Skip to comments.Richard Koo: The Ratings Agencies May Destroy The Global Economy Once Again
Posted on 08/09/2011 7:43:52 PM PDT by lbryce
The latest note from Nomura's Richard Koo is chock full of insight, which is not surprising since talk of fiscal consolidation, misguided ratings agencies, and balance sheet recessions is his wheelhouse.
As he's famously observed before, in such recessions like these, spending cuts actually make deficits worse, and so he's particularly dismayed by the counter-productive actions of S&P.
Fiscal stimulus will reduce budget deficit in balance sheet recession. What I find even more interesting is that Japans fiscal deficit increased under the Hashimoto administration, which pursued fiscal consolidation, but decreased under the Obuchi and Mori governments, which gave up on deficit-reduction efforts and began applying fiscal stimulus. Prime Minister Junichiro Koizumi also came into office with a pledge to reduce the fiscal deficit by capping new JGB issuance at ¥30trn, but the economy weakened and the deficit rose. Only after he abandoned that pledge in 2003 did the economy pick up and the fiscal deficit begin to shrink.
These experiences demonstrate that during a balance sheet recession, when businesses and households are struggling to deleverage, the correct policyfiscal stimulusis exactly the opposite of what is needed under normal circumstances. Active application of stimulus will ultimately minimize the fiscal deficit.
Standard & Poors does not understand this and says Americas AAA* rating may be restored if the government succeeds in trimming its deficit by $4trn. The adoption of such a policy by the US government today would plunge the economy into another Great Depression.
Rating agencies may actually destroy the global economy again
Moreover, the experiences of Japan and more recently Ireland show that once the economy slows as a result of fiscal consolidation, the credit agencies will issue another downgrade, this time citing economic weakness
(Excerpt) Read more at businessinsider.com ...
Rating agencies may actually destroy the global economy again Moreover, the experiences of Japan and more recently Ireland show that once the economy slows as a result of fiscal consolidation, the credit agencies will issue another downgrade, this time citing economic weakness. Even worse, they will disavow any knowledge of the fact that it was the fiscal consolidation they themselves prescribed that sparked the downturn.
For that reason, we need to be extremely wary of actions taken by rating agencies that do not understand the concept of balance sheet recessions. As I noted in my 26 April report, the rating agencies are now poised to destroy the global economy once again. The first time, they exacerbated a massive bubble by assigning AAA* ratings to a raft of questionable subprime securities. This represented a complete abdication of duty for businesses originally intended to serve as an overseer of private-sector finance.
The housing bubble could never have grown as large as it did had the rating agencies not recklessly issued those AAA* ratings, and the balance sheet recession triggered by the bubbles collapse would not have been nearly as severe. ==========================================================================================================================================================================================================================================
Exactly who are those at the credit rating agencies who wield as much power as they do who have so egregiously misguided us all with their AAA* ratings for the subprime mortgage boondoggle fiasco...... and why should we trust them now??
Elsewhere in the note he slams the ignorance of the Tea Party, and urges Obama to teach the nation about balance sheet recessions, a prospect to which we'd assign 0% odds, given that Obama himself thinks that we should reduce the deficit. ==========================================================================================================================================================================================================================================
I was hanging on to every last word of this guy until he ruined it by slamming the ignorance of the Tea Party.
This writer should try and remember WHO it was that has, and continues, to ruin our economy. It certainly was not, and is not, the ratings agencies. They have done some bad calls, but they are not the CORE of the problem.
Say it ain't so, Joe!
Like trying to blame your speeding tickets your automobile insurance company.
Joe Weaselthorn is an idiot. He’s the same one who said about a year and a half ago that debt and deficit spending does not matter.
And, yeah, Joey Boy, it’s those eeeeviiilll ratings agencies that cause the economic turmoil. It has nothing to do with socialist banking (central banking) and the socialists who use those central banks in their borrow-and-spend schemes, isn’t it?
Huge federal deficits and debt. Housing bubble underwritten by Fannie Mae and Freddie Mac with banks participating at federal gunpoint. But it's the rating agencies who are the culprits, not the criminal class inside the Beltway who do all the taxing, spending and regulating. Right.
