My Last Good Nerve

July 21st, 2011 at 6:37 pm

Standard and Poor’s are seriously workin’ my last good nerve.

According to the WSJ,

“If no deal is struck and the U.S. fails to repay bondholders on maturing debt or misses interest payments, the rating would be moved to default. If the ceiling is raised without a long-term plan to get the U.S. debt load back in balance, S&P might lower the AAA rating to AA+.”

I get the first part and we’d of course deserve the downgrade and worse if we default.

But the second part is maddening.  Lemme get this straight: if these credit raters, whose razor-sharp assessments graded toxic mortgage-backed securities as triple-A, don’t think the deficit-reduction plan goes far enough, they’re going to take us down a notch!?

That’s nuts.  Even amidst the turmoil of the last few months, markets are still treating US debt as the safest investment out there.  And the debt ceiling is a totally manufactured crisis.  Once we get it behind us, no one should have any doubt that the US will back its obligations as reliably as it has for hundreds of years.

Whatever deficit package we come up with, we have the institutions, the wealth, the tax collection and market infrastructure to service our debts the same way we always have. This should not even be an issue.

And that’s especially the case given the costs of a downgrade, even one notch to double-A.  Investors would automatically seek a risk premium on gov’t debt, and remember, every basis point equals about $1 billion of annual debt service.  What’s more, given the amount of global debt benchmarked to US Treasuries, such a careless move by S&P has negative implications for growth throughout the world.

They need to quickly pull a Grover (see update here).

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8 comments in reply to "My Last Good Nerve"

  1. Taryn H. says:

    Couldn’t even let me get a full day? :)

    If these ratings agencies were basing their ratings on sound economics, they’d be lowering our rating for failing to do stimulus; not for failing to be austere. This is surreal. Look at what Europe did today. Austerity for the non-debt-constrained nations and the ECB is going to raise rates. History and sound economic theory tells us that this will cause a serious slump and that slump – because it will crater GDP – will make it harder and harder for countries to meet their obligations. It could turn out that trying to reduce deficits will cause more debt and will leave countries less able to meet their obligations. Aren’t the people at these ratings agencies and drafting these agreements in Europe supposed to know all of this? I’m baffled.

    On a brighter side …

    I’ve heard both you and Christina Romer talking about the fact that it is difficult, just as a logistical matter, to do large-scale stimulus. So, I think getting projects (like FAST) ready is exactly what we should be doing. Kind of a Field of Dreams thing.


  2. Concerned says:

    I’ve been irritated for days about these finger-pointing, incompetent, hypocritical jerks – who are partly responsible for the financial crisis and hence the deficits and debt problems – suddenly telling the U.S. how to get it’s house (pun intended) in order. Isn’t U.S. debt as good as that toxic crap they were rating AAA?


  3. Mary says:

    I have to catch up on posts later, but I wanted to share a quick note. I’m getting panicked – really, really panicked. This is getting worse. I have no idea what people are thinking with these new proposals, but I’m starting to feel the way I did with the tax cut extension. (And that turned out disastrously.) Actually, incredibly, this is scarier….

    Obama needs to follow Clinton’s advice. Clinton is right! Let it to go the courts. Obama cannot bargain on these terms. He shouldn’t be bargaining at all. He’s terrible at it. But he has to claim Article 14, and just raise the debt ceiling.

    This is seriously Twilight Zone territory.


  4. Mary says:

    Correction: Section 4, 14th Amendment.


    • Mary says:

      This has reached the level of complete insanity. I just can’t believe it. I did not think it could get worse, and here we are.
      http://www.cnn.com/2011/POLITICS/07/21/debt.talks/index.html

      “According to the congressional aides who spoke on condition of not being identified, the possible deal remains in limbo over a disagreement on whether to extend Bush-era tax cuts for families earning more than $250,000 a year.”

      “However, House Speaker John Boehner, R-Ohio, wants the deal to make all of the Bush tax cuts permanent while keeping the commitment to tax reform, the sources said.”

      –If Obama agrees to this, I swear to God, I will hate him for the rest of my life.

      Seriously, what is going on with this party, with this President? This is completely NUTS!

      I know that Obama can’t tell people where to go. He just can’t be tough so he needs to shutdown. He needs to shut the R’s out. He can’t continue this way. If he forces the Dems to compromise to some outrageous plan, I will lose my mind. He needs to bow out and let more seasoned politicians handle this. He needs to just state clearly that if they can’t come to a REASONABLE deal one that is balanced between revenue increases and spending cuts, which don’t come into effect until after the recovery has taken hold, and keeps them to a reasonable figure like $1 trillion or less, there will be no deal, and he will unilaterally raise the debt ceiling.

