So What?

By James Kwak

Everyone (well, the media at least) seems to be acting as if Moody’s downgrading the United States would be a bad thing. I feel like I must be missing something.

First of all, we know what bond ratings are worth. See, oh, the entire past decade for evidence. (It wasn’t just mortgage-backed securities; they didn’t downgrade Enron until after the SEC announced an inquiry and CFO Andrew Fastow was forced out, and less than five weeks before the company declared bankruptcy.)

Still, the point of bond rating agencies is to do research on securities that other investors may not know well. If I’m a buy-side investor, I don’t have the time to review tens of thousands of different debt securities I could buy. It makes sense for me to turn to someone like Moody’s or S&P, because I can count on them to do at least some level of research and analysis on them. In other words, the ratings may not be great, but they still carry information.

But this is emphatically not true when it comes to U.S. government debt. Enormous amounts of information about the government’s finances are open to the public and are pored over by thousands of analysts from all around the world. Moody’s is no better at estimating future tax revenues and spending commitments than anyone else.

On top of that, we all know that the short-term likelihood of default has nothing to do with the government’s finances. It’s all politics, and it’s all in the spotlight. We have thousands of politicians, reporters, commentators, and academics expressing their opinions on the likelihood of default. Every major institutional investor has its own opinion about whether the government will default next month. Moody’s has no competitive advantage in this game, so it’s just one more opinion, and not a particularly trustworthy one.

Since it seems preposterous to me that anyone could care about the informational content of a Moody’s downgrade, I’m guessing that people are worried about the legal-mechanical consequences of a downgrade — in particular, the requirements that some investors (money market funds, some other mutual funds, maybe pension funds and insurance companies) must invest some proportion of their assets in AAA securities. If, say, every money market fund suddenly has to dump all of its T-bills, that could cause systemic problems.

But in that case, what is Moody’s thinking? Would they really express their opinion by downgrading Treasuries, knowing (a) that no one cares about their opinion itself yet (b) it could trigger a financial crisis? That sounds to me like just about the most irresponsible thing one can imagine — blowing up the global financial system to express an opinion that no one would care about except for the fact that large amounts of money are mechanically tied to it.

So I must be missing something. What is it?

112 thoughts on “So What?

  1. Raising interest rates gives Wall Street more money. The debate is not about America, but about how much money can be siphoned in higher rates. And don’t forget hedge funds make money from uncertainty. Wall Street owns Washington.

  2. Why would a downgrade cause a crisis if the downgrade doesn’t contain any information? A downgrade is not a default. If what your saying is true, a downgrade will not cause a crisis.

  3. Markets are not rational and “rational” models the market best. The word “downgrade” inherently contains information and connotations and denotations. All point to higher risk which means higher interest rates.

  4. Why don’t these requirements that you speak of just define US Government debt as AAA? Why bring Moody’s into it in the first place if no one cares about their opinion?

    I don’t disagree with you. I think this just shows a glaring stupidity in how AAA is defined.

  5. Japan got downgraded and rates have fallen. It’s a game of musical chairs and the music isn’t stopping yet — or so the market thinks.

  6. But in that case, what is Moody’s thinking? Would they really express their opinion by downgrading Treasuries, knowing (a) that no one cares about their opinion itself yet (b) it could trigger a financial crisis?

    Well, theoretically, they should (if that is indeed their opinion), because if they wouldn’t, and would intentionally withhold a (by hypothesis, here) reasoned judgment of theirs due to perceived effects, then they have no integrity and their opinion carries no weight on anything. Or shouldn’t, anyway.

    But that, too, is not new information.

    What I find odd is that there seems to be a desire to have one’s cake and eat it too. We have, for good or ill, anointed the rating agencies as quasigovernmental institutions whose ‘opinions’ affect the legal capital status of holding this or that debt, are used in rules about which funds can buy what, etc. If there is a good reason for this (and, I am not convinced there is), it is because of a belief that the rating agencies’ pronouncements are worth something and the result of independent, objective analysis. Yet apparently if we decide that a rating agency issuing such an opinion would have results we don’t like then we don’t want them giving it and call them irresponsible.

