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In the wake of the S&P downgrade, Scott Sumner featured some comments by David Levey, the former Director of Sovereign Ratings for Moody’s, who during his tenure there wrote Moody’s Sovereign Rating Methodology Handbook. Despite his agreement that the United States’ “long-term debt outlook is deteriorating under the pressure of rising entitlement costs and an inefficient, distortionary tax system”, David argued that we have “extra leeway” due to the “the global role of the dollar and the central position of US bond markets”. I had an email discussion with David about the ratings agencies and his position on the downgrade. A lightly edited version follows:
Adam: Are the judgements you’re making based upon S&P’s recently updated Sovereign Government Rating Methodology and Assumptions, or the guidelines used when you were at S&P? I have only looked at the new guidelines, and I know there was a change made after public comment on proposed rules. So upon which methods are you basing your judgement? And would you say the methodological change is consquential in this regard?
David: Hard to answer the first part of your query, since I was at Moody’s, not S&P. Don’t feel bad about the mix-up. During my working years, even very sophisticated investors would quickly forget which agency had made which rating move and in which order. And any dumb move on either’s part would harm the reputation of both. On methodology, things changed in the mid-2000s. Under pressure from regulators and issuers, the agencies were forced to “open the black box” and become much more explicit about their criteria, scorings, weights attached to various factors, etc. There was a tendency to move to a “scientistic”, quantitative, formulaic approach. I tended to resist that (being a great admirer of Hayek). I saw risk assessment as a multidisciplinary, highly qualitative, judgment process involving a varied weighting of factors. It was not sufficient to assign likelihoods to various risk scenarios in the economic and political areas. The importance of these factors would vary according to each country’s “stage of development” and specific institutional features.
BTW, I never believed that we were somehow smarter than all the other bank/hedge fund analysts doing the same kind of assessment. Our only special claim was that we could be “unbiased” because the company held no financial assets. Of course, that still leaves open all the perverse incentives and “rating shopping” practices that contributed to the agencies’ awful performance in the MBS/CDO markets.
Adam: I also think you’re argument, with a slight modification, is not so different than S&P’s. Here is how I would change your’s to make them consistent:
The bottom line is that the global role of the dollar and the central position of US bond markets make somewhat elevated debt ratios more compatible with a Aaa rating than is the case for other countries, another version of the US’s “exorbitant privilege”. But that extra leeway is finite and serious reforms to entitlement programs, particularly Medicare, must be made in a reasonable time horizon. Given the current deterioration of and divisiveness in fiscal policy, we view the threat that serious reforms are not made in a reasonable time non-negligible.Thus there is a small but significant risk that within the next ten years. global investors will eventually conclude that our political system is incapable of making the needed changes and turn away from US assets, regardless of the institutional strengths of US markets.
How far are you from my edited version of your views? And would this be sufficient for a downgrade?
David: The long-term forecasts for government debt — depending as they do mainly on demographic and medical cost trends — haven’t changed much. We’re just more aware of them and the divisiveness you mention was inevitably going to arise as painful choices got closer and key groups — like the elderly — began to realize what they might be in for. The divisiveness can alternatively be viewed positively as a signal that the intensive social bargaining and political negotiations necessary for a solution are arriving more rapidly than we previously expected.
You say that my argument and S&P’s are not that far apart. No reason they should be. The difference in expected probability of default for a one-notch downgrade near the top of the scale is tiny. The problem is that the symbolic value of a AAA/Aaa makes a downgrade from that level significant far beyond its intrinsic significance. In any case, even with the new wording, I would still total up all the relevant considerations as leaving the US in the AAA category — but maybe not at its very top.
Adam: Felix Salmon characterizes the difference between Moody’s and S&P’s ratings objectives as S&P being only interested in the probability of default, whereas Moody’s is not interested in the the probability of default per se, but rather the expected losses. In addition, he says S&P explicitly does not intend their ratings to be a market signal, whereas Moody’s does. Do you agree with Felix’s characterization of their differences? And if there are differences between agencies in what they intend their ratings to be, is your judgement that S&P shouldn’t have downgraded them based on what they intend their ratings to be, or based on Moody’s intention, or something else?
David: Not an easy question to answer succinctly, but here goes…
I think Felix is wrong. Since S&P has not been as explicit as Moody’s about what their ratings mean, some indirect evidence has to be used. First, S&P “notches” for subordinated debt, meaning that they are taking into account that a default on that debt is likely to have a greater severity than on senior debt. Second, market participants would find ratings almost impossible to use without comparability of meaning. So — in a sense — the markets more or less force equivalence of meaning on the agencies. Third, if the meanings were that different, there would be a lot more “split ratings” (situations where the agencies rate differently) than there are. So, if there is a disagreement between Moody’s (and myself) and S&P on the U.S. rating, it is a substantive one, based on judgments of the likelihood of fundamental reforms to spending and taxation, alongside the financial market characteristics I referred to in my initial statement.
In your comments on Felix’s comments on Nate Silver’s comments on S&P’s decision, you make a point which I think is only half right. You say that sovereign defaults “are always political, rather than economic” and that “A sovereign credit rating is therefore primarily a function of a country’s willingness to pay, rather than its ability to pay.” The truth, however, is more complex. Neither willingness nor ability can be defined independent of the other. “Willingness” depends on political calculations of the degree of sacrifice that would be required to make payment, which in turn depends on the financial resources available or easily raised. “Ability” depends on how much additional resources for debt payment the government can “squeeze out” through reductions in spending or increases in taxation — a political consideration. So the relation between them is -to use an old phrase-”dialectical” and the analysis is based on what Adam Smith called “political economy”. This may sound like “scholastic” nit-picking, but the point is vital for guiding the rating decision process.
“America is a scooter-bound glutton who, when its continuously increasing mass finally overwhelms the doughtiest scooter’s capacities, shakes its fat fists like a mad baby and demands deliverance from the laws of physics.”
He has a serious point to make about the unsustainability of our collective fiscal demands, all of which is dwarfed by this quote.
This chart is actually a bit old
The 5 year TIPS rate crossed –1% today.
That means the government can make more money borrowing than the average person can by saving.
