Friday, August 05, 2011

Bye-Bye, Trippe-A

This post has a preface. The preface goes like this: remember the ratings agencies? Those august bodies that completely missed the sub-prime mess even though they proudly/smugly presume to ordain the economic wellbeing of each important player in our economy? The bodies whose views have proven so thoroughly establishmentarian that (and this may be only my opinion) we should no longer regard their pronouncements as anything more than the consensus view? Well, the consensus as pronounced via ratings agency have news for the United States today, and it ain't good.

Apparently the Treasury and Standard & Poor's have been arguing back and forth behind the scenes all afternoon about whether there was an "arithmetic" issue with the rating agency's recent calculations pertaining to the United States' sovereign debt. (The Treasury was concerned that S&P had overestimated the national deficit by about $2 trillion--yes, that really is two million millions of dollars--but S&P later "conceded the error.") By now you can guess the reason the Treasury was concerned with arithmetic: S&P just downgraded our credit rating. Why? Well, basically because it concluded that Congress was too inept to confront our nation's problems. (Like I said: "consensus view.")

For those who don't follow such things, what that means is that United States debt no longer deserves to be considered one of the safest investments in the world. Money is now no safer with us than it is with, say, Belgium or New Zealand. That may not seem so bad, but consider the effect that a sudden 0.5 percent interest hike could have all those whiz-bang Wall Street algorithms that essentially run vast swaths of our still-vulnerable economy . . . suffice it to say, this has the potential to be, um, sort of a big deal. Not like, "oh my, does this mean more Ponzi schemers going to be shaken from the woodwork?" kind of big deal but, more like "holy hell the 'great recession' of 2008-2010 may have been on the beginning!" kind of big deal. I don't think I'm exaggerating here.

For those who DO follow such things, here are various questions that come to my mind:
  • Is it too early to kiss Obama's second term goodbye?
  • Is it uncouth to ask if I can get my double-dip with extra toppings?
  • Will a potential QE3, or 4, or 12, inflate the dollar sufficiently to make my student loans bearable?
  • Given that Europe is in the middle of a full-blown credit crisis, we can't pay our bills, and China (to whom everyone is looking to pull the entire world out of the recession) is currently manufacturing at just above contraction levels . . . why is it that the gold nuts on late-night TV and the gun nuts in Kalispell, Montana, seem to be the only people freaked the hell out right now?
  • Finally, and most importantly, will today's downgrade irritate Congress enough that it finally moves toward meaningful reform the entire banking-rating complex?


Anonymous Anonymous said...

Patrick is correct. This is very bad for business and, in case you are a boaltie who doesn't give a fuck about business, it also is a very bad omen for future boaltie employment prospects.

8/05/2011 7:35 PM  
Anonymous Anonymous said...

I hate Obama as much as Dean Edley, and I voted for him. And no, not because they are black.

8/05/2011 8:10 PM  
Anonymous Anonymous said...

Long term treasuries still trade for under 3%. Investors don't give a shit about AAA or AA+ from S&P, they know that US Debt and the US Dollar is still the safest investment in the world. Also, they dont' really have much alternative. If rates go up .5%, as you say, it will be because of other macroeconomic factors.

That's not all to say that Obama isn't a colossal failure. He undoubtedly is.

Of course, you couldn't expect more from a president who thought economic recovery would come from 10 road "workers" standing around in orange vests watching the one or two who actually do any work.

8/05/2011 8:11 PM  
Anonymous Anonymous said...

... continuing..... Let's remember also that Boehner was on the record as supportive of some revenue increases through an overhaul of the tax code. I read that he would have supported from 400b-800b. This made a lot of sense for everyone, as the Reps have no love for inefficient deductions, whether they be for corporations or Democratic fundraising hedge fund managers, and the dems obviously just want more more more more tax revenue so that they can hire more gov worker's whose unions can turn the money right back around as campaign contributions to the dems.

But that wasn't enough for Obama. A trillion in tax increases via Obamacare going into effect year AND the bush tax rate cuts expiring is not enough for him! He wanted more!

The debt crisis and this economy are 100% property of Obama. He should make the dignified move and resign.

8/05/2011 8:17 PM  
Blogger Toney said...

8:17 - *eye roll* Boehner wouldn't have gone with $1 in tax increases even if meant curing cancer and declaring the Big Lebowski our national film.

Anyway, I'm interested in seeing if the stock market reacts to this, or if the downgrade was already priced in. Keep in mind that Moody's reaffirmed the US's credit AAA rating today as well. I wonder if there are people at S&P that leaked the downgrade to investors a couple days ago, and that this was the reason the DOW lost 500 points. I wouldn't be surprised.

