Moody's is becoming that kid from "Better off Dead" who wanted the two dollars.He's referring to this. My own feeling is that the behavior of the ratings agencies through this thing, such as this episode, really was about as good as their behavior has always (at least in the last few years) been: a disgrace. I'd like to see Democratic Senators haul them all up for a hearing, to question why they suddenly discovered the debt just when it meant making the debt limit battle a bit more difficult. Of course, regular readers will know what I don't consider the federal government debt to be a significant problem, other than to the extent that policy makers foolishly adopt austerity programs when they shouldn't be. So your mileage may vary.
Regardless -- Weigel gets the CotD mainly because I'm always for a Savage Steve Holland reference. Well, that, and I wanted to make the Senate hearings point. Well, mostly the Savage Steve Holland thing. I just watched "How I Got Into College," the third and least great of his three great movies, again, and so I was all primed for it.
Oh -- great catch!
Do investors play politics the same way ratings agencies do? Here's a timeline of the S&P 500 today:
ReplyDelete9:30 opens at 1281, down about 0.5% vs. 8/1 close
12:30 = 1274, down about 1% on the day
12:31 Senate passes debt deal
4:00 closes at 1254, down about 2.6%
You can interpret market activity any way you like, but note the below link from the CBO blog: using generous growth rates, and non-controversial program continuation, our debt is forecasted, pre-today's agreement, to balloon by about 12 trillion in the next 10 years. After the plan signed into law today, that debt increase may be only, er, 10 trillion!
Does our intrepid host interpret a 10 trillion ballooning of the national debt over the next decade as "austerity"? Raises a rather macabre question: what would be profligacy?
http://cboblog.cbo.gov/?p=1879
On the markets today...c'mon; there's no way that anything the Senate did today, which was reported as a done deal throughout the day, affected the markets. The closest thing to news on that front today was the GOP talking point that this was now a permanent part of the budget process. I don't think that had anything to do with the markets, but at least it's vaguely plausible.
ReplyDeleteAs far as austerity...your point isn't unreasonable, but I do disagree. Is an average yearly deficit of $1T/year unsustainable? I'm not sure why not. If it becomes a problem (say, if it actually starts pushing up interest rates), then I'm for deficit reduction. But since that's not the case now, I think there are much higher priorities, at the very least.
"other than to the extent that policy makers foolishly adopt austerity programs when they shouldn't be. So your mileage may vary."
ReplyDeleteBeing for stimulus doesn't mean you're against deficit reduction. We can balance the deficit over the long term while also stimulating the economy in the short term. The current plan sucks because it takes away all of the stimulus we've had going for the past year but that doesn't mean we shouldn't be striving for the goal of short term stimulus to boost the recovery while putting in place long term deficit reduction that can bring the deficit closer in line to 3% of GDP. We can't keep above that indefinitely without growing the debt well beyond current levels or even levels that are higher but manageable. However, deficit reduction doesn't have to come tomorrow, we can still back load it to hit later.
I wrote a blog post on this topic so shameless plug:
http://hawksthought.wordpress.com/2011/08/03/we-can-have-our-cake-and-balance-the-debt-too/
When we woke up yesterday, the Senate vote was quite likely - but not guaranteed, as reflected by lingering threats such as filibuster from the likes of Utah's Lee.
ReplyDeleteYesterday's market action: open down, drift lower, than accelerate midday into outright chaos is the opposite of what you'd expect if the final deal was a welcome antidote to default.
As far as sustainable deficits: $1 T is about 7% of our $14 T national GDP. To my knowledge, even the most wildly optimistic Krugman/Keynesian scenario has our mature economy growing at far below 7%. Its hard to imagine anything that would cause the US' going growth rate to be even half of that 7%.
Sustainable deficits are justified to the extent that they produce growth in excess of their spending. Does anyone have a link to an economist that thinks that deficits at 7% of GDP are sustainable? I've personally never encountered such a thing.
The role of the government is a counter-weight to the economy. When the economy is down, it should stimulate. When times are good, it should pay down the debt. The fact that the Republicans ran up huge deficits in good times was destructive governance - but apparently it is part of their Machiavellian plan to destroy the Federal government. Thanks, GOP. No reasonable person wants to run big deficits forever. However, we need jobs and growth to get out of this mess - jobs and growth, some way, some how.
ReplyDeleteebd -- That’s the classic Keynesian method of business cycle management. And it did work during the Bush admin -- Greenspan’s monetary stimulus effectively spared us from a recession following the dot-com bubble. Unfortunately, there was too much stimulus, which inflated the housing bubble. This outcome was foreseeable and something that people warned of at the time. It would be foolish to again ignore the warning signs (this time of too much debt), identified here by CSH. There’s little chance that we can successfully manage the economy if we don’t use our heads about it.
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ReplyDeleteCouves: yes, but Greenspan kept his foot on the pedal for 8 years. The housing bubble wouldn't have been anywhere near as bad had Greenspan raised rates back up off the floor in, oh, 2003.
ReplyDeleteCSH: People have been using the "rational stock market" argument in political science for a little over a decade now, with it seeming to have more prominence over the last 5 years. To that argument, I always have this snarky response: Pets.com. I've had way too many friends work for way too many .com companies that were paper millionaires for a while there to believe that the stock market is really all that efficient. Plus, the whole "stock market prices reflect reality" argument hinges on a collective group being good at, well, everything. They not only invest intelligently, but they're expert political analysts, foreign policy analysts, security analysts, culture analysts, etc. I'll be honest: I just don't buy it.
Matt Jarvis: Yes, I completely agree - Greenspan is mostly to blame. My point was that stimulus, even when it works, can still be a double-edged sword.
ReplyDeleteRegarding the "rational stock market," Bernstein relies on this the most, since he doesn't want to address the debt/deficit until interest rates go up. In other words, only interest rates determine the reality of our budget problems. That's a dangerous game, especially since bondholders aren't necessarily tethered to reality themselves.