Skip to comments.Late to The Party..Once Again(Peter Schiff:"S&P rating underestimates this disaster ")
Posted on 04/29/2011 8:45:40 PM PDT by sickoflibs
The only thing more ridiculous than S&P's too little too late semi-downgrade of U.S. sovereign debt was the market's severe reaction to the announcement. Has S&P really added anything to the debate that wasn't already widely known? In any event, S&P's statement amounts to a wake up call to anyone who has somehow managed to sleepwalk through the unprecedented debt explosion of the last few years.
Given S&P's concerns that Congress will fail to address its long-term fiscal problems, on what basis can it conclude that the U.S. deserves its AAA credit rating? The highest possible rating should be reserved for fiscally responsible nations where the fiscal outlook is crystal clear. If S&P has genuine concerns that the U.S. will not deal with its out of control deficits, the AAA rating should be reduced right now.
By its own admission, S&P is unsure whether Congress will take the necessary steps to get America's fiscal house in order. Given that uncertainty, it should immediately reduce its rating on U.S. sovereign debt several notches below AAA. Then if the U.S. does get its fiscal house in order, the AAA rating could be restored. If on the other hand, the situation deteriorates, additional downgrades would be in order.
AAA is the highest rating S&P can give. It is the Wall Street equivalent to a "strong buy." If a stock analyst has serious concerns that a company may go bankrupt, would he maintain a "strong buy" on the assumption that there was still a possibility that bankruptcy could be averted? If the company declared bankruptcy, would the analyst reduce his rating from "strong buy" to "accumulate"?
In truth, if bankruptcy is even possible, the rating should be reduced to "hold,"at best. Only if the outlook improves to the point where bankruptcy is out of the picture should a stock be upgraded to "buy." A "hold" rating would at least send the message to potential buyers that problems loom. Then if the company does declare bankruptcy, at least it does not do so sporting a "buy" rating.
Of course, by shifting to a negative outlook, S&P will try to have its cake and eat it too. In the unlikely event that Congress does act responsibly to restore fiscal prudence, its AAA would be validated. If on the other hand, out of control deficits lead to outright default or hyperinflation, it will hang its hat on the timely warning of its negative outlook. This is like a stock analyst putting a strong buy on a stock, but qualifying the rating as being speculative.
The bottom line is that the AAA rating on U.S. sovereign debt is pure politics.
S&P simply does not have the integrity to honestly rate U.S. debt. It has too cozy a relationship with the U.S. government and Wall Street to threaten the status quo.
In fact, given the culpability of the rating agencies in the financial crisis, it may well be a quid pro quo that as long as the U.S.' AAA rating is maintained, the rating agencies will continue to enjoy their government sanctioned monopolies, and that no criminal or civil charges will be filed related to inappropriately rated mortgage-backed securities.
Remember S&P had investment grade, AAA, ratings on countless mortgage-backed securities right up until the moment the paper became worthless. Amazingly, the rating agencies somehow maintained their status, and their ability to move markets, after the dust settled.
Currently, they are making the same mistake with U.S. Treasuries. Once it becomes obvious to everyone that the U.S. will either default on its debt or inflate its obligations away, S&P might downgrade treasuries to AA+. Such a move will be of little comfort to those investors left holding the bag.
In its analysis of U.S. solvency, S&P typically factors in the government's ability to print its way out of any fiscal jam. As a result, it applies a very different set of criteria in its analysis of investment risk than it would for a private company, or even a government whose currency has no reserve status. But the agency completely fails to consider how reckless printing will impact the value of the dollar itself. It can assure investors that they will be repaid, but the agency doesn't spare a thought about what if anything our creditors may be able to buy with their dollars.
If you realize both parties in Washington think that our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus that has some magic easy cure for the economy; someone who is going to get elected in Washington and fix everything just by cutting your taxes, investing (more government spending) a few trillion more we don't have and will never have, and who will just command some countries to lower their prices and others to raise their prices all to suit your best interests, then this list is not for you.
You can read past posts by clicking on : schifflist , I try to tag all relevant threads with the keyword : schifflist.
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The Austrian Economics Schools Commandments plus :From : link
1) You cannot spend your way out of a recession
2) You cannot regulate the economy into oblivion and expect it to function
3) You cannot tax people and businesses to the point of near slavery and expect them to keep producing
4) You cannot create an abundance of money out of thin air without making all that paper worthless
5) The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever
6) You cannot live beyond your means indefinitely
7) The economy must actually produce something others are willing to buy
8) Every government bureaucrat should keep the following motto in mind when attempting to influence the economy: First, do no harm!
9) Central bank-supported fractional reserve banking is an economically distorting, ethically questionable activity. In particular, no government should ever do anything to save any bank from the full consequences of a bank run, no matter what the short-term consequences.
