One nation, under Moody’s; Updated: Reid trumpets CBO score, Schumer goes bonkers over GOP pep talk
I was noodling around on a column for tomorrow titled “Who elected the credit agencies?” But it can’t wait.
The downgrade hysteria is reaching fever pitch as the House holds hearings this morning featuring the big credit ratings agencies.
It’s been aggravating to hear Republicans join Democrats on this fear-mongering meme — holding America hostage to the whims and determinations of credit agencies that made abysmally wrong-headed judgments about the subprime meltdown.
Since when did politicians pledge allegiance to S&P’s and Moody’s? And since when is it Washington’s job to avert overdue credit downgrades based on decades of profligate policies?
Holman Jenkins at the WSJ beat me to the punch — and draws an important distinction between a government shutdown and a default.
Even without the Treasury empowered to borrow, plenty of cash will still be coming in, plenty of assets exist that can be liquidated. John Silvia of Wells Fargo told Bloomberg TV that a partial government shutdown (which still isn’t a default) might not be needed for at least two weeks beyond the artificial Aug. 2 deadline set by the Obama administration in the wholly artificial debt-ceiling crisis.
But now we have a new problem. The rating agencies, especially Standard & Poor’s, have decided to join the politicians in turning an artificial crisis into a real one. S&P says it plans a U.S. debt downgrade, regardless of any debt-ceiling outcome, unless it sees a “credible” plan to reduce future deficits by $4 trillion over the next 10 years.
This has become the real worry for Wall Street, but why? America’s spending debate does not remotely make it any more of a default threat than it was a week or month or year ago. America’s IOUs are still completely acceptable to the markets.
Even in the long term, the threat is not to bondholders. The threat is to Americans under 50 who think they can rely on Social Security and Medicare. The threat is to countries that hope the U.S. will fight their wars for them. The threat is to K Street bandits trying to live off federal handouts.
But the debt to bondholders will be the last to be dishonored—not least because, unlike a lot of claimants, bondholders can be satisfied with inflation-ravaged dollars.
For the unwarranted power granted to rating agencies, which after all merely issue opinions, blame U.S. law and regulation. These require bankers, pension funds and other regulated investment funds not just to consult ratings, but to act on them.
When the cart is properly positioned in relation to the horse, notice what happens. Ratings opinions are treated as opinions. S&P recently downgraded the debt of Japan. The price of Japanese debt actually went up because the market made its own judgment. Citigroup and Goldman Sachs last week promoted a package of Triple-A commercial mortgages to investors. Investors vetoed the deal because they didn’t agree with the ratings.
This is not to say that America doesn’t have bitter political wrangles ahead. But S&P and others offer nothing of value in rating the messiness of our political debates.
On the contrary, they step out of line in presuming they must be satisfied with our current spending priorities in order to be satisfied with the long-term payability of America’s formal debt.
Investor Jim Rogers puts it more bluntly: “The US has lost its AAA status. Anybody who knows what’s going on knows that the US is now the largest debtor nation in the history of the world. It’s only Moody’s and S&P that haven’t figured out what’s going on. The world, the investment world, the financial world knows that America is not AAA anymore. Who cares what Moody’s said? Moody’s has gotten everything wrong in the past 10 years, why do you pay attention to them?”
Others weigh in on historical irrelevancy of credit ratings agencies here and here.
From last week: Obama’s backdoor negotiations with credit ratings agencies.
And from the always trenchant and pithy Doctor Zero John Hayward via Twitter: “Perhaps the more immediate question is: how do we “vote” Moody’s out of our lives? Answer: don’t carry $14T in debt.”
Jimmie Bise Jr. has a different take — applying political jujitsu, as I understand it, to use the credit ratings agencies against Dems.
***
Update…Word from Washington is that Republicans are coalescing around House Speaker John Boehner’s plan.
A close friend’s prediction over the weekend about the Kabuki outcome by the end of this week and his investment advice for the politically panicked:
1) the debt ceiling will be raised at the last minute.
2) politicians will boast that they achieved spending cuts, but this will be done via accounting tricks. For example:
- classifying spending reductions that were already scheduled to occur as cuts;
- appointing a bipartisan commission to identify spending cuts. the commission’s recommendations, however, will not be binding and will be ignored.
- spending “caps” that are supposed to go into effect 5-10 years from now, but which will be ignored when the time comes.
In truth, expenditures will not be meaningfully reduced.
3) there will be no tax increases.
4) the U.S., which is already heavily in debt, will go much further into debt.
5) Credit rating agencies will downgrade U.S. treasuries. It will have no effect on interest rates because there is no serious risk of default and because no one cares what the credit agencies say.