The gubmint was warned in March that a possible downgrade could happen if they didn’t get their fiscal house in order. Of course politicians are screaming bloody murder and threatening the ONE rating agency which didn’t kowtow to the powers that be, but looked at the overall picture and rated it as they saw it. They admitted the US wouldn’t default (they have a printing press) but took into account devaluation and the fiscal policies of the US.
Central Banks are not “socialist”.
We need a Balanced Approach - there should be TAX rate CUTS to accompany Budget cuts otherwise the cuts will slow economic activity and increase the deficits. But pairing Tax Rate Cuts with Budget Cuts will allows revenues to increase and decrease the deficit.
Japan went on a borrowed money spending binge shooting well past 100% of GDP to “stimulate” their economy and it didn't work. And now they're left with a stagnant economy and massive debt. The worst of both worlds. I also like how these people scream about the rating agencies failing to do their job by not downgrading the mortgage bubble earlier while at the same time complaining about them doing their job on US government debt... They want it both ways... Oh yah, they're lefties... Hypocrisy is thou name...
Yes, they are.
They are controlled by a central authority, not the markets.
They privatize the profits and socialize the losses.
They were instituted by a ruling elite.
Their goal, as a cartel, is global domination of all currency and thus the economies of every nation.
And if you want a better understanding of the socialists that implemented central banking throughout the world, read Griffin’s “The Creature from Jekyll Island,” Woods’ “Meltdown,” or Rothbard’s, “Case Against the Fed.”
The rating agencies ARE the CORE of the problem of the housing market implosion, which is not done yet.
IF they had NOT rated all those worthless, unassigned mortgage backed securities AAA, they would NOT be sitting around in pensions and on balance sheets across the world.
If that isn’t core, well, it certainly is BIG.
And, by the way, there’s that frightening, bipartisan Newspeak term “balanced” which the left is fond of using for everything accept a balanced budget.
What we need is to limit government. To hell with all the fractional portions of what to cut and what to raise.
CUT ALL TAXES.
ELIMINATE ALL UNNECESSARY FEDERAL DEPARTMENTS.
That’s right, get rid of the Dept. of Ed. Get rid of the EPA. Get rid of HUD. GET RID OF THEM ALL.
There is no Constitutional allowance for any of that crap and that is the crap that is ruining us.
And most of all...
GET RID OF THE GD FEDERAL RESERVE.
That private, socialist, international banking cartel is responsible for these booms and busts and for stealing the savings and prosperity of tens of millions of Americans through these booms and busts and through the hidden tax called inflation.
They are the enemy within the gate.
END THE FED.
Yes it is all S&P’s fault for yelling “the emperor has no clothes”. If only we could go on blindly to our destruction we could all be happy! /sarc
Central Banks that depend on FIAT ARE socialist, to the core.
They DEPEND on the ever expanding debt and credit bubbles to prop up their “precious” fiat. Since when is the private sector and the government sector being BOTH in debt up to their eyeballs,... capitalist? Since when?
Debt slavery is NOT capitalism.
Fiscal stimulus will reduce budget deficit in balance sheet recession
Here it comes. The Keynesian left is pushing for more government spending to solve the US problems.
The example of Japan is a very poor example for Koo to prove his point. Japan had a severe monitary and fiscal problem. It never really resolved the fiscal problem, and in fact is still struggling with its symptoms today. Japan tanked not because they had the wrong stimulus, but because they never addressed the fiscal and regulatory policies that led to their crisis. He draws the wrong conclusion from his data.
Having said that, we are in a similar situation. More stimulous will be disasterous. We need to fix the fiscal and regulatory issues that got us here in the first place, not apply more fiscal stimulous.
You quote Wheeze’n’fall like a true disciple.
I agree DaveyB.
There once was an unknown man with a new Marxist plan I'll distribute your wealth and give you free health But the debt soon hit the fan
Obama owns this shovel ready mess. Wise money has been running like rats from a sinking ship from Obama's first day. Every day he brings more damage to the country.
|The winning rule in 2012: a direct and non-stop political attack on Obama's record!
