Arrogance of Self-Appointed Judges of U.S. Credit

First, S&P and Moody have made hash out of their duty to be independent and assess the worthiness of bucketsful of real estate-related securities in the first decade of this century. Now on the rebound they are trying to regain their balance and reputations by heroically assessing and talking about their intentions to DOWNGRADE the AAA rating of the credit of the United States of America. I have seen a lot chutzpah in my 80 years. This may take the cake!

While it is true that it may seem late to be criticizing them for downgrading, since they have been holding a AAA rating for decades, it now seems clear that they should never have been rating U.S. government credit because whenever they changed their mind the horrible situation that now prevails was inevitable and should have been anticipated.

Their gall in sitting in judgment appalls me because, while the first amendment obviously applies, there is one major exception to the first amendment which is that “one cannot cry fire in a crowded theatre.” This bit of theatre coming out of Washington (and it is real political theatre with all its foibles) is crowded beyond debate. They are piling on in ugly fashion and making a bad situation worse.

And beyond the bad taste and judgment they are exhibiting, they are probably (or should be) violating some National Security law which prohibits people from doing or saying treasonous things which could be harmful to the national interest. And, even if they are and/or turn out to be right, their involvement is likely to have a self-fulfilling effect on the outcome. Therefore they have a serious conflict of interest (brought about by their motives at this time) which should be immediately and thoroughly reviewed in the national interest.

And, even if they are right, (which they very well may be), they are brutally and blatantly entering the political arena and trying to affect the political process. While I agree with almost everything they have said, and I normally would metaphorically kill to protect their right to say whatever they think, this case is so special and different I think their whole involvement in the sovereign rating of the U.S. should be reconsidered.

Moreover, what they are doing is not necessary. The bond markets do not need their views to make assessments of the situation. The markets by themselves are the best indicator of what everyone needs and wants to know. Rating agencies exist to tell investors what they cannot easily learn on their own. Our domestic bond and equity markets and the global market for the dollar, are open and transparent and are better judges of the sovereign risk of the United States than traditional commercial credit analysts. At best or worst, rating agency views are most likely misleading icing on the cake.

Ironically there is one plus to their mistake: it should put increased pressure into the political system to fix the problems. Still, it seems inappropriate for such a group of incompetents to be this deeply and importantly involved in such an important political problem — even if they are, in fact, correct!

There is another related problem with PIMCO, probably the largest owner/manager of fixed income securities including vast quantities of U.S. treasuries of various denominations and duration. Pimco has been in recent months making very clear their negative view on U.S. credit and they claim they have sold all their U.S. treasuries. NOW they are making loud pronouncements AGAINST the credit standing of the U.S. contributing to further weakness in those markets. Don’t they have a rather serious conflict of interest? It smacks of promoting a run on a bank to benefit from the fall of the bank shares to cover a short position. It may be one thing to attack a bank but perhaps there is or should be a national security issue in promoting a run on the credit of the U.S.  If a foreign government were doing such a thing, there surely would be a big stink!

These are unusual issues that may be a case of first impression, because this may be the first situation in modern times in which these kinds of facts have occurred and come together. At a minimum it would be a good idea to air widely these issues now and start a discussion.

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An Imagined Speech, Yearned for by Many

Folks, people keep telling me I have lost the narrative and am not coming across in a way that explains the economy and what my administration is trying to do about it. I thought I was laying it out in a straightforward and simple way, but perhaps it requires more ‘personality’ to connect to you all who are caught up in the horrible drama we find ourselves in today. So listen up, here is a new type of message, with the same basic facts, to help you think about the America we are living in today.

Just about the same time that I secured the nomination for President in June 2008 things began to really turn sour in our financial system and economy. Two giant investment banking firms on Wall Street failed before the election in November, brought down by their greedy mistakes and excesses largely due to real estate finance and something related called derivatives, which are as risky as atom bombs.

As a result, also before the election, the nationwide banking system of the country began to freeze up and banks no longer trusted each other or even their best customers. That led to thousands of businesses all across the country letting employees go, as customers who could not borrow stopped buying and suppliers also stopped manufacturing and shipping. By January 20, when I actually became President, the unemployment rate had already risen to close to where it is today. The economy was clearly in free fall. So we had to move really fast to put a tourniquet on the bleeding country and find some way to prop up things and reverse what was about to become a slide into a full-fledged depression.