    Need I really point out that if their ratings really are subject to the sort of self-editing you seem to want them to do here, this calls into question the premise that it’s worth listening to them on or using them for anything whatsoever.

  7. P.S. In other contexts we have decided it is not such a great idea to allow this or that institution to get in a position where it, by its actions, is able to ‘trigger a financial crisis’. Much ink has been spilled the past three years trying to figure out how to prevent this possibility going forward. Given that you apparently think it’s possible for a rating agency’s pronouncement to ‘trigger a financial crisis’, is it perhaps time to revisit and rethink the role of rating agencies as well? We don’t want to allow banks to become Too Big To Fail, likewise should we allow rating agencies to become Powerful Enough To Trigger?

    In a sane system rating agencies would be like movie reviewers: useful to some, while others can choose to ignore them. Notice, we do not give movie reviewers any sort of official status in our laws or regulations.

  8. Step 1: Americans too “busy” or lazy to read/decipher news. Newspaper and general media quality goes down. Even when presented with good journalism Americans would rather watch FOX, celeb news, or softporn. Americans use their “economic vote” to consume garbage media/non-journalism.

    Step 2: Because Americans don’t bother to stay informed on their political candidates, the lowest common denominator (i.e. “death panel” scaremongers and empty, shallow characters referring to men’s fascination with breasts) gets elected promising more and more lies. The biggest and most unrealistic lies win, promising everyone can have their cake and eat it too. Lowest character candidate wins. Behavioral Scientists might even call this the “default” choice. Uninformed voter= default choice= lowest common denominator

    Step 3: Low character candidates take money from lobbyists. % of election success rises with lobbyist support. Lowest character candidate attracts the most lobbyist support as low character politician’s vote is easily bought. Industry lobbyist (Example: American Bankers Association, National Association of Realtors, etc…etc…) support comes to be seen as necessary. Lobbyist control reinforces itself in high % of low character lawmakers passing weak campaign finance laws/regulations.

    Step 4: Republicans badmouth “bailouts” while at the same time causing them with weak bank regulation laws and non-funding of resources and staff of Agencies like SEC. Then after they have castrated regulators and agencies, telling people said agencies are “useless” post-castration. Guys with names sounding similar to Dickhead Shelsby hide behind the facade of being pro-market by voting against bailouts while simultaneously passing laws which protect large banks gauging depositors, investors, and consumers with high fees and usury rates. (No head of CFPB, political bullying of any legitimate candidate for head of O.C.C.)

    Step 5: System (crony-capitalism) becomes disjointed, asymmetrical information, more and more burdensome to those born poor. Uneducated whites who barely got the passing grade on GED test after dropping out of high school, feel embittered/resentful. No job or low-pay with Zero career advancement. Because of ignorance, uneducated whites hook-up to the Glenn Beck/Rush Limbaugh/Fox News matrix (think of the FOX news matrix as an IV drip of cow crap) and believe every word they hear. The “big government!!!” is coming to take away their guns and their hunting dog. Uneducated whites hooked up to the FOX matrix vote for candidates in an unknowingly masochistic fashion.

    And America’s big circle of watching each other mast*rbate (kind of like watching a kinetic desk toy) continues. Grab some popcorn kids, it’s not ending anytime soon.

  9. Mr. Kawk said, “If I’m a buy-side investor, I don’t have the time to review tens of thousands of different debt securities I could buy. It makes sense for me to turn to someone like Moody’s or S&P, because I can count on them to do at least some level of research and analysis on them.”

    You get what you pay for (though usually even less).

    The business model for rating agencies receiving fees from bond issuers screams conflict of interest.
    The research model for expecting others to do it for you–for free screams stupidity.

  10. “(It wasn’t just mortgage-backed securities; they didn’t downgrade Enron until after the SEC announced an inquiry and CFO Andrew Fastow was forced out, and less than five weeks before the company declared bankruptcy.)”

    If Moody’s DID NOT downgrade the US, would we blame the rating agency for not having done their job in time? Seems like a two edged sword to me – doomed if they rate, doomed if they don’t. I think we cannot assume that rating agencies have over-reaching powers to predict fallouts, but know for a fact that they only provide direction. We cannot have them “rate” debt in a manner and time of our convenience or choosing.