Net new labor demand (openings – quits) was down in June but not quite enough to break the upward trend
July and August will be key if this indicator is to tell us what I think it tells us.
I am channeling Ed Leamer, whom I chided in 2007 for denying the possibility of a recession even though his models were flashing red.
Leamer said
The models say “recession;” the mind says “no way.”
I’m going with the mind. This time the problems in housing will stay in housing. If you are a builder or a broker, it will feel like a deep depression. The rest of us will hardly notice.
Obviously, that was spectacularly wrong.
Well, now here we are a few years later and as ironic as it is I can’t help thinking something similar.
I look at a lot of fundamentals but at the end of the day the money markets drive my forecasts. The money markets are telling me in every possible way that recession is coming. Liquidity demand is rising, inflation expectations are falling, nominal interests rates are collapsing.
However, like Leamer in 2007, I am hard pressed to see what is left to recess? At the time Leamer doubted a recession because he didn’t think there were enough manufacturing jobs left to lose.
This time, I look at construction and local government and think the same thing. The cyclical employment sectors are already so far down. Are we going to start losing jobs in Health Care and Education at this point?
Its possible but its just so hard to wrap your mind around. It’s a macro-economic story that’s never been told.
From CNBC
Banks are charging more to store gold after a surge in demand for precious metals has left London, the centre of the global bullion market, short of vault space.
Almost all of the major bullion-dealing banks have raised fees since March this year, in some cases more than doubling the rates they charge for vaulting gold, according to clients of the banks and people familiar with the situation.
The development is a further sign of how demand for assets which are seen as safe is straining the financial system. Bank of New York Mellon announced last week it would start charging fees on large deposits after a sudden influx of cash.
And, yes Virginia, charging customers to store their cash is equivalent to a negative nominal rate of interest.
Of course negative nominal rates are down limited by physical storage costs, but they can and do exist.
So again, I am in no way supporting this as a growth model, but suppose our primary interest was GDP growth at the expense of all else. How would we achieve the Chinese model in the United States?
The most straight forward way would be for the Federal Reserve to commit itself to very low interest rates for the indefinite future – say at least twenty years or more.
This would cause the entire yield curve to collapse and and significantly reduce uncertainty to businesses.
The US government would then sharply raise the payroll tax. You could implement a VAT but you can show the two are equivalent in the long run.
It would use the payroll tax for two purposes. One, to slow consumer spending. In a world with super easy credit there will be a tendency towards increasing consumer spending and consumer inflation. You want to tax away as much of that as possible.
Second, you use the surplus from the huge payroll tax to fund large purchases of foreign debt. This will drive down the dollar and make US exports more competitive.
So, what you will have in the US is an environment where investment is dirt cheap, US consumption is low, Net US savings are very high and exports form the source of final demand for US products.
You should be getting the Newsletter or at least reading the blog but if not this is nice piece in the Wall Street Journal on China. China is an amazing case study in so many ways but one of the most important is the way the Chinese goosed investment growth by decreasing the net rate of return on to households.
The Chinese growth model transfers income from households to the corporate sector, mainly in the form of artificially low interest rates. These sharply reduce borrowing costs for the state-owned companies that funnel this easy money into mega-investments. The easy financing also gooses banks’ profit margins and allows them to resolve bad loans with ease.
This cheap borrowing comes at the expense of depositors. Low yields on deposits force them to sacrifice consumption, to save more.
There is such a strong presumption in the US political-policy circles that increasing the rate of return to households will increase investment, and that this can be accomplished by lower the capital gains tax etc. Yet, our biggest investment story ever is one of household suppression.
Likewise in the US collapsing savings was associated with huge bull markets and rising home prices. In short enormous returns to households.
This is not to say we should emulate this, I just want to put cracks in common assumptions about the way households and the corporate sector work.
Krugman is unimpressed by the Fed statement
The Fed didn’t announce a new policy. And despite what some press reports said, it didn’t even commit to keeping rates low; all it did was say that if the economy stays weak, rates will stay low — well, duh
And three members of the FOMC dissented even from that!
Its worth looking at the wording of the statement and the dissent. The statement read
The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
I read that as Fed speak for we intend to keep interest rates low for two years. Not, if we need to we will. But, we will.
The dissent read
Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period
Why is this important. Because the difference between extended period and mid-2013 highlights the significance of the Fed wording. Had this simply meant “so long as appropriate” there really wouldn’t be a difference between extended period and 2013.
This statrment is rightfully viewed as a quasi-commitment by the Fed to keep interest rates at zero for two more years.
What you would want to see is the phrase “at least through mid-2013” repeated over and over in new statements and speeches. That will solidify the commitment.
Remember that the last thing you want to do as a central banker is hurt your credibility. So, repeating specific dates indicates that those dates have real meaning.
If the Fed were to begin to tighten its stance the first thing you would expect to see is the phrase “at least” removed from statements and speeches. Further tightening would move us to something phrasing like “possibly through mid-2013”
How the Fed frames the certainty of its statements tells you how tight the policy is.
From CNBC
"I applaud the Fed’s move because they didn’t do Congress’s job. They said, ‘We will keep rates low for the next two years, now Congress, come back and institute fiscal spending discipline and pro-growth economic policies,’" said Doug Cote, chief market strategist at ING Investment Management in New York. "The private economy now has assured low rates for the next two years and that…makes equities that much more attractive."
Forget the color commentary and focus on the bold. That my friends is Central Banking.
So, I still see charter on this so its time to post this graph again. Even after a significant downward revision to investment in Equipment and Software we can see that the US is still on an investment tear. The recent slowdown takes us to levels that still beat anything since the dot-com boom and the peak of the recent surge was bigger than the dot-com boom.
Same chart but for residential investment
This actually understates the collapse in building since remodeling has stayed fair strong.
At the zero lower bound, and what do you do. Classic macro says you commit to a higher inflation target. In practice the markets rarely understand that and so you simply commit to keeping short term rates low for a long period of time. The Fed did that today.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
"Pursuant to our criteria, the fiscal autonomy, political independence, and generally strong credit cultures of U.S. states and local governments can support ratings above that of the U.S. sovereign,"
Now from a practical perspective I am happy to hear that as I advise some very well run state and local governments who are undoubtedly among those to keep the AAA.