Why do I tell you this story now? Some people say I am simply trying to set up an excuse for why we are still struggling with these problems three years later. It is tempting to make that mistake, I know. The truth is, you really have to understand how we got to where we are now and what it will take to get us all out of this mess.

It is irrelevant that we got there on another President’s watch and I am not saying not to hold me responsible simply because I did not cause the problem. But, as I am responsible now, I am saying we have to be careful not to compound the kind of mistakes that got us in the mess in the first place with new mistakes now, which Republicans in the House and Senate, who are bent and determined to bring me down, are trying to force on us, even if they have to bring the whole economy, and you, down at the same time.

I would be willing to sacrifice a second term, if I believed that my successor could and would do the things necessary to get your bacon out of the fire. But, given what we all see they are proposing, it is clear to me, and most serious economists in the country, that what they are proposing now would almost surely push the whole country into a deeper and longer lasting hole. I cannot stand by passively and let that happen to you, my friends, and to our country.

Now, let’s go back to January 2009. We held taxes to the level they had been; we passed a $750 billion stimulus package (which, with hindsight, probably should have been bigger); we got the banks (too slowly, I agree) back into their business of lending; we saved General Motors and Chrysler and a few hundred thousand jobs; we took painfully slow first steps to get the real estate world back on its feet; and despite ferocious resistance, we started to reform Wall Street.

But we also know that the only way to get the country back to work is to regain peoples’ confidence. Trust and confidence is the bedrock of a free economy. We have to fear the fear of failure. I have always believed that when we get the country to regain our self-confidence in our future, while the path ahead will be thorny and arduous, it will take us to where we all want to be.

To get people back to work and into stores they need both confidence in the future and opportunity; that in turn leads to more goods and services and jobs. It truly is a virtuous circle. Only the private sector and its private employers can make that happen. Your government cannot simply order it. (If only we could, we would have.)

Our job is to create the conditions that enable and encourage private employers to add employees. While more infrastructure investment is essential, by itself it cannot be sufficient to get the economy fully back on track. And the last thing we need today is to expand public employment simply to replace lost private jobs.

We also knew that because it took a long time (like a couple of decades) to create the problem — 10 million excess homes and several million excess cars, just for starters — that it is inevitable that it must take a fair amount of time for those excesses to be worked off and recreate the kind of equilibrium that can become a new springboard to growth again.

Those are the hard, simple facts we faced in January 2009 and still face today to a greater degree than anyone would like. We did get the auto business back on track. But housing still is struggling with an excessively large overhang of foreclosed and abandoned homes.

Happily, many larger companies are doing a lot better today, but unhappily they are not the most important part of the economy that can create the most new jobs. Small businesses, taken as a whole, are by far the largest source of employment in America. Despite all the headwinds we have all faced there have been two-and-a-half million new private sector jobs created in the past two years, far short of what we need, but a reassuring start in the right direction. We are definitely on the right track but we have to stay the course and reinforce the policies and programs that my administration has begun.

That is where the current stalemate with Congress has become the big stumbling block. Yes, we need to work on our ever-growing national deficit, but if we try to do that too fast we are very likely to throw a body block to the economy and knock it back on its heels again. We must create more employment incentives as well as continue to protect the unemployed. The very rich can definitely afford somewhat higher taxes and we can seek some reductions in entitlement programs. But, if we make the kind of across the board budget cuts the Republicans propose, there is a very great risk they will throw the economy back into a recession or worse.

My program is not rocket science. It is straight forward, plain vanilla, sound economic good sense. And, I will continue to try to tell you the story in terms that you can relate to your personal everyday lives. Please do not think of me trying to save my job. That will take care of itself, if I can make you understand how I will save your job and help your neighbor regain his. Then, even though it may take longer than we all wish today, we can get back to the American dream of a bright future.

Economics Without Tears?!

It is certainly neither accidental nor irrelevant that economics was dubbed “the dismal science” by Thomas Carlyle in the 19th century. The term was intended then to be derogatory, as an inversion of the phrase “gay science” which meant “life enhancing knowledge.” In all events, ‘dismal’ implies ‘gloom and depression’ and, sadly, today economic discussion tends far too often to move in that direction. In fact, there remains a long-running debate about whether economics is a science at all.

That said, economics is now more real and important than ever, but simultaneously it also seems to be more opaque than ever.

When I was a child 75 years ago I had a book entitled Reading Without Tears, which I loved and still credit with my lifelong passion for reading. Perhaps a book today called Economics Without Tears might make the subject more accessible to more people. It certainly could not hurt.