  11. Grab some popcorn kids, it’s not ending anytime soon.

    No, but it does say in the bible, that those days, (the ones that you are complainng about) will be “shortened” for the SAKE of the elect. Which implies that it’s the people controling the elect, that are the actual problem. And that would necessarly take rich people to accomplish, and their version of trust to pull off. Which is why the congress has become simply a trust of the people, by the rich, for themselves. I think a good judgement day might include human excesses, and what they did with it.

  12. Some thoughts from David Einhorn on Moody’s circa 2009:

    Click to access einhorn-tcf-2009-speech.pdf

    More from David Einhorn (S&P and ratings) in Greenlight Letter Q2 2011

    Click to access Qlet2011-02.pdf

    I have read all of Einhorn’s book. If you’re not an investment junkie it could get a little tedious somewhere in the middle, but I still recommend the book to those who want to deepen their knowledge on ratings and also the SEC (and our easily purchased U.S. Congress, who often purposely “play dumb” on these issues).
    I actually enjoyed all of the book. I would put it in my top 5 investment books of all time, and I’ve read my fair share. It was a “labor of love” reading to the end, just like “13 Bankers” was. But I’m kinda weird that way. I’ve been lobbying (not with money, but intense nagging) James Kwak to invite Mr. Einhorn to make a post on BaselineScenario, but I know Mr. Kwak protects the integrity of this site like the Pope does all his art and wine at the Vatican. (that’s an affectionate elbow nudge)

  13. The future of banking will depend on the accurate rating of bank investments and loans. Rating agencies like Moody’s Investor Services and Standard & Poor’s (S&P) have given the green light to deals that have seriously damaged the investment and banking industry. In particular, the approval of collateralized debt obligations, or CDO’s, have led to this demise, because they were based on loans that were inevitably going to default.

  14. @James Kwak “I’m guessing that people are worried about the legal-mechanical consequences of a downgrade”

    Absolutely, because it is not so much a question about what the credit ratings are than about what you do with those ratings… For instance, banks regulators should know that their primary concern is not the credit ratings being right but the credit ratings being wrong, and so that therefore setting capital requirements for banks that are based on the credit ratings being right, is about the last thing they should do as regulators… and yet!

    Currently, courtesy of the Basel Committee, when a bank gives a loan to the government it needs much less capital than when it lends to a “risky” small business or entrepreneur. Without this immense regulatory bias in favor of government debt the US would not have been able to contract its current debt at the current advantageous interest rates… and that is a fact…. Which make some of us think that either those in the Basel Committee are communists, or they mistakenly outsourced the drafting of Basel I-II-III to Fidel Castro in Cuba.

    What a pity that regulators never applied Heisenberg´s uncertainty principle, then they would have understood that just measuring the present credit ratings, even with the maximum precision possible, would determine the future credit ratings… in ways they were not capable of understanding.

    PS. Loony bank regulations explained in an apolitical red and blue!

  15. @Sonic Charmer: Good points, but I think the silly thing is having rating agencies rate U.S. government debt in the first place. When it comes to Random Small-Cap Company Issuing Debt For The First Time, sure it makes sense, because then you know at least that someone has looked at the financial statements and compared cash flow to debt payments. But I don’t see why anyone ever needed them to rate Treasuries in the first place, since their ratings could only be irrelevant (99 percent of the time) or harmful (now).

  16. @DM: As in the previous comment, I don’t see what point there is in having rating agencies rate Treasuries to begin with. I’m skeptical about having rating agencies rate countries like Greece, even, given that the market participants have many sources of information about Greece.

    In principle, it made sense for them to rate CDOs, because there were thousands of CDOs and market participants did not have many sources of information about them. The fact that they screwed it up is a separate matter.

  17. Rating agency analysts don’t focus on second order events, ie what happens after they rate. Their job is to rate as they see it. It will be up to others to decide if that has any value or not.