8/05/2011 10:50 PM  
Blogger Patrick said...

I don't know if Obama "owns" the downgrade or the recent market slide (there is plenty of blame to go around), but I agree that he got his ass kicked in the debt ceiling negotiations and that his failure to reckon with the tea party contingent in the House was an utter failure in leadership. Sort of like Dodd-Frank. Or the Affordable Care Act.

I disagree that a half percent (which is a number I pulled from thin air, by the way) doesn't mater. The US currently pays about 250 billion per year on its debt. Anonymous is correct that yields are super-low right now, but that only makes a half percent change more significant, not less. Maybe the days of debt-financed healthcare, wars, and entitlements are behind us, but forgive me for being skeptical.

Anonymous is also correct that investors have nowhere else to go. I doubt many have the cojones to move money to stocks right now and at any rate the big institutional investors have no choice; much big money is limited to treasuries by statute or other law. And, Toney is wise to point out that the other two big ratings agencies haven't downgraded.

So maybe this is a happy historical quirk that pundits and bloggers will all talk about but the global economy will more or less ignore, like the flash crash. But I doubt it. My larger points -- that our liabilities exceed our income, that the world's other big players are incapable of pulling us out, and that there is no indication that our elected representatives are capable of handling the problem in a responsible way -- are sound.

Which brings me to Toney's speculation about the market this week. Leak-schmeak. I think traders saw the same thing S&P did.

(A side note on John Boehner. My impression is that when it comes to dealmaking he is a lot more like Obama than he is like the tea party folk. Thank goodness we have him and not that heel-biter Eric Cantor. Recall that Boehner was amenable to revenue increases early on, and they only went "off the table" when the House freshman made clear that upon any revenue increase they would trade him for Cantor quicker than he could drop a tear for the flag. So if we have to play the blame game, I would allocate more to the Democrats -- who for once had a unified front but somehow managed to let Biden put medicare on the table way back in May and who, after confronting "scholars", ran away from the POTUS 14th Amendment argument like it was cancer -- and the tea party representatives in the House who, as far as I can tell, have no clue how things actually work and who may secretly hope that the country descends into total chaos from which their sacred Jeffersonian ideal may magically emerge.)

8/05/2011 11:26 PM  
Anonymous Anonymous said...

The good news is that many retirement funds and pensions that have a mandate of having x% in Treasuries probably won't be as affected because Treasuries are considered a separate asset class, and don't hinge on being AAA, at least as far as I understand. On the flip side, you probably will of course, see a ton of movement on Monday from mandates that did require AAA ratings. As you point out though, where exactly will the flight to safety go towards? Gold?IT's not like many other countries are doing any better from a credit rating perspective. Long-term, US will be screwed more because it has to pay more interest now on its obligations. There we go further into the debthole.

As far as your last question re: Congress and the rating agencies, I don't think the question makes a whole lot of sense. Why would Congress move to reform the credit rating agencies now? Because they got screwed by them? That'll look worse. And what's more, S&P actually DID their job this time, unlike with the whole CDO debacle. They actually gained credibility in my eyes today (regardless of the $2trillion mathematical error), not lose it. If Congress now wants to push back and say, hey, you need reforming because we're AAA quality and you made a math error, well that's just BS and anyone can see right through that.
-boaltie who does care about this stuff.

8/06/2011 1:53 PM  
Anonymous Anonymous said...

Aren't theses the same credit agencies that gave out great ratings to all those firms before the financial collapse? And they want me to take them seriously?

8/06/2011 3:08 PM  
Blogger Jackie O said...

I have a question for those blaming Obama for the poor result of the debt ceiling negotiations. He certainly lost, that's for sure. But I'd like to know what he should have done differently and how he could have better tackled the Tea Party. It seems like he a) brought a very reasonable offer to the table b) tried to make Americans aware of how unreasonable the GOP was being and c) gave up to avoid default. I guess I place blame (for the shit show of a debt ceiling debate, not the economic situation generally) squarely with the Tea Party and I struggle to think of how Obama could have rained them in. Seems only the GOP majority could have done that, and they didn't want to.

8/06/2011 5:51 PM  
Anonymous Anonymous said...

Jackie O:

Given that you are probably surrounded by people who have nothing but disdain for the tea party, the "teabaggers" and now "terrorists" according to those who supposedly champion civility, it's not at all surprising that your first instinct is to blame Republicans and blame the tea party.

In fact, it might actually be technically true, depending on how you frame the question of for what we are assigning blame. If your goal was to see the size of government increase and taxes to go up, then yes the tea party is absolutely an obstacle to those goals and in so far as you can call it blame, they would deserve it. After all, the tea party is an anti-tax, small government movement.