A real problem is that far too few people in modern society have any real idea of what experts are talking about when they start talking about the all-important subject today, the economy, in ecospeak terms. And, that includes our brilliant, law professor, experienced President who mainly speaks soundly and wisely, but often not understandably, to the public about vital economics issues — issues which underlie the policies he proposes to fix the economy and create jobs. And, if they fail to understand his language, often they fail to understand his arguments and have a hard time supporting his ideas and goals.

Sometimes it verges on the embarrassing to test that hypothesis. For example, start with yourself: can you simply, quickly and easily explain the difference between ‘fiscal’ and ‘monetary’ policy? That question, put to a random but educated collection of acquaintances, yielded only one person out of about 20 who answered affirmatively, and his answer was only about 75 percent correct.

Actually, the answer is really pretty simple and straightforward:

  • fiscal policy is about taxes and government expenditure;
  • monetary policy is about interest rates and availability of money and the Federal Reserve Bank.

People who deal with the subject every day appear to assume that everyone understands and then rarely speak in anything other than ecospeak. There is nothing wrong with people who do not know ecospeak, but there is something the matter with our system that keeps them in the dark.

The big problem with the public’s (which surely includes most of the Congress) incomprehension of economic discussions is that, as a democratic society, we are doomed to have to live with economic policy making that requires actual public involvement and support, which today often springs out of serious distortions and misunderstandings of reality.

One way of thinking about economics is to think of it as beginning with a language that creates a kind of shorthand notational system for recording and describing societal/human behavior into terms that can be measured, tracked and influenced by various factors to create better conditions for all who are touched by economic activity, which is just about everybody.

As an illustration, for example, in the mid 20th century, one of that period’s first and great conglomerate builders and managers was a British-born accountant who was the driving force behind a then very successful giant company. He was known to devour endless pounds of heavy statistical reports on every nook and cranny of his businesses in order to put his operating executives on the rack to defend their quarterly reports.

Asked once what he learned from all that data, he said, “All that data sounds and looks to me the way music and ballet scores must appear to musicians and dancers. The difference is that I see trucks backing up to warehouses, machines churning out products, customers in stores and offices as well as endless everyday activities which add up to ordinary economic life. It is the real life stories of what is happening in my companies. That enables me to understand and manage such a wide range of businesses and their managers. The data is the shorthand of business and finance.”

What he said, of course, was absolutely right (and still is) but, surprisingly, relatively few people ever get to the point of recognizing what he meant. Most financial analysts and business experts become mesmerized by the data in and of itself and often draw vital conclusions from trend lines and even random discontinuities simply from the data by itself. For example, data spread sheets like Excel and others make data dance to assumptions as they are changed and projections are accordingly modified interactively for years ahead with an appearance of precision that too often deludes people into stupefying and mistaken beliefs.

It is very useful, when properly utilized, to size the effect of changing assumptions in economic and financial assumptions both public and private. But people have to be very careful to recognize the limitations of such exercises on decision making. That is where having an understanding of a common economic language becomes so important in both business and public policy circles.

The same manager above was often accused by his executives of being a tyrant. His retort was uniformly, “I m not a tyrant. The facts are the tyrant!” Again, he was absolutely right. The same thing applies today with the national economy. The politicians argue endlessly about the meaning of the facts, when the facts are blaring, like a neon sign, clear signals of danger: “FIX ME.” But, because there is so much noise in the system of ecospeak, the real messages get drowned out and misunderstood. And, nothing gets done, until it is often too late to head off serious problems.

There is consistent talk in business circles about the need to support better education in this country to be sure we have an educated workforce that can compete in the world economy. That is absolutely correct. And there is another equally crucial reason to support such education, and that is to ensure a population at large that is economically literate. Perhaps a start in that direction would be for the Department of Education to sponsor a competition to write an Economics Without Tears with several levels of sophistication to enhance nationwide understanding of enough economics to help push the political process to make more informed and intelligent choices for the country.

Are the Best Things in Life Still Free?

What people get free in life, they tend not to value highly, conversely, when people become invested in something — via money and/or effort — they generally attach real importance and value to it. That principle applies pretty equally to gorgeous sunsets as well as to more personal and tangible things.

It appears that this type of human behavior in modern society has been growing in recent decades and may be becoming something of a systemic problem that should be addressed.

A few examples will make this clearer. Then let’s see if there are any themes which could be deconstructed.

