Scene from a modern American newsroom
{Reporters and editors staff meeting, Metropolis Times-Post-Globe-Tribune, Monday, August 8, 2011}
“OK, people, this looks like a big week. There’s a lot coming down this week, so we all need to do some serious, in-depth work to stay ahead of the curve. First, we’ve got the downgrade and the associated fallout. I need someone who can look at the aftereffects, and make a guess about what it means.”
“Chief, I’ve been doing some analysis on this, and…”
“Stop right there, Beth. This is another one of those ‘Obama made a mistake’ pieces you want to do, isn’t it? When I hired you last spring, I thought I made it clear that we take a balanced approach here. We need to look for fault on all sides, and respect the office of the presidency. Walt, how about you?”
“Chief, do we have to use the word fallout? On this weekend’s talk shows, everyone was using the term ‘Tea Party downgrade’. I think that’s the right analysis. Why, with that approach, the piece practically writes itself.”
“Perfect. Since that’s the new factor in DC, it’s clear that the Tea Party is the biggest factor in this. Get to work. Beth, what is it?”
“Uh, sir, how does a faction that only controls 1/3 of the majority party in one house of Congress cause this problem in only seven months? Don’t we need to go back further in time for a better analysis?”
“No, this is a newspaper, not some right-wing think tank.”
“But, sir, the articles I read about the Tea Party that we put out last year claimed they were just a bunch of whackjobs who would never have any significant effect on Washington because of their extremism. Don’t we at least need to examine how that changed over the last year?”
“No. Our readers understand how the Tea Party has morphed into a national threat. So the Tea Party downgrade is one direction we’ll go. But we need something with some math in it to explain the whole thirty year future thing. I know we don’t normally do math stuff, but with the stock market dropping like a rock, people need some reassurance on this so they don’t panic. Did anybody in here take calculus? Destiny, I seem to recall that it’s on your transcript.”
“Well, um, yeah, but I don’t remember much of it.”
“Your transcript says you made an A. And it was only two years ago. What gives?”
“Well, see, the teacher and me, we had a sort of arrangement. He was real cute, and I really needed to pass calculus, so…. I really didn’t expect the A, but we hit it off better than I thought we would.”
“OK, anybody else want to tackle that? Not you, Beth.”
“Chief, I know a guy over at MoveOn who is good with charts. I can probably get something good from him.”
“OK, Hunter, that will do. Of course, you’ll want to attribute the original source instead of MoveOn. You understand.”
“Certainly, sir.”
“Moving on, this whole gun running thing just won’t go away. Personally, I don’t see why our readers would be interested in it, but we’ve been taking some flack on the right-wing extremist talk shows at Fox. So we need to do some real investigation here, and find out the real story. It’s pretty clear that those extremists at Fox are trying to gin up a controversy that makes the Obama administration look bad, so we need to counter that with some objective analysis. Who’s up for it? Jeremy, you wrote a couple of articles on it early on. You want to go deep on it?”
“Not really, sir. I can’t get anybody in the Justice Department to talk about it, so I can’t get any balance. They’re scared by the way the whole Scooter Libby thing turned out.”
“Yeah, yet again, the Republicans ruined it for everybody. Can’t you get anyone to talk?”
“The only people I can get are field people, who seem to have an agenda here to push this as a controversy. I think they’ve been influenced by the Fox people. I don’t want to give them a soapbox. All they want to talk about is some dead agent from last year and memos from Obama’s people.”
“Sir?”
“Yes, Beth, what is it?”
“Sir, I think we have to take into consideration that there’s a real conspiracy here, something that would take us to very high levels. This could even be Pulitzer material.”
“Beth, I think you’re absolutely right. Why, given the phone hacking scandals in Britain, who knows what these Fox people are capable of. This might go all the way to Rupert Murdoch.”
“That wasn’t exactly…”
“OK, Jeremy, there’s your angle. Go back to your sources and see if any of them are interested in talking about the Fox conspiracy side of things.
“What do you want me to do about the rumors that the FBI and DEA were involved?”
