Downgrading the Downgrade

August 3rd, 2012 at 5:40 pm

Remember the catastrophic debt downgrade from a year ago, when the S&P credit rating agency took the US debt rating down a notch and interest rates, according to some scolds of the day, like Rep Paul Ryan, were going to go through the roof?

Yeah, me neither.

But MarketPlace does, and they did a nice lookback on this issue (H/t: PVdW).

[Marketplace]: As far as worst predictions, it would take a medal stand the size of a swimming pool to hold all the people who were wrong. But we’ve only got room for one, so the gold goes to Republican Congressman Paul Ryan, speaking on Fox just after the downgrade.

Paul Ryan: Obviously, not only does it hurt the federal government in its ability to close the deficits, but it hurts people. You know, car loans, home loans, all these things are gonna go up.

Didn’t happen. In fact, the opposite occurred. Home loan interest rates are now at record lows, in large part because global investors kept faith that America would always pay its debts.

Here’s what I said at the time but I was far from the only one who thought S&P was making a foolish mistake. 

The issue here is not “we told you so.”  It’s about respecting a key rule of the economics of debt, deficits, and markets.  Be very wary of those who tell you how the market is going to react to any given level of public debt.  Such reactions are highly dynamic and relate importantly to the point in the business cycle, the relative health of our economy compared to that of others, the Fed’s monetary policy, investors expectations and sentiments, and a bunch of other stuff.

Forget that rule and you’ll step in it like S&P and Ryan did.

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5 comments in reply to "Downgrading the Downgrade"

  1. davesnyd says:

    Yes, but, if I’m understanding the “LIBOR scandal” correctly, an upshot of uncovering it is likely to be an increase in rates for ALL loans.

    Should we be surprised if Ryan et. al. blame that increase on this or bond vigilantes or whatever?


  2. Fred Donaldson says:

    Just returned from a trip to “socialist” Toronto, where dozens of skyscrapers are in the process of erection, rarely is a storefront vacant, and the citizens I interviewed seemed oddly happy – the result of $10.25 minimum wage, free healthcare, adequate taxation of the wealthy, and a general commone sense that refuses to equate progress with no regulation of private enterprise.


    • jo6pac says:

      Thanks for the report and what a concept keeping money coming in for the citizens, free health care, and taxes on the wealth. Amazing:)


  3. procopius says:

    The issue here is not “we told you so.” It’s about respecting a key rule of the economics of debt, deficits, and markets

    I would say the issue here is that we need to reduce the power (and the income) of the “Nationally Recognized Statistical Rating Orgainzations.” They have demonstrated that they have no redeeming social value, much less add value to our economy. The laws that have been enacted to protect them, requiring fiduciary agencies such as pension funds to only invest in assets which have a high rating from them, should be rescinded. I know there have been cases of abuse (Teamsters’ Fund, anyone?) but that kind of thing happens under the current regime, too. An alternative would be to have the securities issuers pay their feed into a central fund, managed by, say, the Office of the Comptroller of the Currency (the most corrupt regulator), and make the regulator randomly assign the jobs of evaluating new issues, paying the agencies on a piece-work basis.


  4. mitakeet says:

    My concern with the high levels of debt is the proportion that is kept as short-term and rolled over continuously. As I recall that was one of the primary factors that caused the overnight death of Lehman Brothers, they were carrying their debt on short-term notes and suddenly no one wanted to repurchase yesterday’s debt. I strongly favor leveraging the current below inflation rates to fund an infrastructure bank to pay for the long ignored infrastructure maintenance and upgrades (which, I am quite convinced, would give a huge (positive) jolt to the economy, dare I say ‘stimulus’?), but only if it is done with long-term notes. I am not aware of the proportion of our nation’s debt that is short-term (I have the impression it is quite a bit, perhaps 20-30%), but if it is substantial then we are acutely sensitive (just like Lehman Bros) to changes in lender behavior. After all, nothing backs our debt but faith in our government, damage that faith and you run the risk that our short-term rates can skyrocket and bingo, instant austerity and all the evils that go with it.


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