This is a deal everyone can agree on. Republicans can vote for it because they don’t want to be blamed for a government shutdown (remember 1995?) and because the deal will not raise taxes. Democrats can vote for it because it doesn’t really cut spending and because it provides the debt ceiling increase they need to finance the programs they refuse to cut (Medicare, Social Security, discretionary spending, etc).
The bond market is not at all worried about default. The stock market is not at all worried about default (up 6 percent in the last month). Neither am I. Ignore the headlines. Stay the course.
***
Update 11:55am Eastern…The CBO scores the Reid proposal…cuts derived from massive reductions in military spending….he’s trumpeting the CBO analysis on Capitol Hill at this hour.
The Congressional Budget Office released a report Wednesday morning that credits the Senate bill with reducing budget deficits by about $2.2 trillion through 2021, nearly three times the $850 billion credited to the Boehner bill on Tuesday.
Part of the disparity is owed to the fact that the House bill takes a two-step approach to raising the debt ceiling and therefore postpones actions on major entitlement savings until November and December. For this reason, Boehner’s forces would argue the race has just begun, and the scores now are an incomplete picture.
But the bigger issue is sure to be the Senate’s willingness to take advantage of CBO baseline rules and claim large savings from winding down U.S. military operations in Afghanistan and Iraq.
In essence the Senate plan allows a full $127 billion for war-related costs in 2012 and then caps future spending at $450 billion. Republicans argue that these limits have no relevance to the debate at hand, but under CBO rules they yield at least $1.044 trillion in additional savings not in the Boehner package.
Dumb diatribe of the day: Charles Schumer going bonkers over a Ben Affleck film scene that GOP leaders used last night to whip House members into backing the Boehner plan.
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Since when does anyone believe and/or worry about anything Timmy G. says? His magic dates for the end of time and doom have already been pushed back.
What will happen is Obama, the hero of mankind, raising the debt ceiling all by himself.
And to think I should be bothered when I talked on the phone to an Internal Revenue Service rep with an Indian accent yesterday and I had to keep asking “What did you say?” I keep hearing the rhetoric from both sides in DC and I keep on asking “What did you say?” Maybe we should outsource Congress. It wouldn’t be all that different.
Anything he really wants, he just does by himself. It is that the action taken must be prepared in such a way to make the GOP appear to be the evil villains who must be divided, conquered and driven from power.
We must remember the fundamental transformation of the USA is at stake here and CONgressjust can’t interfere with that.
Might be better and cheaper.
Unfortunately, there are too many people who are intellectually bankrupt and simply can’t afford to pay attention.
Pdigaudio, what else would we expect dems to think tax cuts are, especially when you consider there party considers spending cuts being not spending money they never planned on spending in the first place (i.e.the Reid gimmick cuts)
hawkeye54,
Correct, and the last thing I’d want to be accused of is being a Moody’s water carrier. Their complacency is at the core of the problem.
I recall reading, at the height of the Re-fi Frenzy, 80% of all mortgages in CA were less than 2 years old! That’s substantial volume by any measure.
As we’re now seeing, nearly all of it fluffed and/or fabricated. But to speak more directly to MM’s primary concern ( even had the Rating Agencies made the correct calls back then ) should they be wielding this much influence now..?
Nice to know you believe that John Kennedy was an idiot.
“Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.”
– John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964
“The largest single barrier to full employment of our manpower and resources and to a higher rate of economic growth is the unrealistically heavy drag of federal income taxes on private purchasing power, initiative and incentive.”
– John F. Kennedy, Jan. 24, 1963, special message to Congress on tax reduction and reform
That bankruptcy is perversely self-willful on their part.
No, My opinion is that I don’t believe they ever should have been wielding that much influence, then or now.
That’s good. Now I need to figure out why code pink is ok with the killing of innocent Libyans.
On July 27th, 2011 at 12:27 pm, Ota Benga said:
I assume that you’re against the money being spent on Libya. Surely, you’re not a bogus hypocrite.
I’ve been consistently against the waste of time and money spent in Libya.
Revenues increase every year during the Bush administration. What exactly had to be offset?
Here’s a tip. If you criticize Bush for spending too much money, then we’ll agree with you.
Fixed it for you.
X was never reduced so that kinda ruins your point.
I don’t wonder. I’m quite sure that irrationally spending Y is how we got into this mess.
Libs just don’t get economics.
Choose one.
A) 30% of one trillion dollars
B) 20% of two trillion dollars
Liberals choose A every time. Every one of their tax projections is based on a static tax base. It’s just like when they propose “sin” taxes. They estimate revenue based on the current number of smokers, never figuring some will change their behavior to avoid the additional expense.
Selective deafness, too.
I agree.
Number of Discouraged Workers in December 2006,
just before Nancy Pelosi took power as Speaker of the House: 274,000
Number of Discouraged Workers in December 2010,
after four years of Nancy Pelosi as Speaker of the House: 1,318,000
– Source: US Department of Labor, Bureau of Labor Statistics.