Nonetheless, how does this make any sense? If the US defaults then do we really think all is well in Charlotte, NC. Somehow I am guessing not.
The US, and world economy needs the Fed to act today, and markets seem to be indicating that they believe that the Fed will act. This is the same situation we found ourselves in during the fall of ’08. Growth is barely even anemic, and markets are indicating that they expect future NGDP growth to slow. Headline inflation has subsided, and the recent “major” blip in core inflation has turned out to to be a fluke — inflation is still running below the Fed’s implicit target. Combined with that, markets have roundly given the finger to S&P, and world troubles are pushing people into dollar assets, exacerbating the problems that we are experiencing with elevated money demand.
[Click Image to Enlarge]
The Fed needs to do something bold today, before we fall off the cliff again, just like in October/November 2008…we’ve seen when happens when passively tight monetary policy causes the economy to limp along…once the buildup of balance sheet problems, falling asset prices, and increased demand for money reaches a head, the tipping point comes quickly and painfully. However, this time we’ll likely experience actual deflation, which will likely become a deflationary trend due to the timidity of our central bank.
So Bernanke, please give the hawks the finger for now, and do the right thing. The future of the US economy desperately needs it.
He says
Carnage in stock markets as I write — and all of the headlines I see attribute it to S&P’s downgrade.
They really are trying to make my head explode, aren’t they?
Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns.
The “signature” of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions.
I don’t know if this right. You have to consider the fact that Treasuries are still the baseline risk-free asset. Again, because Treasury risk is existential risk. And, things that are present everywhere are by that token present nowhere.
What the S&P downgrade is, is frightening. Its unnerving it makes people scared. Realizations about the economy could certainly be in their too but there is no reason to think that the downgrade doesn’t matter.
Imagine if we found out on Friday that buried deep within the human genetic code was a time bomb and that there was a very small but real probability that within the next ten years every human being on earth would simultaneously suffer a massive brain hemorrhage and die. Because of the nature of this disorder there is nothing we can do about it.
This would mean that the existential risk to humanity had risen. But, its risen in a way that we can’t really do anything about. You would expect in such a time for nervousness – not only about the time bomb but about what other people might do because of the time bomb – to get the better of investors. You would expect to see some sell off in stocks and of course Treasury prices rise.
If this story is correct then this period should fade as the uncertainty fades. When it become clear how everyone is going to react then we should see stock prices march a bit up. Of course, to balance the equilibrium there must be a small chance of a genuine world wide freak out or some massively catastrophic policy action out of Washington, but the odds are against it.
So Krugman has this post on dual equilibrium in default. He draws a couple of graphs and labels the post as (very wonkish).
He is a very successful writer so I assume he knows his audience. However, it seems to me that his basic point – that there are multiple equlibria associated with an expectation of default – is so blindingly obvious that I am not sure how you consider the question without coming up with that answer.
Now maybe that simply because I am in the process of winning back the title of most detached econ blogger. But, its just not clear to me. What else would someone think?
CNBC had this to say
Standard & Poor’s spoke loudly and clearly when it downgraded US debt, but the Treasury market on Monday didn’t appear to be listening.
While stock markets were selling off around the world bonds rallied. The 30-year bond gained more than a point in price as investors sent their own clear message that in times of turmoil, Treasurys were still the safest house on the block.
The movements seemed to suggest that S&P, for all the bluster and bold headlines its move created, was not calling the shots.
All over the media and my social media network people keep saying things like this. However, this is just the wrong way to think about the world.
Let me explain this way. Lets forget about S&P or downgrades or Europe or any of that.
I was shocked and appalled by the way the debt ceiling debate was handled. I was even more appalled that some people in positions of power seemed to endorse this as the new normal. Playing games with the global economy is no joke and no way for the leaders of the most powerful nation in the world to behave.
In my mind the political mess in Washington was worth a downgrade. And, indeed, I felt less safe than I did a month or two ago about the world and the fate of humanity.
However, what should I do in response to that? I should buy US Treasuries. Yes, buy.
Why?
Because you cannot escape US default risk. Its not like you could go out and buy something else that would guarantee you income in the event the US government defaulted. I am not even sure that investing in farmland or other wild schemes would do it.
Certainly there is no place to stash the trillions of dollars that now sit in Treasuries.
You have to buy Treasuries. There is no alternative.
This is why my reaction to the debacle wasn’t. OMG sell Treasuries. It was OMG we need to create an alternative to Treasuries and fast.
Right now, there is just no way out but through.
Matt Yglesias says focus on real things
Instead, everyone seems obsessed by the fluctuations of the financial markets. These are, I guess, interesting indicators. But that’s what they are at very best — aggregators of guesses about the likely future state of things. Problems don’t arise because markets are down. Markets go down, perhaps, because it seems likely that bad things are happening. In particular, if your economy grows slowly, it’s hard for financial markets to go up.
So on one level I would market the Mill/Keynes insight as noting that this is wrong. Financial markets do matter. Why they matter is a question that we still haven’t completely sorted out.
However, as a basic result there is no clean nominal/real dichotomy. Things that happen to money and money markets can affect what happens in the real world. Maybe this is because of sticky prices or a co-ordination problem or a whole host of things that we can get back to arguing about once the crisis is over.
However, that financial markets matter is an insight we can’t lose. I know Matt realizes this when it comes to the Central Bank, but remember that all Central Banks really do is intervene in financial markets. They trade one financial instrument for another. Typically currency for government debt. Yet, it has real effects.
The money quote
S&P’s assessment is only remotely serious if you assume that this particular Congress, with its huge contingent of crazy Tea Partiers, is going to serve in perpetuity. But this Congress isn’t going to serve in perpetuity — there are elections next year, and many of the Tea Party freshmen are likely to lose.
They won in 2010 because it was a “wave election” in the middle of a very severe economic slump. But 2012 is a presidential election cycle with an incumbent Democratic president. A lot of these Tea Partiers who won in traditionally Democratic districts (and swing districts) are going to lose. In fact, it’s probably even odds that the Dems take back the House.