“They’re just rumors.”
“Yeah, but they have some emails that look a bit incriminating.”
“Probably faked. You know how those right wingers are. First they’ll claim that Rather’s memos were faked to cover up for Bush, then they’ll turn around and fake stuff up themselves. You can’t trust anything you get from them. So stick to reliable sources. Eric Holder says the feds didn’t do anything wrong, correct?”
“That’s what he says.”
“Then you can take it to the bank. We all know there are people out there who would attack Holder just because of his race. He’s an embattled public servant. So let’s make sure the truth gets out, shall we? Now, let’s see what’s next. There was apparently a riot in Wisconsin. A flash-mob thing. I think there was also one in Philadelphia a while back. This looks like a great opportunity for some serious cultural analysis on problems in the inner city. Estelle, didn’t you minor in black studies? You want to work on this?”
“I only glanced at it this weekend sir. Were any of the victims black?”
“I don’t know, I didn’t look at it much either. I’m so tired of Wisconsin. Yes, Beth?”
“Sir, the blogs say all the victims were white, and the mob was black.”
“How many times do I have to tell you to ignore those right wing extremist blogs? We need some primary sources. Estelle, can you get facts on this?”
“What if it turns out the blogs are right and there are no black victims? I don’t know how to handle such a case. Anything I write could be used to attack underprivileged minorities. I thought that was against our mission statement.”
“Well, if that turns out to be the case, just leave race out of it completely. You can at least get some numbers of people arrested and people hurt and so forth. Remember to leave all the names out so people don’t draw any erroneous conclusions and inappropriately make this a racial thing. You can fall back on the underage confidentiality thing for that if you need to. OK, the final big subject is the crash of that helicopter that killed a bunch of SEALs. Clearly, this is a great opening to talk about what Bush did wrong in Afghanistan that has made it a quagmire. Who wants to work on that?”
“I do!” “Me, me!” “Please, can I do that one?” “No, I want to do it!” ….
S & P downgrades Freddie Mac and Fannie Mae
Following the downgrading of the US sovereign debt, S&P has also downgraded the credit ratings of the two quasi-government agencies, Freddie Mac and Fannie Mae, to the same level as the US (AA+). The reason given by S&P:
The downgrades of Fannie Mae and Freddie Mac reflect their direct reliance on the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship in September 2008 and their ability to fund operations relies heavily on the U.S. government. In addition to the implicit support we factor into our ratings, the U.S. Treasury has demonstrated explicit support by providing these entities with capital quarterly, as necessary.
The projected cost to bailout Fannie and Freddie through 2020 is estimated to be between $373 billion and $376 billion. The agencies which Barney Frank assured us were in fine financial shape are, in fact, giant money pits. They are indeed reliant upon the US government for their subsidy as is obvious by the future funding that’s being planned for them. It is believed that approximately $291 billion dollars was necessary in 2009 to prop up the two agencies.
Of course it is possible that the administration will try to attack this finding by S&P as well. However, the reality is the agency’s downgrade has indeed had an effect, no matter how hard the administration and various Democrats attempt to attack the messenger. Everyone has known at some point it wasn’t a matter of “if” the US debt would be downgraded, but “when”. And all the grousing and griping we’ve seen the last few days, all the attempts at blame-shifting and attack politics don’t change that simple bit of reality. Freddie Mac and Fannie Mae’s downgrade simply puts a cherry on the downgrade sundae.
~McQ
Twitter: @McQandO
The Tea Party downgrade
“Look at the history of this – the fact of the matter is that this is essentially a Tea Party downgrade. The Tea Party brought us to the brink of a default.” –David Axelrod, top political consultant to President Obama, in an appearance on “Face the Nation”, Sunday, 7 August, 2011
Damn those Tea Partiers, and their rigid insistence on slashing the Federal budget. If only they were more flexible on spending and increased taxes, we’d be just fine. Their demand that we substantially cut federal spending, balance the budget, and pay down the debt without significant tax increases has now caused S&P to conclude that we aren’t serious about getting debt under control.