    You and many others claim that there is no informational value in what rating agencies do. Yet not only do markets move regularly on their actions but you can ask any rating agency analyst and they will tell they get calls from investors all the time. Clearly there is the perception of some value.

    The US rating is not about the US. It’s about the US relative to other countries in the world. While there are plenty of people that follow closely what happens in the US, only a small subset of them also follows what happens in 120 other countries across the world and rank orders them. That’s where the value comes from.

    Enron is not a good example for two reasons. First, there was fraud and rating agencies can’t rate under that basis. They are not auditors. Second, ratings are probabilities and, as you know, probabilities can’t be proven right or wrong on single events. That’s why Lehman is also a bad example. You need to look all similarly rated entities and check what the default rates are.

    Which brings me to the last point. Those in the know are aware sovereign ratings have a very good track record. You can check on the sovereign default studies that are published annually by all rating agencies. As you go down the rating scale the historical default probabilities go up.

  18. @Ed “Rating agency analysts don’t focus on second order events, ie what happens after they rate. Their job is to rate as they see it. It will be up to others to decide if that has any value or not.”

    Absolutely! And that is precisely why it is so ridiculous for the regulators to structure the capital requirements for banks around the credit ratings in Basel II… before credit ratings expressed just another opinion, thereafter they became THE opinion.

  19. You are clearly unaware of how collateral and credit markets work, let alone the upheaval this will cause in the rates market. Ratings transitions may cause defaults in some contracts, how are you not aware of this? This entire post is nonsense.

  20. Per,

    But that’s not the rating agencies fault.

    And what’s the alternative? Are we going to accept that banks police themselves? I don’t see that. And what about the regulators? Can you imagine the ECB having to publicly grade EU sovereigns and make that known? The political pressures and biases would be enormous.

  21. James Kwak: “…it made sense for them to rate CDOs…The fact that they screwed it up is a separate matter.”

    Is it a separate matter that the ratings agencies are basically paid by the people who are selling they are rating a separate matter? It would seem to me that a. the whole premise of the ratings agencies is faulty; and b. the ratings agencies have shown themselves to be corrupt.

    Every time the ratings agencies threaten to downgrade U.S. Treasuries, and what a terrible thing this will be for the country, it just drives home one fact that the financial crisis made crystal clear: we are living in a banana republic.

  22. Whoops– 1st sentence, 2nd paragraph should read: Is it a seperate matter that the ratings agencies are basically paid by the people peddling the products those agencies are rating?

    3rd paragraph: “….and everyone cries about what a terrible this will be for the country”

  23. @Ed “But that’s not the rating agencies fault… And what’s the alternative?”

    Of course it is not their fault, and the alternative is to make the regulators to stick to regulating and supervising, and stop them from arrogantly playing risk managers of the world by arbitrarily setting risk-weights that, based on the credit ratings, determine the capital requirements of banks.

  24. @Carla “we are living in a banana republic”

    That is the prime evidence of global warming, the equator has moved towards Washington.

  25. Per,

    Maybe but I can’t see how that works in the real world. Imagine that Greece’s default risk had to be decided by the european banks holding the debt or by regulators. Can you imagine that? Greece would never be downgraded.

    Yes, maybe in a perfect world regulators would do a perfect job but in the real world we have it doesn’t work that way. Can you imagine the political pressures on the poor ECB analyst that covered Greece, if that was to be the ‘official’ rating?

  26. @Ed
    The banks were already pricing in default risk WELL BEFORE any credit rating agency downgraded.

    Get yourself a time series of Greece bond prices and ratings downgrades. The prices (set by the banks, in case you were curious) went lower before the downgrades, as well as after.

    You don’t understand how banks work, or how prices are set. If the prices were held artificially high while default was likely, people would sell the bond and buy the default (CDS), and the banks would lose incredible amounts of money.

  27. Ed,

    Before the Basel Committee came up with their Basel II regulatory paradigm, the market and the banks looked at all credit information available, including credit ratings, and then decided on the interest rate they wanted to charge. (Like Seriously? says)

    But then came Basel and decide to also look at exactly the same credit ratings, now in order to decide what capital a bank had to have. And any information, no matter how correct it might be, if it is considered excessively, morphs into something wrong. And that is why the credit ratings have basically sequestered so much of the financial system. I invite you to follow an explanation in the video

  28. Uh, anybody here kept up with events across the pond? Sovereign ratings downgrades move markets.

    Everyone cares about the rating, simply because everyone else cares about the ratings. As with most other economic statistics, market participants don’t care about the substance or methodology of the ratings.

