Monday, August 08, 2011
Secretary of the Treasury Geithner attacked Standard & Poor's, saying it showed "terrible judgment."
"They've handled themselves very poorly. And they've shown a stunning lack of knowledge about the basic U.S. fiscal budget math," Geithner said in his first public comments about the credit rating decision.
The clip has been running more or less non-stop on CNBC all morning.
One is forced to wonder whether it is wise for the Secretary of the Treasury, however stung that his debt has been downgraded, to attack S&P. There are at least two reasons why it might be wise, neither of which are creditable, but in the main the attack would seem to boost S&P's credibility, which is the only thing it has going for it.
Back to first principles. Standard & Poor's is just a bunch of dudes who express their opinions about credit. You and I are also entitled to do that (see, inter alia, the First Amendment). The value of the ratings (apart from some residual regulatory impact because the government has not written the enabling regulations for Dodd-Frank) depends on whether investors find them credible. That credibility has suffered grievously since the financial crisis. S&P (along with the other agencies) is fighting to preserve its credibility.
Now, when the Secretary of the Treasury starts popping his veins with rage over S&P's decision, he looks just like an intemperate CEO who loses his mind because some analyst downgrades his stock. No difference, and with the same result: The angry response only enhances the credibility of the analyst (or rating agency) that issues the downgrade. Tim Geithner's defensive rant runs the great risk of persuading investors that they should pay attention to S&P.
If Geithner's objective is to discredit S&P and blunt the impact of the downgrade, it would have been far smarter to act like they are just dopes that nobody ought to listen to. He might have said "Look, these are just a bunch of analysts with spreadsheets who are expressing an opinion as they are entitled to do under the First Amendment. There are lots of people with lots of opinions about the credit of the United States, and many of them will think that S&P is wrong, and that is the beauty of free markets. We look forward to the day when S&P reconsiders its views, but until then we will manage the finances of the United States taking the interests of all its citizens in to account."
The only problem with the "ignore 'em" approach, of course, is that Obama administration has been in a state of high anxiety over the rating agencies for weeks, which has enormously boosted their credibility. Geithner is therefore in something of a box -- playing it cool now only makes his boss appear easily panicked, which is never a good look for a president. In other words, the linkage of the downgrade risk to the debt ceiling negotiations, which came from the White House, effectively confines the administration's response to the downgrade to ranting, which only makes the downgrade worse.
Of course, there are at least two less creditable reasons for the administration's assault on S&P. First, it needs a political scapegoat, and the credit rating agencies are easy targets because of their shoddy practices in the mortgage market. Second, it must be hoping to intimidate Moody's and Fitch in to maintaining the top rating. The problem with the intimidation approach, though, is that it must succeed or it will fail massively. If S&P emerges from the fight stronger rather than weaker (as I suspect it will), Moody's and Fitch will notice that defying the
Release the hounds.
MORE: Thank you, Glenn, and welcome Instapundit readers.
S&P has "shown a stunning lack of knowledge about the basic U.S. fiscal budget math"
Timmy, your nose is growing. That's a whopper, even for you. Maybe Timmy wants the markets to force his resignation, because Obama won't let him quit.
PIMCO's Bill Gross today: "[S&P] spoke to a dysfunctional political system and deficits as far as the eye can see. They are enforcing some discipline. My hat is off to them."
"Debt to GDP" is the key metric for assessing sovereign risk. Ours has grown rapidly over the last five years. We're no longer in the ranks of countries like Canada, which is still AAA. The pace of growth in ours is particularly troubling. We have no plan for how to control it.
You can only argue that we should be AAA because we have a man behind the screen with magical powers -- Ben Bernanke. But if the QE3 doesn't sail soon, we'll find out how hard it is for us to borrow $1 trillion a year in the real markets. Ben is keeping twenty plates spinning on twenty sticks. He can't keep it up forever.
If we had real auditors of our government's books, we'd be forced to put Fannie and Freddie on-balance sheet, etc etc. That'd blow up our ratio of "Debt to GDP" significantly, way past any nation in Europe.
Ireland is a canary in the coal mine, and has a different set of problems from the other PIIGS. I expect that the young in Ireland will revolt at the polls over the prospect of a lifetime of involuntary servitude paying for a full bailout of the blatant theft that went on between real estate speculators, the Irish banks, and Irish politicians. They'll have Ireland default and then hit the big reset button. I'd bet this happens inside of five years. Interesting precedent, no?