That’s the Democrats’ argument anyway. And they’re sticking to it.
I will defer to Protein Wisdom’s Jeff Goldstein for his response:
For all those — both left and (establishment) right — inclined to excuse their own complicity and try to scapegoat the TEA Party, which remains the one faction who actively pushed for serious, actual debt reduction and a return to fiscal sanity, take note here: we recognize that it’s been your strategy since the downgrade to seize on the warnings against “political gridlock” in order to insist that a failure to “compromise” on the part of the TEA Party supporters is what led to the downgrade. We also recognize the dishonesty and cynicism of such a strategy: as has been noted time and again, Cut Cap and Balance was the compromise, with the vast majority of TEA Party supporters in the House voting for the bill, which gave the President his debt ceiling increase in exchange for both real cuts and a mechanism by which to control future deficit spending and debt.
Who didn’t compromise — and whose political intransigence is at the heart of the downgrade — is the Democrats, who refused to come up with their own plan, and who then refused to even allow CC&B come up for a vote. This faction — along with the go along/get along GOP establishment — is now looking to pass blame for their own willingness to block compromise onto the TEA Party.
It won’t work. 66% of the population backed CC&B; 75% backed a Balanced Budget Amendment. What they got instead was more spending (the single largest increase in history) for more empty promises of future cuts in the rate of spending.
This didn’t come anywhere near to what the credit agencies demanded, and it is not lost on us, no matter how feverishly you wish to spin it, that what is missing from any plan but those pushed by the TEA Party is any “‘stabilization and eventual decline’ of the federal debt as a share of the economy,” something that simply won’t happen without real cuts. Raising taxes on “millionaires and billionaires,” even were you to confiscate all their wealth by taxing them at 100%, would run this government for less than a year. And once you confiscated it all, you’d have to then look elsewhere for new “revenues” to keep the government running.
The political class is unwilling to accept a simple premise: They’ve looted the system. And they’ve looted it to such an extent that some notional increase in revenues obtained by taxing the "rich" can never make up for the spending.
Blaming the downgrade—or anything else—on the only group in America who are willing to fix the problem, rather than kicking it down the road as far as they can, is just a non-starter.
Or, it would be, if there weren’t so many people who weren’t so desperate to believe the gravy train can roll forever.
~
Dale Franks
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The death of the social democratic welfare state
Margret Thatcher boiled it down to its essence years ago – “the problem with socialism is you eventually run out of other people’s money”.
Janet Daley, writing the the UK’s Telegraph, hits a proverbial homerun with her macro look at the “situation” in which both the US and Europe find them selves. It’s not a pretty picture, but quite accurate. Per Daley, what we’re going through right now, at least on the European side of the pond, isn’t some esoteric debate about a crisis that will eventually be solved, it is the predictable endgame of the premise that a capitalist system can support an ever expanding social welfare state. Per Daley, the answer seems to be a pretty obvious “no”.
Her reasoning for her conclusion is painful for those who want to believe that such a premise is actually attainable. Let’s take a look:
The truly fundamental question that is at the heart of the disaster toward which we are racing is being debated only in America: is it possible for a free market economy to support a democratic socialist society? On this side of the Atlantic, the model of a national welfare system with comprehensive entitlements, which is paid for by the wealth created through capitalist endeavour, has been accepted (even by parties of the centre-Right) as the essence of post-war political enlightenment.
This was the heaven on earth for which liberal democracy had been striving: a system of wealth redistribution that was merciful but not Marxist, and a guarantee of lifelong economic and social security for everyone that did not involve totalitarian government. This was the ideal the European Union was designed to entrench. It was the dream of Blairism, which adopted it as a replacement for the state socialism of Old Labour. And it is the aspiration of President Obama and his liberal Democrats, who want the United States to become a European-style social democracy.