      Pull him out of these negotiations. This is going from bad to worse everyday. He is a marshmallow. He has no business negotiating on these huge issues, dismantling the things others have worked so hard for. It needs to stop. NO MORE NEGOTIATING. He needs to draw this line in the sand and just disappear.


    • Mary says:

      Look, if Obama really cares about the country, as he says he does, his political future cannot be the concern anymore. (It should never have been the concern.) The Dem party will go on to find another entirely electable candidate. I am officially of the opinion that Obama and the country would be better off if he ran again at a different time. He needs more experience governing, especially learning how to negotiate.

      Obama had a significant political advantage coming into his first term, and he has squandered it. He has to put the country first. He needs to unilaterally raise the debt ceiling, and direct any political damage toward himself. If he becomes so politically toxic, he can’t run in 2012, so be it. But this is absurd, and it needs to stop.

      I don’t care about him. I care about my country. That’s it.


  5. Desi Erasmus says:

    JB sez:
    “But the second part is maddening. Lemme get this straight: if these credit raters, whose razor-sharp assessments graded toxic mortgage-backed securities as triple-A, don’t think the deficit-reduction plan goes far enough, they’re going to take us down a notch!?”

    Several thoughts:

    Perhaps “once burned, twice shy”? In other words, having done a crappy job of catching the sociopath bankster’s flim-flammery with toxic mortgage assets, the credit raters are trying to recover their tattered reputations by being a bit more realistic about their ratings?

    The Knightian partition of risk into “measureable” and “non-measurable”, to the extent that it’s valid, brings into question a ‘fundamental assumption’ in the credit rating exercise:

    •The Financial Times – Ratings easy to criticise, harder to exorcise
    “A similar recasting has happened in finance, too. In the decades leading up to the financial crisis, global debt markets grew as never before precisely because it was assumed that risks could be measured and managed. At the centre of this transformation were credit ratings.”

    Getting past the usual ‘butcher’s thumb on the scale’, ‘scandalous misalignment of incentives’ complaints about the rating agencies (all quite valid concerns), does this fundamental assumption hold up? If not, it really doesn’t matter how sincere and ethical and analytically competent the raters are: their analytical product degrades to a ‘placebo for investors’ in an environment where the ‘non-measurable’ component of risk has become substantial enough to overwhelm the ‘measurable’ component. Perhaps much of the saber rattling at Fitch, S&P, and Moody’s concerning US Treasury paper and ECB bond issues just translates into a leading indicator that should warn the investing public about this uncomfortable possibility? To the extent that “AAA” has been used as a proxy for ‘essentially risk-free asset’, the question is not whether the rating is appropriate for some particular asset, but whether the rating makes sense at all for any asset. This is an especially delicate question to probe at a time when such a large fraction (~60%) of outstanding fixed income debt holds that rating

    http://www.ritholtz.com/blog/2011/07/sp-threatens-to-downgrade-everything/

    Investor love risk-free bonds, but is it possible to have so many of them?
    http://www.theatlantic.com/business/archive/2011/07/should-we-worry-about-a-aaa-rated-debt-bubble/242025/

    In 1999, about $1.5 trillion AAA-rated securities were issued globally. In 2009, AAA-rated issuance peaked at over $6 trillion. Are we in bubble territory? … Tracy Alloway at the Financial Times Alphaville blogs says that this could be the most important chart in the world right now. Is this a clear indication that the rating agencies and investors are both out of their minds? The chart shows two things. First, AAA-rated security issuance has grown at an extremely rapid pace over the past decade. Second, the portion of bonds that are AAA-rated has also grown significantly, to more than 50% of all fixed-income bonds issued, from around 20% in 1991.*

    http://ftalphaville.ft.com/blog/2011/07/15/623881/the-aaa-bubble/
    “This, we think, could well be the most important chart in the world right now:”
    http://av.r.ftdata.co.uk/files/2011/07/AAAratings.jpg
    “It comes from a new report, issued by the BIS and Basel Committee’s joint forum, on the subject of securitisation incentives. But what it shows has much wider, more current implications.” [read the rest of the post for details]

    To draw the contrast between “normal conditions” where AAA and other points on the rating scale might make sense, and an era of “fat-tailed uncertainty” where the ratings scale loses its efficacy, N N Taleb uses the term “Extremistan’ for the latter and ‘Mediocristan’ for the former. These postings and the following discussion by readers could be useful stimulus to our own thinking about these states of the investing environment, which seem especially timely in view of current market-impacting ‘extremes’ in daily reports of the European and US ‘sovereign debt’ uncertainties, and political unrest in the MENA countries and South Asia (Afghanistan, Pakistan, India).


  6. Nadia_H says:

    A lot of this depends on investors. Alliance Bernstein and Wells Fargo think it might not be that bad.

    https://www.wellsfargo.com/downloads/pdf/com/research/special_reports/USTreasuryDowngradeImplications_7212011.pdf


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