The simple fact is that the Tea Partiers are almost certainly at the height of their power in this Congress. And no, the debt ceiling debate doesn’t reflect some sort of secular change in US policymaking — the next time there’s a Republican president, House Republicans will be all about raising the debt ceiling, and Democrats won’t engage in the same kind of political brinksmanship. You’d have to be stunningly naïve not to believe this.There have also been plenty of political de-escalations over the years — Republicans didn’t shut down the government every year after 1995, for instance. After Tom DeLay won the Medicare Part D vote by holding the vote open for 3 hours, everyone claimed that this would be the new normal on all controversial votes. Didn’t happen. There are plenty of one-off political confrontations. Simply assuming that every political confrontation represents a secular change in US politics and policymaking is ridiculous.
Points all well taken. I’ll have to think this through more but off the cuff I will say the shock factor in seeing what went down with the debt ceiling debate was so intense that it definitely moved the needle on my perception of US creditworthiness.
Seeing that this sort of thing could happen and then hearing Mitch McConnell proclaim that he intends for it to be the new normal is deeply disconcerting.
Perhaps, when heads cool we will look back and see that there never really was a chance at default and that everything was under control despite the theatrics. At this point, however, I don’t see it.
Brad Delong on our current state
… I would have laughed at you. I would have said that while there were possible futures in which each of those things happened, they were disjoint futures.
Tyler Cowens adds
One way to solve that conundrum is to think about what expected real rate of return fits into both facts.
I think that’s the wrong way to think about it. One of the things that makes high finance so clear is that it sweeps away some of the bad intuition that we form being a part of the retail market.
For example, going about their daily lives people think that sometimes they buy things, perhaps sometimes they sell things, though mostly they get to buy things because they have a job.
From an economics standpoint this is of course all rubbish. There is no buy. There is no sell. There is only trade. I give you and you give me.
Because no one can take delivery of $500 Million in cold hard cash this fact becomes obvious in finance. If you are selling one thing you are buying another and hence the prices of all things are interlinked. They are in the retail world as well but because they are mediated by ever changing cash balances the link is not as direct.
So now we think about all the worlds in which S&P could downgrade the United States on August 5, 2011. How many of those worlds contain a viable alternative to Treasuries? In how many of those worlds is there an asset that you could sell out of Treasuries and into for safety reasons.
Lets even suppose that Europe was fine and Japan was fine. Does it make sense to sell Treasuries to buy German and Japanese bonds? In what world does the US default but Japan does not? In what world does the US default and Germany is not swept up into an unpredictable firestorm?
If you are selling Treasuries on credit risk, what are you buying? You have to trade for something. This has always been the problem.
This is why a downgrade of the United States is a downgrade of humanity itself. Its also why alternative to the dollar and Treasuries need to be found.
He says
So there is a reasonable case that what we’re seeing in Italy is a self-fulfilling crisis trying to happen, in which fear of default is precisely what leads to default. And that’s exactly the kind of case in which intervention could short-circuit the crisis. Let the ECB buy lots of Italian bonds, in effect guaranteeing a low interest rate, and the possibility of default fades – which in turn means that further intervention isn’t needed. It’s certainly worth a try.
While I’m at it, a further note: a country with the same level of debt as Italy, but with its own currency – and with debt in its own currency – would not face the same kind of crisis.
I agree with his stance on Italy. I am not sure that the situation is any different in Greece, however. Ultimately, whether or not as institution is solvent is not key to its functioning. Its whether or not it is liquid.
You can operate a bank, a country, a corporation or household in insolvency so long as they are liquid. Indeed, many corporations and households spend most of their time in insolvency.
We call a household “underwater” when they are insolvent as mortgage seller, but if we held the household to more serious capital standards and forced them to mark the house to distressed sale value, then the majority of households would be underwater.
Anyway, this is a digression from my larger point that even Greece’s problems could have been held in check if it had a central bank willing to keep them in check.
We might have been in for some serious devaluation and a bout of inflation, but indeed, that should have turned on the export spigot, a lead to a surge in the Greek economy. However, Greece is under the Euro and the ECB decided that it would rather not take on the job of being a Central Bank but instead strangle the European Periphery.
Now, it seems this morning that the ECB may have changed its mind. Central banking may be a useful vocation after all and perhaps intervention will be helpful.
For Greece this is too late but for the world lets hope its not too little.
On Meet the Press Alan Greenspan said
"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default"
"What I think the S&P thing did was to hit a nerve that there’s something basically bad going on, and it’s hit the self-esteem of the United States, the psyche"
In many ways Alan Greenspan and I are cut from the same cloth. I know that statement won’t win me many friends but its important to put what I am about to say in perspective.
We are both come from a philosophically libertarian, small government, low regulation, efficient markets, balanced budget background. That instinct, however, was in both our cases tempered by the daily grind of looking through data series and trying to figure out the best practical advice to give to government officials to deal with the real problems facing people every day. And, of course in Greenspan’s case eventually a stint as the most powerful bureaucrat in the world.
I think I began to doubt before he did and have been more transformed by the events of the past five years but nonetheless we are coming from similar places.
I say all that to point out the extent to which what happened in the government has not fully sunk in with Alan Greenspan. His statement about the United States having zero probability of default reminds me of something I might have said six months ago.
Its something that is predicated on a government that works with the Federal Reserve, trusts its experts and is committed above all else to global stability.
That, however, is not the government we have. We have a government where partisans are committed first to attempting to win the war over the future of the United States.
This is something that is hard for technocrats to swallow because in our world politicians have no control over the future of the United States. No deals, or demands or hostage taking is going to change the basic fact that when push comes to shove, the public will not take kindly starving old people, or grandma being denied chemo because she can’t afford it.
The future is in our minds more or less deterministic. Its set by human nature. Politics are just a veil.
What politicians can do, however, is manage society on its journey. They can see to it that the ship keeps an even keel and that the water is pumped out of the lower decks. They can maintain financial and political stability. They can create a climate of quiet certainty.
Our political system, however, has rejected that task. Instead they have decided to take fool errand into changing what cannot be changed and putting the global financial system at risk as they attempt to hold back the tide.
In that world its not the technical ability of the United States to avoid default has come under question. It’s the pratical ability of our politicians to keep their act to together and focus on the things over which they have actual control and to do their duty to ensure that steady march of the Enlightenment does not go down in flames on their watch. To put out the fires when they begin and to above all keep the peace.