The left in this country can deny this all they wish, but Daley succinctly lays out the Democrat’s “ideal” in plain English. Any attempt to deny that is simply counter-factual. European-style social democracy has been the ideal of Democrats for years. And the fight over entitlements makes the point. The difference between the US and Europe is two-fold. We thankfully began pursuing that ideal much later than did Europe and the basic difference in make up between Europe and the US is the primary reason:
But the US has a very different historical experience from European countries, with their accretions of national remorse and class guilt: it has a far stronger and more resilient belief in the moral value of liberty and the dangers of state power. This is a political as much as an economic crisis, but not for the reasons that Mr Obama believes. The ruckus that nearly paralysed the US economy last week, and led to the loss of its AAA rating from Standard & Poor’s, arose from a confrontation over the most basic principles of American life.
Contrary to what the Obama Democrats claimed, the face-off in Congress did not mean that the nation’s politics were “dysfunctional”. The politics of the US were functioning precisely as the Founding Fathers intended: the legislature was acting as a check on the power of the executive.
Precisely. None other than Cokie Roberts noted the “problem” we have here that Europe doesn’t on one of the Sunday shows.
That “problem” and a different but eroding view of the role of government. And all though we’re on the precipice, that “problem” is all that have kept us from sliding into the pit Europe has dug for itself over the decades.
What is going on now is not the fault of the Tea Party, no matter how hard the spinners like David Axlerod and John Kerry attempt to make it so. In fact, the Tea Party contingent actually represents that fundamental but eroding view of the role of government and the “problem” Cokie Roberts refers too.
The Tea Party faction within the Republican party was demanding that, before any further steps were taken, there must be a debate about where all this was going. They had seen the future toward which they were being pushed, and it didn’t work. They were convinced that the entitlement culture and benefits programmes which the Democrats were determined to preserve and extend with tax rises could only lead to the diminution of that robust economic freedom that had created the American historical miracle.
And, again contrary to prevailing wisdom, their view is not naive and parochial: it is corroborated by the European experience. By rights, it should be Europe that is immersed in this debate, but its leaders are so steeped in the sacred texts of social democracy that they cannot admit the force of the contradictions which they are now hopelessly trying to evade.
Facts are a stubborn thing. They have a tendency to destroy beliefs and perceptions. The belief and perception of the “premise” that a capitalist system could forever support an expanding social welfare state is in the throes of being dashed upon the rocks of economic reality. That’s a harsh thing to see if it is your belief. And we all know the various stages of grief. Right now, the true believers are in the “denial” stage. The only one’s dealing in reality are the Tea Partiers. Like the canary in the coal mine, they’ve alerted us to a mortal danger that has been acted out in Europe and is now collapsing from within. They’ve accurately pointed to our problem and how it will lead to the very same conclusion. They’re demanding we stop pursuing that reckless and doomed “ideal” and return to our fundamental governing ideals – limited government, less costly government, less intrusive government.
And, of course, the true believers in the social welfare state, those who’ve gotten us into this mess and want to deny the problem and continue the pursuit of their destructive ideal are resisting with every fiber of their being and ironically, calling the Tea Partiers the radicals.
What the left can’t control though is the example of our future that Europe provides, like it or not:
No, it is not just the preposterousness of the euro project that is being exposed. (Let’s merge the currencies of lots of countries with wildly differing economic conditions and lock them all into the interest rate of the most successful. What could possibly go wrong?)
Also collapsing before our eyes is the lodestone of the Christian Socialist doctrine that has underpinned the EU’s political philosophy: the idea that a capitalist economy can support an ever-expanding socialist welfare state.
Phenomenally, while the problem becomes more and more undeniable, the solutions being considered are precisely the opposite of what is needed.
As the EU leadership is (almost) admitting now, the next step to ensure the survival of the world as we know it will involve moving toward a command economy, in which individual countries and their electorates will lose significant degrees of freedom and self-determination.
That’s right – those who, through the years, have managed to put us in this situation now think they need more control, intrusion and command, not less. Those who’ve managed, through their policies and ideology, to wreck the best economies on earth, want more power. They won’t let go of the belief, despite the reality. Take for example the Democrats almost single focus on higher taxes. They still believe they can have their cake (or your cake actually) and eat it too.