Zer0 knows what he is doing, and he is having a great time doing it. The game played by the Marxists is war where the end justifies the means. No matter how it's dressed up, it's an assault on America's freedom.
Countdown until Obama leaves Office: 529 days as of August 9, 2011.
LOL. Oh, please. You’ve got to be kidding. Why don’t you check my previous posts before you make any ill-informed, ignorant comments. Drinking and commenting on FR don’t mix.
I sent the link to this article to my daughter, who is familiar with Koo’s work, because she’s doing her Senior Thesis in Economics, on Japan’s Lost Decade.
The Fed is a private corporation.
Profits from the Fed go to the US Treasury. I think it was 40 billion last year.
As far as the elite creating it, sure it did, but only after fighting the idea for 30+ years.
The idea arose in the West where farmers were constantly bashed by deflations triggered by the actions of Easter banks. They wanted a Reserve bank to keep specie from flowing to the Money Center banks and to prevent their mortgages from being called even when current because of the demands of those banks.
The banks refused to go along with creating a system of Reserve banks as the Populists demanded because such a system would diminish their private financial power. It was Finance Capitalists of the highest order who created the Fed not socialists. The very top of the capitalist order.
After the Panic of 1907 (the Bankers’ Panic) occurred and was stopped by the personal authority of J.P. Morgan, the bankers started to realize that without Morgan they would be screwed. He died a few years later and they created the Federal Reserve.
Their goal is to try and create favorable economic conditions. The Fed has been ordered by congress to try and achieve full employment in the US as well.
Yes, you’re absolutely correct. I did forget.
I was mocking Urkel with the term “balanced approach”.
Credit has been one of the engines of capitalist growth. In fact, real capitalism did not take off until the Italians invented banking.
And, no, central banks don’t become socialist just because you call them that.
My FRiend, you need to read the books I listed.
The FED is not your friend.
They are the enemy. The sooner you read those books, the sooner you will understand this, and the sooner you can work to take your country back from the collectivists.
Incidentally, you argued nothing that I did not argue five years ago.
Credit that grows to the point of debt slavery, where people can’t pay anymore, is slavery. The government can’t pay, the banks are insolvent, and the average citizen is tapped out. Credit bubbles pop, and kill the fiat currency.
That is not capitalism.
Of course it is. Government debt has nothing to do with capitalism per se even socialist nations have debt. China’s is rated below ours.
Private debt has hardly become so bad that “the average citizen is tapped out” that is just an exaggeration.
Credit bubbles don’t “kill” the fiat currency either and their bursting and the resulting deflation generally strengthens that currency.
You should study the history of capitalism.
The FED was signed into law by the socialist Wilson and his majority Dems, just like DeathCare. The socialists have given us many programs, all of them socialistic.
As to the mandate of full employment, you have got to be kidding?
Since when does the FED have the power to create jobs ever?
Tell that one to the poor decent souls who have to work two jobs now, or just got out of college and can’t FIND a job.
what a bunch of academic baloney. what a load. And it stinks.
And the FED is NOT Constitutional.
We have a country that is NOT capitalistic.
YOU go read some history, we have SOCIALISM.
From Social Security to a progressive taxation to DeathCare, NOTHING this government does is capitalism.
Not even the housing market. We basically don’t have property rights anymore either. And public schools are the shinning example of socialism.
It is YOU who have not read your history. It is sheer propaganda of you to pretend otherwise. Don’t want the sheeple waking up too soon? eh?
Don’t confuse Socialism with Welfarism or Regulated capitalism.
“...NOTHING this government does is capitalism.” Capitalism works better when government stays out of the way, it isn’t supposed to do much capitalism.
Property rights have never been absolute either. You are imagining a dream world.
Nor are public schools socialism.
We have established, however, that you do not know what “socialism” actually is, other than a rhetorical device to hurl at things you don’t like.
It was this same failure to pay attention to the borrower’s credit rating that was a factor causing the collapse of the mortgage industry. Are we going to repeat this colossal failure on a world scale?
Most of the arguments against the Fed are both familiar to me and unconvincing. Reserve banking arose here because of market failures over a large country and will never go away. Modern capitalism is too closely linked to it.