They have shown a willingness to shrink this responsibility that is simply beyond the pale.
That is the essence of a nation downgraded and a world a few inches closer to default.
I’ve been wondering how much of last weeks tumbling market was due to rumors that an S&P downgrade was imminent. Here is one claim on this matter that indicates the answer is at least some of it:
At 8 a.m. Friday, S.& P. convened a global conference call of its sovereign rating committee… By 10 a.m., they’d reached a majority decision — the United States no longer was entitled to its top rating…
Rumors of a downgrade were already swirling in the markets — a prime reason the Dow dove more than 200 points at lunchtime, and at 1:15 p.m., the three men called the Treasury to inform them of the decision. “They were not pleased with the news,” Mr. Beers said.
I’ve been trying to pin down where Fitch stands on a downgrade. On the one hand, in the wake of the debt ceiling being raised Fitch and Moody’s were said to reaffirm AAA rating. Media outlets were reporting it like this:
Moody’s Investors Service and Fitch Ratings reaffirmed their triple-A rating for the United States…
On the other hand, Fitch said a full review was under way and would be completed within a month. So might the full review include a downgrade, or is that off the table as the AAA rating has been reaffirmed? A quote from a Fitch spokeperson clears this up:
Analysts from Fitch Ratings were in their offices over the weekend, churning through financial data. The company has said it may take all month to decide. “Our rating is triple A until the day it changes,” said David Riley, the head of global government debt at Fitch Ratings from his office in London. “That being said, we haven’t formally reaffirmed the rating.”
Moody’s reaffirmed the country’s AAA, though it did put the country on negative outlook on Tuesday. The company’s sovereign analyst said Saturday the company is not as concerned about political gridlock.
So despite media reports like those above, Fitch has not “formally reaffirmed” the AAA rating, and a downgrade appears to be on the table for their upcoming review.
One thing to consider is that an S&P downgrade could make a Fitch downgrade more or less likely. If this spurns politicians to action, it will have helped fix the problem it identified, effectively falsifying itself. However, if the downgrade causes rates to increase or hurts the economy through weaker consumer sentiment or some other Animal Spirit / Confidence Fairy effect, then it would make our fiscal situation even worse.
But what would cause Fitch to downgrade? Reports indicate they are less concerned about political gridlock, and appear to be focused on whether either the super committee’s $1.5 trillion in desired cuts or the automatic trigger backup plan will materialize. But how much clearer will that become within the next month? Are there any signals Washington could send that would indicate they’re likely to back out of these cuts?
With Credit Ratings a popular topic it seemed like a good time to relate this old story.
I had a friend a while back who was going through a financial rough patch but wanted to maintain her high credit score.
I told her to call the mortgage company immediately, explain the situation and attempt to drag them out as long as possible. Then use the breathing room to make sure that she made the minimum payment on the credit cards every month even if it meant skipping the mortgage payment.
She asked why the credit agency be consider her more responsible if she shafted the mortgage company while paying the credit cards. My response is this:
The Credit Agencies don’t give two shits about how responsible you are. Your credit score is not a moral judgment on you. It is an estimate of how likely you are to pay your debts on time, particularly your unsecured revolving debts.
If you are the type of person who knows how to string along the mortgage company in order to pay keep your revolving debt current then you are in fact a better credit risk for the credit card company. A person who does not know this – even if she is Mother Teresa – is a worse credit risk because Mother Teresa, not knowing how to juggle creditors, is more likely to default.
This is the key thing to remember: If I am your creditor then I don’t care about your morality. I care about whether I am going to get my money. If you could convincingly communicate to me that you were willing to kill your mother in her sleep in order to pay me with the insurance money that would significantly up your credit rating with me.
Why?
Because that is a very strong signal that I will, in fact, get my money. This and only this is what I care about.
A few key assumptions
1) The dollar as reserve currency must go. Political instability in the United States has reached the point where the US can no longer be counted on to be financier of last resort.
2) The Euro must be cracked. At a minimum some nations need to be let out of the Euro. There is the possibility of a dual North-South Euro system but something needs to replace.
3) A place needs to be made for China and eventually India over the coming decades.
A potential suggestion: A global central bank, the GCB.
The as its name suggest the GCB will operate as an international central bank. However, GCB currency will be virtual and float against all existing currency. Their will be no physical GCB notes and no retail vendors will be expected (perhaps even permitted) to accept GCB notes as tender.
Instead GCB notes exist solely as a medium of account and exchange for international transactions.
The GCB will issue currency notes as well as bonds and use the proceeds to purchase sovereign debts. As a first step I might suggest a portfolio that mimics the fraction of world GDP from each nation.
Membership of the board of governors of the GCB would be comprised of a single member from each major country, with a vote in accordance to that countries percentage of global output.
For example we imagine that there are 100 votes total. The US would have one representative with approximately 30 votes. This implies that districting countries will not alter votes and of course that vote share will change as countries grow and mature.
The goal of the GCB is to create a reserve currency and a market for bonds deep enough to support global finance without being tied to any individual currency. Also, because GCB notes do not count as tender GCB policy – I suspect – will not serve as monetary policy.
Thus any nation will be free to appreciate, depreciate or float its currency against GCB notes as it sees fit.
Karl and China are in agreement about the safety of U.S. financial assets. Karl writes:
“We should begin to talk and think seriously about how to Internationalize the financial system and perhaps secure at least a viable competitor to the US in the issuance of safe assets.”
Echoing this, China’s official Xinhua news agency writes:
“International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country…”
There may be no alternative to U.S. financial assets right now, but people are certainly starting to look hard.
There’s a lot of anger and indignation being expressed at parties passing judgement on the U.S. for it’s political and economic problems. Here is Paul Krugman mad at S&P:
So what was S&P even talking about? Presumably they had some theory that restraint now is an indicator of the future — but there’s no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment….
So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.
I understand people who want to argue with S&P’s logic, I think there is a case to be made that they are in fact wrong. Maybe the possibility of a loss of confidence in U.S. debt should be of zero concern right now, and a debt crisis is extremely unlikely. I think the uncertainty here makes it difficult to say that is not a serious possibility. On the other hand, perhaps Rogoff is right and we do need to address our long-term fiscal position immediately or risk another crisis. This is a debate to have, and I can understand people being angry if they think S&P’s analysis is wrongheaded and apt to make the situation worse.