They don’t need to pay attention…Obama is going to do that for them.
Any good member of the totalitarian left knows how to fix this, it’s simple, just pass a law making it illegal to downgrade our credit rating.
Obama could do it in his sleep or in the time between holes on the golf course.
It appears that most commenters have moved on from this thread to:
http://michellemalkin.com/2011/07/27/rancor-on-the-right/
It appears that most commenters have moved on from this thread to:
http://michellemalkin.com/2011/07/27/rancor-on-the-right/
It appears that most commenters have moved on from this thread to:
http://michellemalkin.com/2011/07/27/rancor-on-the-right/
After their role in the subprime meltdown, I officially downgraded Moody’s and S&P to junk credibility status.
The movie clip I would have used is this one from “National Treasure”.
Hear hear Michelle! That’s why I say: no debt limit increase no matter what.
In 1968, the US Government defaulted on every silver certificate and every silver bond.
In 1933, the US Government defaulted on every gold certificate and every gold bond.
During the Civil War the US government defaulted on every gold and silver certificate, and every gold and silver bond for about 20 years.
Where were S&P And Moody’s ratings then?
Oh wait, ratings agencies were invented when?
Many days late … I called for a march when I saw the CR crap being ass-kissed away. Only way to break the stigma that TEA is Republican.
In the late 70′s, I was going to “A” school on Governors’ Island in NYC. I had a medical issue and had to go to a US Public Health Service hospital. They had to bring in a translator so I could understand my Pakistani doctor.
Nothing like paying for a service and they refuse to make clear what they are doing (on your behalf).
Things are getting serious and preparations are being made. I got this from my financial institution today.
————————————
“Message Regarding the Potential Government Shutdown
Dear Valued Member,
As the debate over the debt ceiling continues and rumors of a partial government shutdown circulate, we want to reassure you that XXXXX is looking out for your best interests.
As a member whose finances might be affected by the possibility of a government shutdown, we are extending you a special benefit. If you don’t receive your deposit on the regularly scheduled date of your federal payroll deposit or benefit payment, we will extend a one-time provisional credit on your account. This credit, which will be based on the last deposit we received, will allow you to have access to funds while the government budget issues are resolved.
You will not be required to submit an application or request this credit; instead, we will automatically process it, free of charge, as a convenience to you. This provisional credit will be reversed following your next payroll deposit or benefit payment.
We’re providing this service as a convenience to help members through a time that could otherwise be stressful. No matter what occurs with the debt ceiling, you can rest assured that XXXXX is focused on meeting your needs and helping you maintain good financial standing.”
Things are getting serious and preparations are being made. I got this from my financial institution today.
————————————
“Message Regarding the Potential Government Shutdown
Dear Valued Member,
As the debate over the debt ceiling continues and rumors of a partial government shutdown circulate, we want to reassure you that XXXXX is looking out for your best interests.
As a member whose finances might be affected by the possibility of a government shutdown, we are extending you a special benefit. If you don’t receive your deposit on the regularly scheduled date of your federal payroll deposit or benefit payment, we will extend a one-time provisional credit on your account. This credit, which will be based on the last deposit we received, will allow you to have access to funds while the government budget issues are resolved.
You will not be required to submit an application or request this credit; instead, we will automatically process it, free of charge, as a convenience to you. This provisional credit will be reversed following your next payroll deposit or benefit payment.
We’re providing this service as a convenience to help members through a time that could otherwise be stressful. No matter what occurs with the debt ceiling, you can rest assured that XXXXX is focused on meeting your needs and helping you maintain good financial standing.”
That the nation may be destroyed by a GRADE is like worrying that your high school teacher might destroy your life by your failure of a TAKS exam….so much BS.
Borrowers do NOT blindly follow ONLY asset ratings…they are a tad BRIGHTER than that..,..ratings are defensive info in case something goes WRONG…not something that tells you NOT to invest…just a point of possible warning.
This is a canard from the White House that is certain that all Americans, and tea party members are dumber than dirt.
for S & P and Moody’s to suddenly get all testy, is hilarious! Last to notice that the USA has been bankrupt financially for a LONG time, and the Fed has been printing money with NO backing ?? that Fannie and Freddie have a LOT of worthless paper as assets….and they JUST noticed….sure…..this is pure politics with no more reality than anything stated by Bernaki, Geithner, Obama, or Carney.
Watch the NON event three weeks after the deadline is MISSED….nada…the USA STILL is more financially stable than EUROPE or CHINA.
I know that the debt limit has been increased multiple times.
And it pains me that the media never throws obuma’s own quotes back at him where he states it shows a failure in leadership when the debt limit needs to be increased. However…
Has the debt limit ever been reduced? If not, and please excuse my ignorance, what does it take for the debt limit to be decreased?