  • People with non-contributory health benefit plans rarely are fully familiar with those plans, yet they take for granted that they have full protection and are often shocked to discover serious gaps in their coverage. Also there are cases when a non-contributory plan is modified to require as little as a 10 percent contribution, beneficiaries frequently drop the whole plan because they either have/had other coverage or they simply do not see their benefit for their share of the cost. In the meanwhile their employer and others had been incurring real costs for no useful purpose. And, if they get sick with no coverage, hospitals care for them a lot of the time and charge those costs to the whole system and thus all the people who do pay have to pay more.
  • People who get free transportation fare cards or free passes to various places or events rarely connect those benefits to the fact that they received something of value. They take it for granted, as a matter of right, and often use the benefits casually and excessively.
  • People who get a tax break – like favorable capital gains treatment for carried interests in investment funds – not only take their tax benefit for granted, they frequently laboriously articulate justifications for why they deserve such a rich tax break because it raises more capital for American industry. In fact there is essentially no connection to such an outcome. The carried interest is basically a method for determining the size of a bonus which is simply additional normally taxable compensation, when a profit is earned by the real capital at risk.
  • There are people who believe they are “entitled” to Social Security and Medicare because they have rights flowing simply from having attained a certain age. Unless they (and/or their employer) paid Social Security taxes which were deducted from their pay checks during their working years they have no rights. Those for whom payments were made frequently receive several multiples of what was contributed for them and they tend to have no interest in the subject except to protect that amount. The recipients do expect what they get BUT they often do not value it as something they earned because it comes out of a mysterious system of what they think of as entitlements.
  • Over the air free television is struggling in competition with pay TV and cable channels, yet to date the best and most professional offerings still come from over the air. At the same time many people complain a lot about the infernal advertisements that also come over the air. People take for granted what they get for free and object to the form in which they get it. At the same time they pay for movies and other cable offerings which they obviously value. They seem to take for granted the free over the air simply because for a long time that’s all there was.
  • Within families it is common and traditional for parents and grandparents to provide shelter and sustenance to children and other relatives and frequently, when there are sufficient resources, they also supply educational and other opportunities to their young. In far too many cases when those benefits come as a matter of course and easily, they are taken for granted and often utilized irresponsibly. On the other hand when a young person has to invest her/himself in obtaining that education by working and obtaining scholarships they very frequently stay with the challenge longer and better and get far more out of it.
  • People who are employed really tend to value their jobs. Some of the same people, when they become unemployed and receive unemployment benefits, have a tendency to take those benefits for granted until they are about to run out, at which point panic sets in. When the checks keep coming without going to work, with notable exceptions, there are people who get lulled into believing it could go on forever. The unemployment insurance is not really free, but employees seem not to notice what they have paid or what the limitation on the real benefit is.

It is not easy to tease out an answer as to why these and other examples indicate an increase in today’s world of taking free for granted, yet valuing what is sought out more highly. One reason is that as the modern developed world’s societies have properly created greater paternalism, there has been a corresponding growth of expectation of basic human rights to entitlements, which in turn has attenuated the links between the source of those benefits and understanding by recipients of what it took to create those benefits. A century ago almost everyone who needed or wanted most of the types of benefits illustrated in the above examples had to seek out and invest themselves to obtain them. Therefore the balance between what people get in life seems to have shifted considerably from self-help to expectation of automatic free receipt. That tendency has been encouraged as time passes by a political process, which, to gain support, has encouraged people to seek more for themselves at the expense of others.

How can modern society get a better balance between self-help and entitlement? The first step would be to illuminate the fact that what may seem to be free really is not. Obviously there are costs associated with most of the free benefits that people expect and receive. Perhaps, as with all foods today in which the container is required to show the caloric content and nutritional analysis, it might be possible to put some form of labels on all free benefits to illuminate constantly to the recipients the real value of what they are getting. Perhaps there might be better ways to make the free available conditionally. For example, if it is a scholarship, and the recipient fails to complete the course, then he/she would end up owing something for having failed to take appropriate advantage of it.

A final observation is that while there are no obvious or simple ways to reverse this observed trend, the best starting point may be simply to be aware of the issue and to acknowledge that it needs to be thought about in the context of future consequences, the most important of which is that much of the hidden costs of free will, in due course, fall on our descendants.

Perhaps when “the best things in life are free” was more ascendant, fewer of life’s essentials were free and thus because of scarcity they were valued more then? An increase in necessary societal paternalism may have unwittingly and unintentionally weakened many people’s appreciation and determination that the free things in life need to be valued to be properly appreciated.