But I’m not sure why people would attack the fact that they are judging in the first place. If S&P has no authority and is in no position to decide whether a country has an AA+ rating, then they are in no position to decide whether they have an AAA rating. They didn’t start passing judgement yesterday. They were passing judgement last week, last month, and last year.
Maybe we no longer want ratings agencies to have the legal power we’ve bestowed upon them, but surely we don’t want ratings agencies to have the legal power and only the ability to make positive judgements, or judgements that ignore crucial aspects like the “effectiveness, stability, and predictability of the sovereign’s policymaking and political institutions”.
I also want to highlight that despite his criticisms, Krugman does have a lot of agreement with the logic of the report, which cites debt ceiling brinksmanship as part of the problem. He writes:
On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.
I think the value of S&P’s action is that it has given both sides ammo where they need it, which seems like it should strengthen our ability to make a deal. Ironically, perhaps the act of issuing this report will help make the conclusions of the report less true. I hope so anyway.
I was asked at a conference early in the summer whether or not the United States would be downgraded. I said that its possible but it would take some serious stones to downgrade the United States. Besides what would it even mean. If the United States is not AAA then how can anyone be AAA. No one is not exposed to US default risks.
Over the last few years in general my tendency has been to waive away as absurd any notion that the United States would default or that Treasuries are anything less than the most secure asset on the planet.
My thoughts and feeling have been shifting as of late. Indeed, for me the spectacle that was the debt showdown was a turning point. What was horrific was to see what appeared to be an utter lack of party discipline.
This occurred on both sides of the aisle but was without a doubt more prominent on the Republican side. There was a palpable sense that GOP freshman simply would not do as they were told.
Now, at the end of the day I was overwhelmingly certain a deal would come through. However, the level of brinkmanship shown was to great for me to feel comfortable with.
If things could go this badly when there is so little at stake, over a set of issues that is nearly meaningless in the long run, then that has to make one nervous about the future.
In my own mind the US government was downgraded last week. The S&P downgrade only confirms what I was feeling.
Now, we still have the problem that a downgraded US is a downgraded humanity. There is no substitute for Treasuries. What we have to face is that for the time being we are living in a significantly less safe world.
There is the urge to see this as an opportunity/call to action/warning that something needs to be done about the US political process in general and the modern Republican party in particular.
I don’t dispute this.
However, that cannot be the only serious answer. There is no obvious path towards reforming the GOP or repairing the US political system.
What we should and must begin to do is prepare to abandon the United States of America. No sentimental feelings of loyalty. No wishing we lived in a world that we do not. No hoping against hope that the land of our birth will somehow redeem itself.
We should begin to talk and think seriously about how to Internationalize the financial system and perhaps secure at least a viable competitor to the US in the issuance of safe assets.
We should begin detailed discussions and talks about the risks associated with China. We should begin to think heavily about the way the Chinese bureaucracy in structured. What are its long term weaknesses.
Are there forces which will push China towards openness and if so what is the plan for dealing with that type of change.?Is one party rule over the long run – 50+ more years – feasible?
Again this is no time for sentimental defenses of democracy or the open society of any of that. The financial world needs a stable home. We need a stable asset class. If the US cannot provide it, we should look for alternatives where we can find them.
I may be barking up the wrong tree with China and fundamental instability there may be too much to handle. Nonetheless, the search should begin immediately and with vigor.
In some sense we can think of the essence of a liquidity trap as the public wanting to buy more government bonds than the government is willing to sell.
Traditionally our remedies are:
1) Increasing the amount of bonds the government sells. That is deficit financed spending or tax cuts.
2) Lowering the value of said bonds by promising higher inflation.
However, in theory if some funds are forced to sell Treasuries on a ratings drop this could have the same effect as (2).
The price of Treasuries should not move because they are backstopped against the ZLB. However, some money will move out of Treasuries and into some other asset class, promoting borrowing and lending in that class.
Reax?
First I want to let S&P speak for themselves at some length, since their report lays out pretty clearly what it is they are worried about:
The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions, June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging. A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand.
I don’t see a whole lot unreasonable in there. If you read S&P’s document Sovereign Government Rating Methodology and Assumptions, you can get a better look at the criteria they’re using. They use five main ratings factors:
- Political score: Institutional effectiveness and political risk
- Economic score: Economic structure and growth prospects
- External Score: External liquidity and investment position
- Fiscal score: Fiscal flexibility and fiscal performance, combined with debt burden
- Monetary score: Monetary flexibility
Despite some indignant protestations, it’s hard to argue that the bottom 4 criteria are all that matters in assessing sovereign risk and that institutional effectiveness and political risk should be ignored when assessing sovereign risk. The S&P document goes on:
The political score assesses how a government’s institutions and policymaking affect a sovereign’s credit fundamentals by delivering sustainable public finances, promoting balanced economic growth, and responding to economic or political shocks… The primary factor for determining the political score is the effectiveness, stability, and predictability of the sovereign’s policymaking and political institutions.
Again, it’s hard to argue that the recent debt ceiling debate did not represent a decrease in the effectiveness, stability, and predictability of our policymaking. Aren’t those complaining most about S&P the same ones who were making these same criticisms of the Tea Party recently?
I want to disagree with Kevin Drum in particular who argues that we were never going to default on our debt. He says:
…even if a deal hadn’t been cut by August 2nd, we wouldn’t have defaulted on our debt. A bunch of government services would have been temporarily put on hold, but bondholders would have been completely unaffected. This is a really important point. It’s true that a temporary government shutdown would have been bad, but this has happened before. It’s ugly and stupid and unnecessary, but it’s politics. America’s debt, however, was never at any risk.