One would hope for, but not realistically expect (from Timmy or the POTUS), something more dignified: "we respectfully disagree with those analysts/corporate financials tools, who screwed up the calculation by n-trillion" for the following reasons ... US remains strong, blah blah blah
The reality though, is that Mr. Bully Pulpit ranted about how if he didn't get another zillion Trillions for continuing hope-change that the ratings agencies (thereby giving them huge street cred) would do this very thing.
Now, since Bama really only got about 1T for now, he set them up, and just looks like a jagoff for whining about it. He told us what would happen, and it did. Not unlike 'us people living on less of our money'.
In the end, I think it makes you go back to what S&P actually said, which is that our entitlement programs are bankrupting us, and putting the full faith and credit of the USA, and our future, in jeopardy. The did NOT say it's because of the Tea Party, and went out of their way to emphasize so.
As with the Presidents inartful Boehner negotiating strategy, the lack of any meaningful experience shows.
When Obama was able successfully negotiate an $800 billion tax increase with Boehner he should have closed his deal but, instead (and like the amateur he is), he tried to reopen the negotiation at the last minute and get more. Any person with high level negotiation experience could have told him what a terrible idea that is, and how it is almost certainly both doomed to fail and causes an acidic deterioration on future relations with your negotiating partner since it teaches that you cannot be trusted, but instead he went ahead and blew up his own deal. Similarly, Secretary Geithner is letting his inexperience show (again) in these ridiculous methods of dealing with S&P.
If he isn't careful, he will practically force Moodys and Fitch to follow suit.
We should add the credibility of S&P, Moody, and Fitch comes from the Fed (and remember, Geithner was President of the New York Fed). The Fed has authorized these three, and only these three, as ratings agencies. A primary purpose of these rating is to provide AAA ratings when deserved. Securities with a AAA rating are valued at face value for bank capital requirements.
The President, Secretary of the Treasury and Administration officials ambasting S&P officials is akin to Gen. Custer teeing-off on his Scouts about the precise number of Sioux on the other side of the hill.
I keep wondering how long it will be before we hear the tales from inside the white house about how Obama is breaking down in private as the awesome responsibility he bears collides with his total lack of experience and incompetence and this finally breaks through his shell studied coolness. In his heart the man KNOWS he is not up to the job. I would almost feel sorry for the fool if he was not so arrogant.
How could anyone use the words "smart" and "Obama administration" on the same page?
Some one should warn Obama that every time he opens his mouth, he adds to the stereotype that black American politicians are dumb, lazy, shiftless and mendacious.
S&P is not just a bunch of guys. They are an anointed group (by govts, international banks) to rate the credit of bonds. Really. Just read Reckless Endangerment.
Anyway, Geither didn't complain when S&P was giving AAA to those junk mortgage bond.
The corruption is so deep, there is little reason to hope for a good outcome.
Obama has yet to realize that the best way to retrieve/trim/redistribute wealth from the rich and create jobs among the poor is to allow, indeed encourage, default and bankruptcies of local governments.
That would allow cities and states to balance their own budgets. Once in balance they would hire more teachers, firemen and policemen.
That should work at the Federal level as well.
Sarah spoke out today:
"One doesn't need a Harvard Law degree to figure this out! ... By what magical thinking did we figure we could run up perpetual trillion dollar deficits and still somehow avoid the unforgiving mathematics of a downgrade? Nothing is ever 'too big to fail.' And there's no such thing as a free lunch. Didn't we all learn that in our micro and macro econ classes? I did at the University of Idaho. How could Obama skip through Columbia and Harvard without learning that?"
That's right. You don't need a Harvard Law degree to understand this. You go girl!
Take note Obama/ Geithner et al, this is how a smart guy does it:
"The Standard & Poor's downgrade of the U.S. credit rating, which threw the stock market into freefall Monday, is "just an opinon," Dimon said. "It's a well thought through opinion...But most of the people I speak to in the marketplace, the big participants, they don't rely on S&P ratings to make their decisions."
However, he agrees with S&P that "the United States needs to show fiscal discipline. We need to show it for ourselves, not because of China, not because of S&P...I'm hopeful we can show that soon."