Hamilton’s bank and the Second Bank of the United States, which performed some of the same functions as the Fed, played very important and productive rolls in the development of the United States.
It became obvious to even anti-bank forces (Jeffersonians principally) that letting the first bank lapse was a serious mistake and it took an even more fanatical Democrat, Andrew Jackson, to destroy the Second. A decade long depression ensued ending only with the Mexican War and California Gold Rush.
NO, it is YOU that have established that knows nothing about socialism or even public schools.
Enjoy your ignorance, it is not bliss.
Government employees and pensioners want more of that free money from debt, and they’ll steal the bond investors and everyone else blind to get it. S&P didn’t downgrade early enough or enough.
As with investments, so with people: “Past performance is not a guarantee of future results.”
I recall that Newt was a highly credible guy, once upon a time. Not so much anymore.
As for this subject being Koo’s “wheelhouse”: global warming is Al Gore’s “wheelhouse”; that doesn’t mean he’s not out to lunch on the subject.
Your past credibility wouldn’t serve to elevate any of those guys. Same here. You don’t help Koo; Koo hurts you.
And on that score, the “IB4TZ” was for him; not so much you.
Despite Koo’s purported guru status, I find his analysis of the present situation missing some depth that leaves me in doubt as to its applicability to our circumstances. Not to mention that some of his assertions caused the needle on my BS meter to ping off the upper limit stop.
It really doesn’t help me to know what Koo’s strong suit is, in fact it makes it worse, because when he says that trimming the U.S. deficit by $4T would trigger another Great Depression...sorry, that’s crazy talk unworthy of a guy who’s supposed to be an expert at this. Yes, if we carved all of it out of the 2012 budget, then we could very likely cause some serious pain. If we just stopped payment on the next scheduled $4T of government outlays — yeah, THAT would be a disaster. But nobody was talking about those kinds of Barakalyptic scenarios. Still, that doesn’t stop Koo setting up a bad implementation of $4T in deficit reductions as a straw man, plastering an S&P label on it, and using it to bash S&P, and it didn’t stop Wiesenthal thinking Koo was credible in doing so, and doesn’t seem to have dissuaded you at all, either.
I don’t buy it.
From all I’d read and heard, S&P didn’t care to see the whole $4T carved out of next year’s budget; they were more focused on Congress agreeing to fiscal reforms that would result in $4T in deficit reduction over that infamous next ten years. So, right there Koo’s alarmism about S&P rings hollow.
That aside, the United States is decidedly NOT Japan (nor Ireland); our economies are structurally different in elemental ways that play heavily into whether or not fiscal policies undertaken there would or wouldn’t work here: our governments are different in basic ideology, policy, and programs, and regulatory details; and our very societies are culturally different in how they respond to stresses. The differentiating factors are myriad; the two systems cannot be assumed to behave the same way under similar fiscal conditions.
To gloss over that, and then assert that S&P analysis of U.S. deficit, debt, and driving factors thereof, produced conclusions that prescribed exactly opposite what would truly cure our ills is just too much to swallow.
A more plausible argument would be to observe that Koo’s unfettered Keynesianism leaves him naturally disposed to regard S&P with a jaundiced eye, and his criticism of S&P drives from his observations of all the ways they disagree with him. This is much the same as the criticism of House Republicans emanating from the White House, these days: “They’re wrong to disagree with ME.”
At the day’s end, Mr. Koo is attempting to argue that a nation topping $14T in debt shouldn’t try to save the credit rating of its sovereign debt by enacting measures to reduce its deficit by a paltry $4T over the next decade. People who walk about with their eyes open already know that our baseline budgeting is such that, if we locked spending at 2011 levels for the next ten years — if we spent every year from 2012 through 2021 exactly the same amount of money we spent in 2011 — the difference between that level of spending versus what we’d spend end up spending due to built-in year-on-year baseline budget increases would be $9T. Locking spending at 2011 levels for a decade would result in $9T fewer dollars spent.
S&P was looking for less than half that.
