Richard Koo: The Ratings Agencies May Destroy The Global Economy Once Again

Business Insider ^ | August 9, 2011 | Joe Wiesenthal

[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 Japan’s 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 policy—fiscal stimulus—is exactly the opposite of what is needed under normal circumstances. Active application of stimulus will ultimately minimize the fiscal deficit.

Standard & Poor’s does not understand this and says America’s 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

[lbryce]

Standard & Poor’s does not understand this and says America’s 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. 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 bubble’s 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. ==========================================================================================================================================================================================================================================
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I was hanging on to every last word of this guy until he ruined it by slamming the ignorance of the Tea Party.

[EagleUSA]

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.

[arkady_renko]

"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."

Say it ain't so, Joe!

[SpaceBar]

Like trying to blame your speeding tickets your automobile insurance company.

[Ghost of Philip Marlowe]

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?

[Dahoser]

Standard & Poor’s does not understand this and says America’s AAA* rating may be restored if the government succeeds in trimming its deficit by $4trn.
...
Rating agencies may actually destroy the global economy again
...
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 bubble’s collapse would not have been nearly as severe.

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.

[BipolarBob]

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.

[arrogantsob]

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.

[DB]

The writer needs to explain Japan then.

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...

[Ghost of Philip Marlowe]

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.”

[TruthConquers]

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.

[Ghost of Philip Marlowe]

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.

[Ghost of Philip Marlowe]

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.

[DaveyB]

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

[TruthConquers]

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.

[papasmurf]

You forgot to add...Barf Alert! to the title.

[mlocher]

As he's famously observed before, in such recessions like these, spending cuts actually make deficits worse

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.

[HKMk23]

You quote Wheeze’n’fall like a true disciple.

IB4TZ

[BobP]

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

--------------------------

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.

[lbryce]

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.