10) Gold is Gods money.
1) Businesses don't hire workers just because of demand for products or services, they hire because it makes them money. Sorry to have to state the obvious.
2) Government spending without taxing is still redistribution
3) Taking one man's money and giving it to another is not a job.
4) Paul Krugman and Bernake have been wrong about everything, as well as the other best and brightest Keynesian's who have been fixing our economy for over a decade.
5) Republicans in the minority (esp out of the White House) act like Republicans, in the majority they act like Democrats .
Equity bubble rules:
1)If something goes up too fast, it is going down faster,
2) By the time it looks like everybody is getting rich, its too late, stay out!
3) To get rich you have to get in early start of recovery and get out at the first really 'bad' news, and ignore the experts that claim that they will stop the next crash(our buddy Bernake.).
4) Don't invest money you will probably need, or worse money you don't really have.
He hasn't posted one of these in a while.
Good post. But keep in mind that ALL of the ratings agencies couldn’t see (or more likely, wouldn’t admit seeing) the OBVIOUS real estate crash that had to come, because of hugely inflated property values (relative to incomes) and explosive loans. It was obvious to me, and I’m just a chump with absolutely no experience in the field.
Also, they have political concerns to deal with - do they REALLY want to go up against the Democrats on this? If they didn’t have the gonads to take on Big Lending, does anyone remotely think that they’ll have it for Big Government.
In other words there are no easy and/or populist answers.
There are plenty but they are all more BS. My theme and the theme of this ping since early 2008 is your comment above.
I keep getting asked why I dont support Trump with all his anti-estabilishment talk. The answer is : "He has all the easy answers to everything for the clueless, much like Obama 2008".
2008 did me in. Obama and McCain talked about nothing and everyone playing make believe they are,
“S&P simply does not have the integrity to honestly rate U.S. debt. It has too cozy a relationship with the U.S. government and Wall Street to threaten the status quo.”
A quote that bears repeating.
And repeating and repeating. Why anybody listens to those crooks is beyond me.
PIMCO divested the American Government bonds. That was a significant, even major, indicator that there was a problem.
Weeks later S&P downgrades....... that is acknowledges that the market has already made the move. The tail was wagging the dog.
more 'too big to fail' nonesense...
the donald still had the purchasing power and inside track of multi-millions, even thru his bankruptcies...when ya got connections and somebody elses money, why would ya burn the barn down ???
Janet Tavakoli detailed the malfeasance of ratings agencies in regard to MBS’s in her book “Dear. Mr. Buffett.”
As for easy answers, there are a couple of easy answers to our financial problems:
Cut the budget 20% across the board. Wages, salaries, entitlements (yeah, SS takes a hit) Congressional salaries, the works.
Reduce capital gains taxes to, say, 10%. Eliminate all death taxes. Reduce corporate taxes to 20%.
The answers are easy. It’s that politicians are afraid to face the truth and tell the truth. Nor is there any political courage to do the right thing.
Everyone can squawk all they want. Fiscal reality is fiscal reality.
Btw, I think if the above were done, the value of the dollar would climb tremendously, which would help to offset the spending cuts.
The word "populist" is one of the most abused on FR. While it's true that Trump has a following, if he were the GOP nominee for POTUS, he would fare poorly in the true test of populist support, the 2012 election. I share some of Trump's contempt (if sincere) for "the elites," for example, opposition to mindless and corrupt Krugman-endorsed spending. On the other hand, imposing a 25% tariff on China, and believing that everybody would live happily ever after, is just as shallow as Obama's easy answers (many of which he backpedaled on).
As you said, He has all the easy answers to everything for the clueless, much like Obama 2008.
Sometimes populism results in good things, sometimes bad. If you opposed every manifestation of populism, you would also oppose the Tea Parties.
The problem is that all the plans for cutting spending happen 10 or 20 years later, after the current office holders are gone.
Think I’ll bookmark this one for future reference.
Of course not. Real deficit reduction measures are unpopular, just as cutting taxes and more spending is popular, to whoever gets it. That is why we have lots of debt, ala Bush and Obama.
How about all those liberal Keynesian expert economists that agreed with Democrats that lots MORE deficit government deficit spending and tax credits was the cure to our housing bubble crash? Who could have predicted we would crash again after the spending sugar high was over, left with lots more debt?
Remember this classic ?
Fred Thompson on the Economy(On the 'Spend yourself to prosperity plan', Dec 3, 2008)
Have you noticed that cutting the FICA payroll taxes hasn't helped the economy a bit? But it did make SS even more dependent on government borrowing. That was the stupidest tax to cut in this situation, but very popular which is why it was.
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