reference point that is not considered to be arbitrary, even though their recent actual performance gives us every reason to think that it is. In short, the credit rating agencies play a moral role in the economy that is now independent of their former role as objective analysts.”
Getting to sound like the Wizard of Oz. What would happen if Toto pulled back the curtain?
I thought there were two parts to this thread: S&P and its issues and governance problems in the US.
I thought also that the NYT Sunday Review(I miss the Week in Review) letter exchange on governance issues was germane -I agreed that the issue of gerrymandering is imortant especially.
I was surprised to see no mention of term limits, and, of course, no discussion of campaign finance reform since the Citizen’s United debacle,
We can talk about the rating agency problems til the cows come home, but until the correlative issue of good governing is solved -and I don’t think it will be -we’ll continue on the ongoing merry go round taking us downhill.
unagidon –
Your point about shifting responsibility is an important one. As our social systems of various kinds become more complex, it seems that blame-games become more common. Nowhere is this more apparent than in the blame-game going on in Congress about responsibility for the credit problem. It’s apparent in some bishops’ attempt to shift responsibility to Rome for the sex scandal (and vice versa), as well as in the ideologues shifting responsibility for their rigidity back to their oracles. Sometimes I think that blame-shifting is a new sin that we just lack a name for. On the other hand, come to think of it, after Adam ate that apple in the garden of Eden . . . .
Bob, why do you think we have a governance problem? Relative to Margaret’s point, if Toto pulled back the curtain, we would see that our entire economy is built on the finance function, not the production function. The economy doesn’t need full employment for the finance part to thrive. It is in fact thriving right now. The unemployment problem should be more of a political problem than it is and good governance would normally demand that in order to eliminate the problem the government should create jobs. But many of the people who should be marching in the streets for jobs are supporting political factions that are primarily supporting the financial sector. Unemployment may be a moral problem in the US but it is not really a political problem. Don’t you think that the unemployed and their families and friends could make things a lot hotter for the government than they are in fact doing?
Bob N. –
Speaking of what’s most wrong with our system of governance, from a pragmatic point of view I would put the assumption that corporations are persons at the very top. It’s a metaphysical horror and we’re paying for it. The influx of corporate money into the governing system has allowed the few people who run the corporations to run the country. This is not a democracy, it’s an oligarchy. The oligarchs have bought the politicians, not by payments under the table, but by contributions to the politicians’ election campaigns. Not to mention the distortion of the whole tax system that results from assuming that a group of individuals is one individual, and a privileged one at that.
uniguidon (8/7 11:48 am):
There seems to be a hoard of think tanks. And what about the Concord Coalition? Why aren’t all these “ready” enough?
(8/7 12:36 pm):
I, too. But the summary of the week’s news that we really need hasn’t been there for a very long time, has it?
David, the credit rating agency would have to be one that the financial markets would recognize. Remember, it’s credibility, not accuracy, that’s important.
U: “Remember, it’s credibility, not accuracy, that’s important.” Yet, credibility requires a certain level of accuracy a certain number of times. Isn’t this analogous to the Vatican and the pedophilia crisis. No accuracy, no credibility (AND THIS IS NOT A CHANGE OF SUBJECT!).
“Credibility, not accuracy” case in point: “Former Federal Reserve Chairman Alan Greenspan on Sunday downplayed the risk of a double-dip recession in the United States, saying its domestic economy was in better shape compared to its European peers.” http://www.nytimes.com/reuters/2011/08/07/business/business-us-usa-economy-greenspan.html?hp
Should we worry about double-dip, given that testimony?
Saying the unemployed should be matching in the streets I fear is a false expectation/
I thoroughly agree with Ann.
I also tried to point out that governnace failures are related to problems of terms and finacing.
I believe the pltocracy rules now.
Pace David S., I think the NYT does a fine job of delivering the news, unless your persinal opinions are shaped by Murdoch, Fox and National Review.
I don’t think Alan Greenspan has much crediblity either, though.
I think Ann states this vey well. “We are an Oligarchy and the Oligarchs have bought the politician.” The politician no longer represent the people. They only represent those who contribute to their campaigns. This may be the best argument for term limits. The immediate problem is that these politicians have to learn in some manner shape or form they must represent the people NOW, and the people are mad as hell over the play acting fiasco they did in Washington during the last month.
“U: “Remember, it’s credibility, not accuracy, that’s important.” Yet, credibility requires a certain level of accuracy a certain number of times. Isn’t this analogous to the Vatican and the pedophilia crisis. No accuracy, no credibility…”
Don’t you find it remarkable (if not beautiful in a Kafkaesque way) that the ratings agencies rated the worst possible risk with the highest possible rating, leading to trillions of dollars in losses, and this has been treated by the most responsible of our business elite as a simple case of “the oopsies”. But S&P has been around in one form or another for about 150 years. I suppose in general it has more or less been accurate.
But the funny thing is that while one might think that the ratings agencies were utterly discredited, their status and longevity are a sort of capital that they have “accumulated” that is keeping its value.
