Saturday, April 23, 2011

What Mattered This Week?

Once again, I'm several days behind in my reading, so I'm going to need everyone's help. Certainly, we had continuing developments in Libya, Egypt, Syria, and the rest of the Middle East, many of which (not John McCain's statements, though) seemed important. I'm assuming that the rating agency flap about US solvency didn't matter, based on the market reactions -- but I'm keeping my eye on disappointing weekly UI filings, although a couple off weeks may not mean anything.

So, what do you think mattered this week?


  1. “I'm assuming that the rating agency flap about US solvency didn't matter, based on the market reactions --”

    Maybe it didn’t matter, but it should. S&P basically said that the US is in much worse shape than every other AAA rated country. We’re getting the benefit of the doubt simply because we are the US. If the confidence in the US ever falters, the market reaction will be especially unpleasant. I wouldn’t wait for that -- this may be the clearest signal we get without having to pay for it…

  2. What does S&P use for their ratings, anyway? What's their methodology?

  3. I completely agree with Couves. We need to raise taxes immediately.

  4. It seems to me that it's the S&P rating that should be lowered to junk status - their evaluations proved pretty much useless, after all.

  5. The meme heading through the blogosphere that a patient and a consumer is not the same thing. Making some effort to counter the notion that one is either pro or anti-free market (and business and profit and growth and ...) on almost any topic is one of the biggest challenges facing those who believe in the indispensibility of our collective institutions. The Krugman serious engagement on this topic was an important effort to make the case rather than dismiss out of hand the motives and analyses of those unsympathetic to collective efforts.

    Also, the Morgenson piece / the reality of arbitrators saying explicitly that a Wall Street firm cannot hide behind the supposed completely unpredictable "financial crisis" to protect their firms and insulate themselves from blame for decisions from the years prior to the near meltdown could set an important path forward for a bit more accountability on Wall Street and the use of the legal system to pit different interests in our financial system against one another. Thanks for the opportunity.

  6. Phat: It’s not long, if you want to read it:

    The text reveals some of their methodology:
    “In 2003-2008, the U.S.'s general (total) government deficit fluctuated between 2% and 5% of GDP. Already noticeably larger than that of most 'AAA' rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover”

    So you’re reassured by the fact that they also gave their highest rating to subprime loans?

  7. What really bothers me is that S&P set these ratings and these ratings are, essentially, arbitrary. They don't actually mean anything. Their AAA ratings on sub-prime loans are a perfect example. Who gave them this power? Why does anybody listen to them?

  8. The re-emergent Trig-gate. But not for the reasons you might think.

    First, an aside: one interesting thing about conspiracy theories is that we are comfortable with them in the abstract, but less so in the particular. I would guess that's because we have well-formed opinions about familiar situations; indeed, perhaps our self-worth is somewhat reflected by our evaluation of how wise we are in these opinions.

    As an illustration: imagine you were a fly on the wall in a trendy bar, Friday night 20 years ago, after a bunch of intellectuals had seen MacBeth. They would glowingly reflect on Shakespeare's insight into how lust for power drives folks like MacBeth to murder to become king.

    And maybe you would return to the same bar on Saturday, same group of intellectuals, this time having seen JFK, and glowingly reflecting on the insight of Oliver Stone regarding the Mafia or Russians or Cubans in the murder of Kennedy. Perhaps you would have interrupted the group, and pointed out that Kennedy's MacBeth was much more likely to have the local (e.g. Ruby in the Dallas police station) and national (e.g. secret service standing back from the limo) connections to make the event occur. Your audience would hate that idea; they all had well-formed ideas about Johnson, and good, bad or indifferent, MacBeth wouldn't have been one of them.

    If the Trig story were a Shakespearian drama, this would be Act IV, and the uncomfortable audience would be shouting at the Palin character: "Just release the damn birth certificate already!" Here though, we find ourselves shouting at Andrew Sullivan: "Why can't you accept the eyewitness testimony of some random guy who claimed to touch her stomach!!!"

    Why is this important? Because the upshot of all of this is that Andrew Sullivan's influence is simply going to grow and grow. To my knowledge, Andrew Sullivan is the only uber-blogger who does not come across as highly motivated by a self-referential need to feel right; as a result, his writing, over time, contains something like the executive editorial control you would see in old media. I don't think you can much find that anywhere else on the internet.

    Which means he will continue to grow more and more influential. Which seems a wee bit dangerous, but at the very least, important.

  9. phat:

    As with subprime loans, US debt will probably have a perfect rating the day it tanks. That’s why we should pay attention to what S&P says, not what it does. The same goes for interest rates on US debt -- they’re currently very low, but that doesn’t necessarily mean everything is ok. Historically, the market seldom gives any warning signs until it’s too late.

  10. Couves,

    I don't think that works.

    With subprime loans, the problem was that the loans were actually bad. That's not at question with US government debt; it certainly is not bad debt. At least not anytime in the foreseeable future.

    The danger with deficits is that it can crowd out/bid up other borrowing, which raises interest rates, which harms economic growth. Or: it produces inflation, which then raises interest rates as the Fed fights inflation, which then harms economic growth.

    It's possible that markets are underpricing the chances of those things happening down the road (but then again perhaps they are not). But at least IMO, those are the possible risks involved here. Note that the markets have generally functioned fine with these (which was why Bush/Congress in 1990 and Clinton in 1993 opted to close the deficit -- because the markets were "telling" them to do so).

    Of course, it is possible that the US will -- despite having plenty of money -- simply refuse to pay its obligations, through refusing to raise the debt limit, or by some insane government in the future deliberately defaulting, or something like that. While those things are technically possible, they are very, very different than what happened with the subprime loans.

  11. Jonathan,

    Yes, it’s hard to imagine the US government defaulting when it can just print money. The possible scenario is that interest rates would spiral upward quickly… with the size of our debt, that would lead to significant economic pain for us and, ultimately, the rest of the world. That simply wasn’t a threat in 1990 and 1993.

    I agree that the most likely outcome is an extended period of depressed economic growth and/or inflation... but I think you're discounting the very real chance that this could lead to a more serious economic meltdown. In any case, even the best case scenario here is well worth avoiding.

  12. Last minute addition...

    Norquist trying to clamp down on Coburn. Wonder if there's any way to enable Coburn without openly helping him (given that anyone enthusiastic about his effort may be poison to the actual efforts). If Coburn holds out and has any luck there's some remote hope for addressing our future challenges through raising revenues instead of cutting everything and then more.

    His line, "Which pledge is most important... the pledge to uphold your oath to the Constitution of the United States or a pledge from a special interest group who claims to speak for all American conservatives when, in fact, they really don't?" is a model for countering the giant barrier to raising revenues to pay off some our obligations. Now, if he can only recruit Nancy Reagan and Arthur Laffer to endorse this effort, there might still be some hope :).


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