We have arrived at the endgame of what was an untenable doctrine: to pay for the kind of entitlements that populations have been led to expect by their politicians, the wealth-creating sector has to be taxed to a degree that makes it almost impossible for it to create the wealth that is needed to pay for the entitlements that populations have been led to expect, etc, etc.
The only way that state benefit programmes could be extended in the ways that are forecast for Europe’s ageing population would be by government seizing all the levers of the economy and producing as much (externally) worthless currency as was needed – in the manner of the old Soviet Union.
That is the problem. So profound is its challenge to the received wisdom of postwar Western democratic life that it is unutterable in the EU circles in which the crucial decisions are being made – or rather, not being made.
Daley speaks of the EU, but listen carefully to the left and the Democrats in this country. They’re offering exactly the same “solutions” and this administration is attempting that solution by executive fiat through regulation. Look at the health care grab as well. We’re headed down exactly the same road Europe has traveled and the left in this country is telling everyone to ignore the road signs telling us so.
The Tea Party has figured that out as have many on the right. But the left wants to go right on pretending it isn’t so:
We have been pretending – with ever more manic protestations – that this could go on for ever. Even when it became clear that European state pensions (and the US social security system) were gigantic Ponzi schemes in which the present beneficiaries were spending the money of the current generation of contributors, and that health provision was creating impossible demands on tax revenue, and that benefit dependency was becoming a substitute for wealth-creating employment, the lesson would not be learnt. We have been living on tick and wishful thinking.
Couldn’t agree more. We ‘radicals’ who’ve been saying this for years have been proven to be factually correct. It is an inconvenient truth the left doesn’t want to either accept or admit. So the still hold on to the belief that if they could only make the ‘rich’ pay their fair share, they’d find utopia still achievable. Reality, however, in the guise of the European experiment now imploding, already provides proof their theory has no basis in truth.
So what is the solution? Well in the short term Daley prescribes some bitter but necessary medicine:
So what are the most important truths we should be addressing if we are to avert – or survive – the looming catastrophe? Raising retirement ages across Europe (not just in Greece) is imperative, as is raising thresholds for out-of-work benefit entitlements.
Lowering the tax burden for both wealth-creators and consumers is essential. In Britain, finding private sources of revenue for health care is a matter of urgency.
More importantly though:
The hardest obstacle to overcome will be the idea that anyone who challenges the prevailing consensus of the past 50 years is irrational and irresponsible. That is what is being said about the Tea Partiers. In fact, what is irrational and irresponsible is the assumption that we can go on as we are.
Dead on. Fundamental change. Backing government out of our lives. And we’re dead meat if we don’t heed and act on the fact that the social welfare state is a zombie (but doesn’t yet know it) and we need to finally and irrevocably kill it, never let it rise again, and return to the ways which made us great and are enshrined in our founding documents.
~McQ
Twitter: @McQandO
The first post-downgrade business day
The yield on the 10-year note has dropped to 2.44%, down from 2.57% at Friday’s close. I’m thinking this is telling us the economy’s on the way into the toilet, as the standard reaction for a credit downgrade is rising interest rates, to cover the extra risk. The Dow’s long slide, which began on 22 July–and continues with a 250 point loss so far today–is probably telling us the same thing, as earning expectations slide. Since the downgrade was one agency only, and the downgrade only to AA+, economic factors are clearly weighing more on the bonds than the downgrade. On the other hand, if you’re a gold investor, you’re probably a little happier today, as Gold hit $1,715/oz.
The key takeaway so far today is the continuing decline in yields, which isn’t good news. Thank goodness there’s no economic releases today. I’d hate to see what more bad news would bring.
So, back into recession, it looks like.
One of the more interesting things I’m wondering about, in a horrified kind of way, is what effect the downgrade has on corporate paper. A number of institutions have investment rules that require they concentrate their investments in AAA-rated securities. But, one of the general rating rules is that subsidiary corporate and government instruments cannot have a higher rating than their sovereign instruments. So if the US Government doesn’t have a AAA rating, no subsidiary US corporate or government paper should have a AAA rating either.