That’s Kevin’s perception. When it comes to markets and financial panics perception is everything and beliefs can be self-fulfilling. If market players agreed with Kevin, then he’d probably be right. I doubt that this is the case however. I side with Lawrence White:
”…if the federal government delays payment to anyone, then certainly in a common-sense sense, the government has defaulted on its obligations….I believe that the financial markets would not be copacetic [if bondholders were repaid but other creditors weren’t]….They would realize that the government was stiffing one set of claimants who are creditors, and the markets would worry that they might be next”
and Neil Buchanan:
“Foreign holders of Treasuries will understand that it is politically untenable to pay foreigners but not Americans…Can you imagine the firestorm if Americans were told that we cannot afford to pay Social Security recipients, because we have to pay foreign banks and governments first? …No matter how strong the argument that doing so is necessary to protect our credit rating, the bottom line is that the government would be favoring foreigners over Americans. Any foreign investor would know that this is not politically sustainable. They would have every reason to dump our bonds, or at least to require much higher rates of return.”
S&P, and I believe Fitch, also said they would have considered any payment prioritization in-and-of itself a “selective default”. I have a hard time believing that these are not risky outcomes.
Arpit Gupta runs the Guns and Butter model with updated data. The upshot and a nice chart
I decided to run the full model with the 2010 election as an additional data point. This is the relevant point to use in evaluating all of the data to use for future modeling; but it may overstate the fit exactly for 2010 slightly. Here’s what I have:
The new prediction for 2010 is 202.5 seats. This overstates Dem gains about about 10 seats, but does cut the overstatement.
I wondered how much adding 2010 did on its own, so next I threw out the 2010 data, and fit the 2010 election based on previous election data, but current economic data: now, I get a Democrat prediction of 206 seats. Roughly, a fourth of the Democrat "underperformance" can be accounted for by economic conditions that were worse than thought at the time.
So if you re-run the model – which I prefer to do but understand why other’s wouldn’t – then roughly half of the democratic underperformance goes away. If you use the co-effecients from the model run before 2010, but incorporate new and better data then about a quarter of the underperformance goes away.
Long story short, we can make a decent argument that the majority of democratic losses were structural but there are still enough excess losses for defenders of non-reductionist politics to stay alive.
Don’t worry, with more data, your days will be numbered. Reductionism swallows all.
Yet the potential apartment boom may be slowed by land use regulations
From Multifamily News
Portland, too, has an urban growth boundary that has limited sprawl, points out Gail Neuburg, principal in the Portland office of Apartment Realty Advisors (ARA). “Oregon in general has very strict land-use planning,” she notes. “It’s very difficult to change the use of land, it’s very difficult to find apartment land, and there’s an urban growth boundary around every municipality that limits availability of land—and our fees have skyrocketed, making cost to build prohibitive.”
The Portland-Vancouver-Hillsboro metro area reported its unemployment rate at 8.6 percent in May. Intel recently announced its $4 billion to $6 million investment in a new plant in Hillsboro. This is expected to bring 6,000 construction jobs, as well as 800 permanent positions.
But where will the new workers live?
Has anyone run the guns a butter model on the last election with the new disposal income data? Supposedly the Dems lost an extra 20 seats in the House or so above what could be explained structurally. However, now that we know the structure of the economy was worse than the frontline data does that estimate still hold?
I haven’t run the numbers but I am guessing what looked to be policy backlash will vanish in the structural void with new estimates.
A few questions on my mind
- Exposure of US institutions to Euro credit risk
- Willingness of the Fed to lend against what seem to be strong US balance sheets
- The effect of a soaring dollar
The first two require more digging to understand. The third we can speculate more about. On the one hand a collapsing Europe and a soaring dollar will squash the manufacturing renaissance. Net exports will plunge and that will be a drag on the economy.
At the same time, however, we should expect oil price to gain some double relief. First a slower Europe means a slower China and that means lower real oil prices. Second, a higher dollar means cheaper oil in dollar terms. Both of those will drive down gasoline prices.
Lower gas prices will ease pressure on US consumers and spur US auto sales – both of which could support recovery.
Lets say the Euro goes all to hell in 2012. However, lets also suppose that we have apartment vacancies approaching 2-3% and gasoline at 2.50 a gallon. Does that sound like a prescription for expansion or contraction. Right now it still reads like expansion to me.
Obviously the markets think I am wrong and so do most economists. I look forward to finding out why.
Short on time. I’ll make a few comments
- Roughly inline with my expectations. Not a strong report. Auto supply issues and higher gasoline prices have sent a bit of a jolt through the economy. But not on par with devastation
- Note that private sector jobs came in at 154K. That’s actually a decent number. If the government sector were adding a normal 30K or so then we would have 185K. That’s a recovery level report. At this point job creation is slow because government is downsizing.
- Government downsizing will not continue forever. I know many economists and commentators are focused on the contractionary nature of the budget deal. Don’t be. As I have said, there are basically two types of government workers: teachers and not-teachers. What we’ve seen over the last year is a sharp drop in State and Local employment and a big chunk of that is teachers. This will not continue forever. Local political forces are different than national ones and the push-back against little Johnny having 45 students in his class, or Maggie getting her AP class canceled will be strong and bipartisan.
A few other notes
Construction added at 8K. Its too early to call this the beginning of an upswing, but we should be seeing stronger number here as the year goes on.
Manufacturing added a very nice 24K. That is, a very good number considering how weak the ISM report was.
Mining is of course up and we should expect it to be as long as oil is above 60 – 70 a barrel.
Both retail and leisure and hospitality showed growth but not near what they are capable of. I think we are seeing gasoline prices here. Still the growth is important because these are the industries that employ low skilled workers
FIRE and Information shrank. Our two superstars are still reeling from what is most likely, actual structural transformations.
Going Forward
I still expect the government downsizing to end. That alone will give us stronger reports. I still expect construction to pick-up. That should improve the reports.
Where I am most concerned are with these manufacturing numbers. They do not seem sustainable or inline with my overall expectations. I could be really wrong and we could see a mini-renaissance. However, your baseline expectation has to be for manufacturing employment to fall and to count a slow rate of fall as a strong report.
Yet, right now we are getting 25% of our job growth from manufacturing.
Andrew Gelman recently wondered how so many economists can hold two seemingly contradictory beliefs:
1. People are rational and respond to incentives. Behavior that looks irrational is actually completely rational once you think like an economist.
2. People are irrational and they need economists, with their open minds, to show them how to be rational and efficient.
This, he suggests, raises a puzzle:
“How is it that economics-writers such as Levitt are so comfortable flipping back and forth between argument 1 (people are rational) and argument 2 (economists are rational, most people are not)?”