But if the question is about debt and the health of the economy, I submit that Obama and the Democrats deserve most of the credit, or blame, or whatever you want to call it.

First, as an important initial matter, Obama took the courageous position of having no official position at all. So to your point about his "reasonable" offers, we can only speculate. We do know, however, that Boehner said they were close to a deal that included revenue-positive tax reform in the range of somewhere between 400-800b. But we also know that Obama rejected this, demanding more revenue through straight tax increases. After the deal broke down he went back to the same populist rhetoric about tax loopholes for corporations and the rich, but the fact is that the Republicans were willing to give a lot of ground here.

It's also extremely important to remember that taxes were scheduled to go up any way. Next year the Obamacare payroll tax goes into effect, in addition to a whole slew of other taxes. This is why the CBO said that Obamacare would not increase the deficit, but it taxed us more than it purportedly would cost (though your head is truly up your ass if you believe Obamacare isn't going to come in over cost). Additionally, the extension of the Bush rate cuts will expire.

8/06/2011 9:11 PM  
Anonymous Anonymous said...

I think you're exaggerating. First of all, there's not a lot out there besides US Treasuries in terms of safe investments to park huge amounts of money. The U.S. embarrassed itself, for sure, but the Euro continues its tailspin into crisis with no signs from the Eurozone of any ability to fix it.

Second, the markets don't seem to be following S&P on this and I believe almost all the regulatory stuff treats Treasuries as safe investments separately from credit ratings.

Third, I think we can all take a Check Your Citations in the Proofing Stage lesson from this. S&P totally undermined itself with its two trillion dollar mistake. I think the downgrade was about the political process, so the two trillion dollar mistake doesn't change S&P's substantive analysis, necessarily, but it's a big credibility hit it didn't need when making a controversial argument.

8/06/2011 9:29 PM  
Anonymous Anonymous said...

The debt crisis and this economy are 100% property of Obama. He should make the dignified move and resign.

This is probably the stupidest comment I've read in years. Really? It's been 3 years and you're now willfully ignorant of the Bush years?

8/07/2011 3:36 PM  
Anonymous Anonymous said...

I don't think you are exaggerating, but to the degree th downgrade is a tipping point, I think it's more psychological tipping point than substantive. The substantive things we should be looking at are unemployment, which refuses to stay below 9%, growth, which is weak, and housing, which continues to drag the economy. What the downgrade does is provide an easy-to-point-to reason to be really worried about this stuff. Which we should be.

8/07/2011 6:42 PM  
Anonymous Anonymous said...

To answer Patrick's first question, it is _way_ too early to kiss Obama's second term goodbye.

Do I wish he'd come up with more creative solutions to stimulate the economy? Yes.

Should he maybe have spent the political capital that he spent on healthcare on a second stimulus? (Or a bigger, badder, more stimulative first stimulus)? Yes.

But voters don't blame Obama for this economic mess. Voters blame Bush/Republicans compared with Obama/Democrats for the state of the economy 57% to 29%. And that difference is growing not shrinking. People knew things weren't going well during Bush's term and they saw things go to shit at the end of his term. It's wishful thinking for Republicans to say this is Obama's economy.

Plus, there will be a Republican nominee. And it will be Romney. And people will take a cold hard look at Romney and see him for what he is: a run-of-the-mill politician who blows wherever the political winds take him. People still trust Obama; they won't trust Romney.

8/07/2011 8:13 PM  
Blogger Carbolic said...

To answer Jackie and Anonymous at 9:11--

First off, the Republicans and the Tea Party congressmen are primarily to blame for the debt downgrade. The reason is because they manufactured an immediate crisis--with potentially disastrous consequences--for political points and long-term policy concessions.

It's like arguing that our health-care system is ultimately unsustainable, so we're going to close all emergency rooms immediately unless you agree to Medicaid reforms in 2020.

It's also worth pointing out that one of the primary reasons of the budget deficit is the $1.8 trillion of GWB tax cuts. Only about 20% of Republicans supported the House Republicans' refusal to consider any government revenue growth. In fact, many Tea Party members thought the problem should be solved through a combination of revenue increases and spending cuts.

But as for Obama--yes, he could have done a lot differently. For starters, he could have encouraged Congress to solve this problem last year, as part of 2011 budget negotiations. I also think that Obama just isn't very good at hardball politics. I mean, he lost even though a great majority of Americans--again, even Republicans--agreed with him. If Hilary Clinton had won the 2008 Democratic Primary, I think she wouldn't have had to cave so completely.

8/08/2011 4:01 PM  
Blogger Toney said...

I actually agree with Carbolic. Call Ripley's.


8/12/2011 9:08 AM  

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