  29. Seriously,

    We may be talking of different things. Although market prices of bonds did signal risk for quite a while now, that does not mean that the banks had to set aside capital for all those expected losses the markets were signaling. Which is why so many of them could be in trouble depending on who defaults. Also, my point was broader. Even as the market prices kept saying that default in Greece and other countries was likely the ECB could still pretend that was not the case and provide support through repos. Imagine if the ECB had to formally declare the default risk of euro sovereigns?

    You could, I guess, just get rely on bond prices and CDS spreads for risk assessment but leaving aside liquidity and coverage issues, that would lead to much more volatility. The markets were ahead of the rating agencies on Greece, but the markets also were predicting defaults in Latvia, and they were wrong (and the rating agencies right). Also remember that for years the rating agencies had Greece much lower than Germany yet the markets were pricing as if there was almost no difference.

  30. per,

    I don’t have a strong opinion one way or the other. Chances are relying on any one system will always lead to trouble, so the more safeguards you have the better. As I wrote above the markets and regulators treated Greece like it was basically germany for years and years. while rating agencies had them much lower. There’s always a counterexample to any proposal.

  31. The circumstances are extremely delicate and go way beyond ideological bickering:

    If the US debt limit is not increased then the US credit rating will be downgraded because of immediate default risk, but as that would also mean there would be less US debt to offer to a market that has no alternative to US debt, the interest rate on the defaulted debt might strangely enough go down as the market feels reassured it will collect on the dollar…. and, on the other hand, if the debt limit is increased but without any enormously strong commitment to get the US fiscal house in order, then the interest rates will shoot up and the default occurs later but at a higher level of debt

    Let us say the US defaults on its debt… does that mean you will invest in China or Greece… or do you still prefer to hang around for your haircut?

  32. IMO, the Moody’s threat to downrate US Treasuries is a ploy by the right wing to force reductions in
    Social Security and Medicare. Why? 1) If dwindling tax revenues continue to flow into SS and Medicare,
    there is less money to divert into corporate welfare and fat cost plus corporate contracts and 2) it sets
    up the insiders who can heavily influence the ratings agencies to make some money off the higher
    interest rates the downrating would force.

    In short, the financial badboys can and will use the credit rating agencies to fill their coffers and
    solidify their control over their political puppets.

  33. Good points, but I think the silly thing is having rating agencies rate U.S. government debt in the first place.

    No, what is silly is to pay attention to those ratings or use them for anything – if indeed you have so much information about that government debt elsewhere. Anyway, I don’t think anyone decided to “have” rating agencies rate government debt; rating agencies are (nominally) private companies who as far as I’m concerned can rate whatever the heck they like. So they rate this, that, and the other. Here they are rating US debt. If you don’t like their pronouncement, ignore it. Just as I do with most of Roger Ebert’s movie reviews….

  34. Whether technically justified, or not, a downgrading by the rating agencies will very likely have a potent psychological impact on people seeing the USA as something less than a solid bet, where the “full faith and credit” of the country, is less powerfully resonant than ever before. Investors that are cautious-minded may suffer a case of jitters before too long a time goes by.

  35. @Singing Around the Campfire “Investors that are cautious-minded may suffer a case of jitters before too long a time goes by”

    Oh the cautious-minded have had the jitters for a long time now… have you not looked at gold prices lately?

  36. @Sonic Charmer “what is silly is to pay attention to those ratings”

    Absolutely but, what is even sillier, is to impose those ratings on others, like the bank regulators do.

  37. Absolutely but, what is even sillier, is to impose those ratings on others, like the bank regulators do.

    Agree 100% and you were the one who convinced me!

  38. @Sonic Charmer “Agree 100% and you were the one who convinced me!”