He provides several examples. First, he quotes Steven Levitt, who argues that people are irrational and “closed-minded” with respect to repugnant ideas, whereas economists are not. But why is this irrationality rather than disagreement he asks?
Another example is Emily Oster, who argues:
“anthropologists, sociologists, and public-health officials . . . believe that cultural differences–differences in how entire groups of people think and act–account for broader social and regional trends. AIDS became a disaster in Africa, the thinking goes, because Africans didn’t know how to deal with it.
Economists like me [Oster] don’t trust that argument. We assume everyone is fundamentally alike; we believe circumstances, not culture, drive people’s decisions, including decisions about sex and disease”
How is it that economists both “assume everyone is fundamentally alike” but also have different beliefs about how people think and act than “anthropologists, sociologists, and public health officials”? That is, how can every be fundamentally alike (rational) if economists have different beliefs than everyone else, and are therefore fundamentally not like everyone else?
Gelman thinks the answer is economists like to associate themselves with rationality, because rational is “good”, or what economists might call high status. They do this by celebrating the rationality of people and by patting economists on the back for their rationality. He says “both are ways of associating oneself with rationality. It’s almost like the important thing is to be in the same room with rationality; it hardly matters whether you yourself are the exemplar of rationality, or whether you’re celebrating the rationality of others”.
I think there’s certainly something to this. But I think a better explanation for some of what Gelman is puzzling over can be found in Bryan Caplan’s Myth of the Rational Voter. Here Bryan agrees with Gelman that rationality is overassumed by many academics. His explanation, however, is that people are rationally irrational. But what does that mean?
Like most economists, Bryan defends the notion that people are rational a lot of the time. But the reason is not some inherent rationality, but because being irrational costs them. So when we are talking about why movie theaters charge so much for candy (one of Gelman’s examples) it’s likely they are being rational because irrational pricing would cost them money.
But when people have no cost to irrationality they may embrace it because they have preferences over beliefs. For instance, when we’re talking about what someone believes about repugnant ideas, they don’t have any monetary incentive to have rational beliefs, and so they don’t.
Bryan argues that the systematic difference between economist and non-economist beliefs comes from four fundamental biases: anti-foreign bias, make-work bias, pessimistic bias, and anti-market bias. (I think you could add an anti-repugnant bias in there as well and explain the Levitt quote that Gelman puzzles over.) So when people don’t have costs to believing irrationally they satisfy their preferences over beliefs, and this leads them to have beliefs that conform to these biases.
Satisfying ones preferences for irrational beliefs when there is no cost to doing so is of course rational, thus giving us rational irrationality.
Economists believe themselves to be more rational when it comes to economic topics because they have incentives to think rationally in the area where they are experts. When it comes to toxicology, in contrast, it is toxocologists who will be rational. But as Gelman has argued before, economics is an imperialistic science, and economists are likely to believe themselves as being experts in just about any subject areas where incentives matter. But how does that explain the different beliefs of, say, economists and the sociologists, anthropologists, and public health officials in the Emily Oster example above? Aren’t they all experts of a sort when it comes to “broader social and regional trend”?
Well the disagreement surely comes from the fact that all three fields tend to operate with different frameworks and ways of looking at things, but quite honestly I don’t know how to account for different frameworks of overlapping experts in the rationally irrational model of belief. Nor can I explain why economists have less biased and more rational beliefs.
David Frum has a pair of nice posts on conservative economic commentary. The money quotes respectively
Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?
and
There’s a strong case for condemning Barack Obama for the things he might have done, but did not do. He might have cut payroll taxes more and faster. He might have pushed for more expansionary Federal Reserve governors. He might have designed a better stimulus. All true. But the things he did do? Texas Gov. Rick Perry today urges us to believe that the economy is gripped by the worst slump since the Great Depression because Obama spoke disrespectfully of the owners of private jets. To which I can only say: Really? That’s the indictment? Really?
The thing to remember is this outpouring of insanity is not the result of a conservative movement that is losing. It is the case that the long run demographic trend is against the GOP and in favor of the welfare state. However, these disagreements are over macro-economic policy not the size and scope of Social Security.
Instead, what we are witnessing is the sad, yet inevitable spectacle of a movement that cannot – as no movement can – survive victory.
Where in the White House are the promulgaters of socialism and class warfare? Where are those suggesting that we even return to the commad and control policies of McCarthy era America? Nowhere that I know of. If I understand correctly Obama is about to push for a decrease in taxes payroll taxes levied on businesses.
We are all neoliberals now and that means that there is nothing to fight over. Yet, a movement survives only to the extent it has something to move against. So we see are left with much of the right tilting at windmills and digging up long discarded economic theory to continue the battle.
I was snuffed at for making this call a few years back. I didn’t call it this time around but nonetheless, the yeild on T-Bills dipped into negative territory this morning
From the WSJ
The one-month T-bill yields zero again, as God intended, and even briefly turned negative this morning, as investors scramble for the safest, most-liquid assets they can find amid a sea of red in the stock market and the slow-motion meltdown of Europe.
The one-month bill maturing on Aug. 11, one week from today, has yielded as low as -0.03% today, according to Tradeweb data.
Now it is hard to look at data like that and say that a major crisis is not upon us. I am rapidly updating my outlook. However, at present it looks like a crisis that has the potential to – yes I am going to say it and yes you may laugh – be contained.
We shall see. The coming weeks will be interesting.
Scott Sumner beat me to it, but this is the best recommendation I can see
Nonetheless, Mankiw (who I’ve recommended before) is the perfect choice. He’d fly through the Senate. Academically impeccable Bernanke and Mankiw, both Republicans, would form a one-two punch that the hawks couldn’t resist. And he’d be pushing for the most expansionary policy that is politically realistic
I just don’t see how this isn’t a no-brainer. The spin-doctors can point to it as an example of Obama’s bipartisanship. The electoral structuralist can point to the fact that anything that helps the economy helps Obama’s chances.
The rest of us can be thankful that a sane pro-stimulus voice is on the Fed and perhaps that the high profile of two conservative New Keynesians will drag the right back into the light.