“The immediate problem is that these politicians have to learn in some manner shape or form they must represent the people NOW, and the people are mad as hell over the play acting fiasco they did in Washington during the last month.”
It depends on what “people” you are talking about. Some people are doing remarkably well in this economy and in this political climate. In the short term, it might look like there was chaos in Washington, but let’s imagine a scenario where the GOP, having driven the economy into the ground, now wants to recapture their old (and currently discredited) identity as the Party of Fiscal Responsibility. Hasn’t this “crisis” been perfect for this?
The Washington Post has this: “Origins of the Debt Showdown.” [and the strategy will be used again according to the story]. Must read for liberals and progressives. It’s very long; pour yourself a drink.
http://www.washingtonpost.com/business/economy/origins-of-the-debt-showdown/2011/08/03/gIQA9uqIzI_print.html
Don’t have to ask me twice.
Bob (8/7 2:35 pm):
The plutocracy always rules. But what comes first, the money or the power?
U- I think you may well be right. It wouldn’t surprise me in the least if the money behind the GOP demanded that the debt crisis occur in order to better their chance in 2011 and 2012 election.
Bob (8/7 2:35 pm):
I agree, but I wish 1) that they’d work harder at keeping the editorial side from influencing the news side and 2) that they’d cut way down on the fluff and add a lot more hard news.
I also wish that they’d get rid of the advertisements in the paid-for content, but that’s probably as likely as Commonweal endorsing Sandra Palin for the Supreme Court.
David et al. I hate to say this being a paper and ink person, but I zipped through the NYTimes “paper” today (book review [blah], Sunday Review (total bore except for the Westen piece [which I don't find wholly compelling]). So is this because I read what I want on-line (hard news…and there’s much more on-line), skip the fluff, etc., or…..??? Recently I find the business section the most interesting to read on paper. Gretchen Morgenson!!! David Leonhardt!!!
I was struck by this quote from the the article linked Margaret linked to at 8/7 5:26
“For Republican leaders, there was pride in a hand well played. “I think some of our members may have thought the default issue was a hostage you might take a chance at shooting,” Senate Minority Leader Mitch McConnell (R-Ky.) said. “Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.”
Maybe our elected officials shouldn’t engage in hostage-taking at all. What is the Republican House planning on holding hostage next?
Robert Reich trashed S&P as well:
“Pardon me for asking, but who gave Standard & Poor’s the authority to tell America how much debt it has to shed, and how?…. 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 …”
http://robertreich.org/
Irene: The McConnell quote you cite is of a piece with his earlier statement that his goal was to make Obama a one-term president. Doesn’t this underline the sense that some Republicans are not into governance but into political battle.
FWIW – I agree with Unagidon’s business analysis of S&P and its own market dynamics. I also agree with what I take to be his assessment of the financial ratings agencies: they are not perfect, but (injecting my own opinion here), all of the alternatives seem even worse.
For example, every major investment bank employs financial analysts who assess investments like publicly traded stocks and government-issued bonds, and part of that assessment is financial/credit assessment. But those firms have a clear conflict of interest, because they all wish to make clients of the companies and governments they are assessing.
The think tanks tend to be politically and/or ideologically oriented. Credit ratings can’t be a function of politics.
The government, too, would run the risk of injecting politics into what should be an objective assessment.
If the financial ratings agencies make mistakes, then, absent evidence of corruption, we may hope they are honest mistakes. Their accuracy is certainly a core competency, but at least as important is the perception by the markets and the public that they are objective/untainted.
“If the financial ratings agencies make mistakes, then, absent evidence of corruption, we may hope they are honest mistakes. Their accuracy is certainly a core competency, but at least as important is the perception by the markets and the public that they are objective/untainted.”
The corruption in this case isn’t in people’s criminal intentions. It’s the role that the ratings agencies have come to play in this society where people are going along to get along. It’s the same sort of corruption as a press agency that sucks up to the government or a particular political party.
Did you hear that S&P downgraded Fannie Mae, because of its ties to the government? If I worked for one of the other credit rating agencies, I would be SO tempted to downgrade S&P as a company.
Because the fortunes of the people at S&P depend to some extent on the accuracy of their judgments, I conclude that their judgments are likely to be honest. Of course, they can fool themselves about facts and figures as much as the rest of us. Indeed, S&P did revise a figure last week when a government agency called them on it.
The question is: is their economics sound? Do their mathematical formulas describe what needs describing? So far I haven’t seen anybody criticize that part of their competence, so, again, I assume they know what they’re talking about and want to reach accurate conclusions.
I’t 12:54, the Dow is down about 407 and the President is speaking.
It’s now 1:19 and Dow is down 489. NASDAQ is down 135.
“The corruption in this case isn’t in people’s criminal intentions. It’s the role that the ratings agencies have come to play in this society where people are going along to get along. It’s the same sort of corruption as a press agency that sucks up to the government or a particular political party.”