All they wanted to see were real reductions to the built-in percentage values for the year-on-year baseline budget growth; cuts to the annual baseline increases from, say, 5.4% to 2%. Oh, the humanity!!! Every department in government would still have seen budget growth next year, and with GDP growth currently running around 0.4 to 1.2 percent per quarter, a two or three percent annual growth in government spending would actually have been quite sufficient.
Over successive years, as the economy picks up in response to a government at last serious about fiscal matters, GDP growth would surpass the annual increases in government budgets, natural growth in tax revenues would begin to approach parity with government spending, and — far from another Great Depression — we’d be in much better shape in ten years.
Yes, we would still be running a deficit, but it wouldn’t be 75% of revenue like it is today. More like 30%, and falling.
Yes, we’d still have huge debt, but it wouldn’t be over 100% of GDP like it is now. More like 60% of GDP, and falling.
More important than ANYTHING else: our numbers would be steadily moving in the right direction; with shrinking deficits, growing GDP, growing revenues (without any new taxes), and an overall government becoming accustomed to real fiscal restraints like those that you and I have to live with in our own personal finances. AND it would all be happening without having to “swallow the camel,” regardless of the fact that Democrats would be continually portraying it all as exactly that in every outrageous way imaginable.
THAT is the kind of scenario that S&P would have preferred to see getting signed by Obama, but Koo thinks it a recipe for total fiscal calamity.
I think Mr. Koo is missing one thing more: a “k” at the end.
Read “The Creature from Jekyll Island.” You’ll understand the history far more fully and you’ll be able to see the true impact of socialist banking. Most of what we’re going through economically is because of socialist economic policies in America backed by the socialist banking system employed by central banks.
...the correct policy -- fiscal stimulus -- is exactly the opposite of what is needed under normal circumstances. Active application of stimulus will ultimately minimize the fiscal deficit.
Your inability to address the facts I have put out there is noted when that is the case the loser generally resorts to empty and meaningless rhetoric.
Welfarism is not socialism. What do you think socialism is?
The Humphery-Hawkins Act charges the Fed with working for full employment. I never claimed it was a good idea or that it achieved this goal. Your hypothetical "college student" and his problems have nothing to do with the facts. We all had to get a job when we got out of college Fed or no Fed. Hamilton destroyed the argument about 220 yrs. ago that a National Bank was unconstitutional. You should read it sometime if you want to see brilliance at work. He made Jefferson's argument look like the work of an idiot as he did virtually every time they were in conflict. Then that "socialist" George Washington signed the law creating the Bank.
One of these days I will read that book but, if the “facts” you listed earlier (which I showed to be false and/or misleading) are an example of what it has to offer, I won’t be expecting much.
I read that book on line, and it is very interesting.
I do find it interesting that the public schools and universities don’t teach the history of economics as part of the curriculum. There is much they don’t cover to give themselves the room to propagandize the less aware and the less curious.
Being a student for life keeps one awake instead of locked into the dead paradigm of unless and unfounded “facts”.
I came across this video on some of what you are talking aobut on ZeroHedge. It starts with the housing crisis, but then moves onto the issues the book you mentioned covers.
It is 30min long, but can be watched in two parts. It is also fun! Enjoy.
You showed nothing. You stated opinion against generalized history. That is why you need to read the books I listed.
The books are written. I don’t have the time to keep repeating the history, methodology, and ulterior motives of the central bank. Go back over my posts for the past year and you’ll find plenty of details.
If nothing else, read Meltdown by Woods. It is a very fast, enjoyable read and it will open your eyes.
You claimed the Fed was created by an “elite”. I gave a little snapshot of the history of the “elite” opposition for thirty years. No comment from you. Just an admonition to read a bunch of books.
I showed you that the Fed profits go to the Treasury. No comment from you. Just an admonition to read a bunch of books.
Even the “controlled by a central authority” is not exactly accurate since the Board of Governors is not monolithic in thought.
“I dont have the time to keep repeating the history, methodology, and ulterior motives of the central bank.” You have done none of that just admonished me to read a bunch of books. And “no” I am not going to go over your posts for the last year.
Dude, you are so effing under-educated on the topic I didn’t bother to respond to your inane “rebuttal.” They are the same dull, wrong arguments that soft-liberals use.
Go read and learn.