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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 06 Aug 2012 12:06 AM PDT
Posted: 05 Aug 2012 02:22 PM PDT
Mike Konczal says financial markets have rightfully ignored the political theater posing as analysis involved in the S&P downgrade of US bonds a year ago, a downgrade that, to the extent that it mattered at all, "collapsed demand" and hurt the economy by giving ammunition to proponents of immediate austerity:
A Year After S&P's Rating Downgrade, US Treasuries Trade 1% Lower, by Mike Konczal: On August 5th, 2011, one year ago today, S&P downgraded the United States from AAA to AA+. This was four days after Congress voted to raise the debt ceiling. S&P did this because they didn't like the politics of the debt ceiling, implicitly blaming the Republicans' aggressive threat of a default on the national debt to obtain their political goals. "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." And they did this because they wanted to nudge Congress to make big, Grand Bargain type changes. S&P was worried that, in the aftermath of the debt ceiling agreement, "new revenues have dropped down on the menu of policy options" and "only minor policy changes on Medicare and little change in other entitlements" would potentially be achieved in the near future.
Analysts at Treasury quickly noted, after reviewing the numbers, that S&P made a $2 trillion dollar mistake, which dramatically overstated the medium-term debt levels of the United States that were their economic justification. S&P stood by their downgrade while admitting the error.
The United States losing its AAA rating was a political shock. The verdict was quick from the center and the right - this would be incredibly harmful to the United States' ability to deal with its national debt. When S&P first brought up the possibility of the downgrade in July, the centrist think tank Third Way highlighted that "S&P estimates that a downgrade would increase the interest rates on U.S. treasuries by 50-basis points," and urged "Congress and the Administration [to] come together and pass a 'grand bargain' that will put us on a sustainable path and avoid a credit downgrade." ...
Did the downgrade increase interest rates on U.S. Treasuries 50-basis points? ... Here's FRED data on Treasury 10 years:... They are down a little over 1 full percentage point, from 2.58 percent to 1.51 percent. If you want to consider the baseline the 3 percent interest rates from right before the downgrade, or the 2 percent interest rates that happened afterwards, then rates are down either 1.5 or 0.5 percentage points. That's a major decline in the borrowing cost of the United States. One can't find the increase in rates in this market. Counterfactuals are difficult - perhaps S&P is correct, and 10-year Treasuries would be closer to 1 percent had there been no downgrade.
But that seems unlikely. ... A year later the downgrade appeared to have been irrelevant to United States' borrowing costs. To the extent that they were relevant they signaled and reinforced a further move away from potential stimulus for the economy, which collapsed demand and drove even more money into government bonds and the interest rate down to 2 percent almost right away. But either way, low interest rates on US debt continues their downward march. Contrary to S&P, the financial markets are calling for a larger deficit, not a smaller one.
Posted: 05 Aug 2012 11:35 AM PDT
Simon Wren-Lewis:
Watching the ECB play chess: ...I cannot help reflecting on is the intellectual weakness of the position adopted by Draghi's opponents. These opponents appear obsessed with a particular form of moral hazard: if the ECB intervenes to reduce the interest rates paid by certain governments, this will reduce the pressure on these governments to cut their debt and undertake certain structural reforms. (Alas this concern is often repeated in otherwise more reasonable analysis.) Now one, quite valid, response is to say that in a crisis you have to put moral hazard concerns to one side, as every central bank should know when it comes to a financial crisis. But a difficulty with this line is that it implicitly concedes a false diagnosis of the major problem faced by the Eurozone.
For most Eurozone countries, the crisis was not caused by their governments spending in an unsustainable way, but by their private sectors doing so (for example, Martin Wolf here). The politics are such that the government ends up picking up the tab for imprudent lending by banks. ...
It's not just in Europe, the false narrative is thriving in the US as well. Bankers, with the help of their purse string controlled puppets in government, have been able to successfully blame our budget problems on social insurance and other government spending they oppose. According to this narrative, our budget problems have nothing to do with the Bush tax cuts, higher spending on the war, and the the loss of revenue and higher spending on social programs from the recession, it is Social Security and Medicare that are the problem. As for the recession itself, it wasn't financial executives in the private sector who made the bad decisions that caused our problems (as they made a mountain of money along the way), it was bad government housing policy that was somehow to blame. And, of course, to solve the problem we shouldn't use higher taxes to claw back any of those large, large gains those at the top made during the bubble years -- gains that in the end hurt our economic productivity instead of helping it -- instead we should reduce the social insurance for typical, working class households that had nothing to do with causing the crisis. After all, if we were to take back the "rewards" those at the top got for crashing the economy, we'll take away their incentive to do it again. Can't have that. It is much better if the "reward" to middle class households for enduring the problems associated with a crisis caused by the financial sector and the executives in charge is to reduce protection against such problems in the future by taking away or reducing social insurance. The people at the top cause the problems, and everyone else pays the cost. What could possibly create better incentives for growth, and be fairer than that?

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