I don’t doubt you’re onto something. To provide a trivial illustration of the same sort of human behavior: I believe it’s commonly thought in the sports world that the beat journalists who cover a sports team day in and day out are somewhat easier on the team and its players than a national or out-of-town journalist who isn’t as dependent on the cooperation and goodwill of the players and management to do their everyday jobs.
Btw, as cheery as the news about the markets and the economy has been today (not!) – here is a piece by Nouriel Roubini that is guaranteed to spread further gloom. He is one of those fellows who almost always has bad news to share, and is almost always right.
Headline: Mission Impossible: Stop Another Recession
http://www.ft.com/intl/cms/s/0/f443f640-c115-11e0-b8c2-00144feabdc0.html#axzz1UTSuOf6Y
The sell off in the stock markets is due to the fears (panic really) of a double dip recession, which the news outlets have increasing talked about for the past month. If people really believed that the US govt. was LESS creditworthy today than it was a week ago, they would not have dumped corporate stocks to invest in US govt. Treasuries. But that is exactly what happened today! So many people wanted to buy Treasuries that the interest that the US govt. had to offer to get people to buy them declined.
Roubini, like Krugman and most economists not beholdened to the Republican party, continue to advocate for a near term fiscal stimulus, exactly the opposite of what the Republican members of Congress want. Why don’t the Republicans want the economy to recover? Because they are hoping that Americans will mistakenly blame Obama (and not the Republicans) for our current economic mess. This is why they refused to approve a large enough stimulus back in 2009 when it could have done the job.
Exactly! And fits right in with Sen. Mitch McConnell’s hope to make Obama a one-term president. Unfortunate that Obama seems to be working on that too!
Eric Cantor: “Cantor To GOP: Don’t Let Up Now” So what’s he saying. Let’s drive the economy into a real depression? This guy needs some attendants. http://tpmdc.talkingpointsmemo.com/2011/08/cantor-to-house-gop-resist-pressure-to-compromise-on-tax-increases-in-wake-of-downgrade.php?ref=fpa
“Why don’t the Republicans want the economy to recover? Because they are hoping that Americans will mistakenly blame Obama (and not the Republicans) for our current economic mess. This is why they refused to approve a large enough stimulus back in 2009 when it could have done the job.”
Wow. Yes, Republicans are willing to create suffering for others for short political gain. So when, as Bill Galston wrote last week, the Democrats passed on taking actions such as passing a larger stimulus, letting the Bush/Obama tax cuts and raising the debt ceiling when they controlled a big majority in both Houses of Congresses, they were…acting for the common good? Out of pure goodness? Not a hint of political games to be had?
Joe Nocera has some useful comments on S & P (channeling Unagidon), the TP Republicans, and President Obama. All on target.
On his blog, Paul Krugman has a link to the observations of a hedge fund manager, who wonders if the big drop (or some of it anyway) yesterday wasn’t due to a hedge fund (he names Paulson) having to sell big because of margin calls. Interesting and under the radar to most of us.
Krugman: Interesting: “John Hempton suggests that what just happened was that
“The market is not puking. Some prime broker is puking the stocks held by one or more very large hedge funds.
“So lets play the game: guess who got the margin call!”
http://krugman.blogs.nytimes.com/2011/08/08/was-that-mr-margin-on-the-line/
Jeff Landry,
The Democrats did not have a filibuster proof majority in the Senate in Feb. 2009 when the stimulus was enacted. Arlen Specter was still a Republican at that time and the Minnesota Senate seat that Coleman had held was still in recounts. So the Democrats had only 58 seats and could not get the stimulus enacted if the Republicans engaged in a filibuster. As a result, the Senate Republicans were able to extract $150 billion in changes to the stimulus package in order to get it enacted. When it was enacted only 3 Senate Republicans voted for it. So as I said earlier, the Republicans were not supportive of the stimulus package and put up roadblocks that deterred the Democrats from making it big enough to be completely effective.
Here is another dose of optimistic analysis (irony absolutely intended). Headline: “Is there enough money to save the banks?” Money quote:
“This has added relevance in light of one of the developments that sent Bank of America Corp. (BAC)’s stock down 20 percent Aug. 8 — the news that American International Group Inc. (AIG) had accused the company of securities fraud in a lawsuit seeking more than $10 billion. Naturally the question arises: Didn’t AIG consult with anyone at the Treasury Department, which owns 76.7 percent of AIG, about whether to fire this market- sinking torpedo at a too-big-to-fail bank so soon after Standard & Poor’s downgraded the U.S. credit rating? It would seem not. A Treasury spokesman, Mark Paustenbach, said: “As per our stated principles, Treasury does not interfere with the day-to-day management of the company.” Just when you think the government might have matters under control, we find out it can’t even keep a bailed-out company it controls from trying to blow up Bank of America, which itself needed federal bailout money to stay afloat”
http://www.bloomberg.com/news/2011-08-11/is-there-enough-money-to-save-world-s-banks-commentary-by-jonathan-weil.html