So, what does this mean for the handful of corporate and government instruments that were rated AAA prior to the downgrade? Do they get downgraded, too? If so, where do the institutions with a AAA rating requirement go with their money?
I’m not at all sure how this works. As we’ve been saying a lot in the last week or so, we’re in uncharted territory.
END OF DAY WRAP-UP: Well, that could’ve been worse, I suppose.
| INDEX | Close |
| Dow | 10,810.83 -634.76 (-5.55%) |
| S&P 500 | 1,119.46 -79.92 (-6.66%) |
| NASDAQ | 2,357,69 -174.72 (-6.90%) |
| 10-Year Yield | 2.34% -0.22% |
| Comex Gold | $1,710.20/oz (+3.7%) |
I’m not sure how much worse it could’ve been, though.
~
Dale Franks
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Global markets off after US credit downgrade
As expected global market reaction to the US credit downgrade has been anything but positive.
Global stock markets sank again Monday as worries over the downgrade of U.S. debt outweighed relief at a European Central Bank pledge to buy up Italian and Spanish bonds to help the two countries avoid devastating defaults.
European markets shed their early momentum and losses were heavy in Asia. Most stocks were trading sharply lower amid mounting fears over the opening of U.S. markets, when traders will have their first chance to respond to Standard & Poor’s momentous decision to lower its triple A rating for the U.S.
"The reverberations from S&P’s downgrade are still being felt across the globe," said David Jones, chief market strategist at IG Index.
The European Central Bank’s buy of Italian and Spanish bonds – two Euro countries in deep financial trouble – at first seemed to allay the expected downturn. However that was later reversed and global markets saw a sharp downturn.
At this time one can only speculate what will happen in US markets, but the global sell off is not a good sign.
Monday’s trading came after one of the worst market weeks since the collapse of U.S. investment bank Lehman Brothers in 2008 – around $2.5 trillion was wiped off global stocks last week.
In Europe, Britain’s FTSE 100 index of leading British shares was down 1.7 percent at 5,157 while France’s CAC-40 fell 1.6 percent to 3,227. Germany’s DAX was 2.3 percent lower at 6,091.
Sentiment in Europe was hurt by an expected sell-off at the U.S. open – Dow futures were down 1.8 percent at 11,196 while the broader Standard & Poor’s 500 futures fell 2.1 percent to 1,173.
The one bright spot in an otherwise dismal picture is the US Treasuries market. And “bright spot” is a relative term considering the rest of the markets:
So far, the S&P downgrade doesn’t seem to be having too much of an impact on U.S. government bonds, known as Treasuries. The worry has been that the downgrade would prompt investors to demand more, but the yield on ten-year Treasuries has actually fallen.
"Early market reactions suggest that the treasury market will remain well supported," said Jane Foley, an analyst at Rabobank International. "Even though there may be no sharp sell-off in treasuries this week, S&P’s decision should at least provide a signal to the U.S. government that it may be foolhardy to continue to take its creditors for granted indefinitely."
Two points. One – yes, it should provide such a signal. However, if that signal isn’t acted upon and acted upon swiftly, then two – the treasury market will not remain well supported. Interest rates will rise on demand by investors and servicing our debt will cost more and more.
To add more fuel to the fire, there’s this:
"Investors are concerned about a rising risk of global recession, credit downgrades especially now in the eurozone, such as France, the threat of a major bank bust and a global liquidity trap as investors stay in cash," said Neil MacKinnon, global macro strategist at VTB Capital.
So much to watch and consider. While this may not be the most interesting news to read about, none is more vital. The problems in both Europe and the US have a far reaching effect on global markets. And they will have an effect, at some point, on everyone’s wallet. We’re in uncharted territory here, and unfortunately, there are no easy and painless ways to solve these problems.
~McQ
Twitter: @McQandO