    Thanks, but sadly though you are most probably not a regulator, they don’t even want to hear about it.

  39. Dear Per, yes, I have noted gold prices for a long time. What I was trying to convey is the sense of uneasiness is only going to intensify, that is, increase and worsen, would you agree?

  40. Dear Steve, I concur, when the deck is marked, and the dealer colluding, and everything else is rigged on your behalf, your suggestion is less a conspiracy theory in my mind, and more a reality-based observation.

  41. Dear Carla, we are living in a banana republic, absolutely….rigged elections, bought and paid for pols, police with machine guns and tanks, attendant crime mafias to generate extra money for all the dirty covert stuff…..and a degenerate elite stealing with hardly a peep from the peons, from whom the wealth is flowing upwards on onwards.

  42. Singing Around the Campfire

    Yes I agree that the sense of uneasiness will increase… unfortunately, no matter what they decide in Washington on this debt ceiling-spending-cuts-tax-increase issue.

    There needs to be a reasonably credible idea of what can get growth and the US going again, and so that the US does not become just another submerging country.

    What I suggest is the following… the bank regulators discriminated against the small businesses and entrepreneurs for the only reason they are perceived as more risky… and this in the land of the brave. Stop that discrimination and release the force of small businesses and entrepreneurs… you (I am not a US citizen) have really nothing to lose, because never ever has a bank crisis originated from excessive lending to those perceived as risky.

  43. Given that the U.S. Fed is printing so much money … shouldn’t the government be taxing it back?

    My non-expert understanding is that too many dollars in search of a safe investment haven is a recipe for a financial bubble that is going to crash.

  44. IMHO, the ratings agencies lost their credibility when they gave AAA-bond ratings to the financial products that have brought the United States and Europe to the brink of bankruptcy.

    They don’t deserve to be taken seriously.

  45. Great post James :-)
    {way ahead of the posse?}

    Subject: Rating Agencies & Regulation


    Click to access Enron.pdf

    Quality Resourse Sites:

    Ref: (Rothschild’s)

    MacGraw-Hill co. owns the S & P Rating agency – controlled by the Rothschild Family

    Ref: “Den of Thieves” (great read); note that Ivan (he who dies with most toys wins – fame) Boesky is in Eastern Europe teaching the Russian Mafia how to work the system ! His partner in crime Sir Michael Milken is a born-again hero of Wall Street teaching all the emerging markets how to play the game against America,… offshoring what’s left of our Manufacturing Base, and Investment House franchises ,…nice!

    Thankyou James and Simon

    God Bless You Julian Assange, and Good Luck :-))

  46. @tippygolden: “My non-expert understanding is that too many dollars in search of a safe investment haven is a recipe for a financial bubble that is going to crash.”

    Good thing that’s never happened before.

    If ordinary people don’t get a grip on this and organize to fight the international banking system, we are heading for something much worse than a crash. We are headed for serfdom.

  47. What are you missing? Pretty simple: people actually thinking that ‘government debt’ in and of itself means anything. It doesn’t.

    However, this is all a confidence game. A playing of political interests against one another.

    It’s all about playing into a trend. If some agency says X and if X ties into the popular fears/hopes of the day then it floats. If it doesn’t it dies. Its a popularity contest. Say what others are saying and chalk up the fact that you’ve appealed to people.

    When we talk economics these days, we’re not REALLY talking economics. We’re talking crap. But that’s because these ‘economic theories’ are rotten and they’ve failed. So, we’ve descended into gossip.

    There’s no real evaluations of what’s going on here. It’s just bluster. But it’s because the ‘Gods have failed’ and so the media is left with little else.

    I don’t blame this on the media — although they propagate it. I blame it on a bad economic theory that cannot explain what’s going on. This confusion leads to people talking rubbish.

    The lesson? If the theory doesn’t work, figure out why and fix it (it was nonsense in the first place).

  48. @carla

    “Good thing that’s never happened before.” lol :)

    @ earle.florida

    “God Bless You Julian Assange.” Ssshhhh … the FBI might be onto you :)

    Seriously, though. If the U.S. Fed printed trillions of dollars to bailout the banks and the economy, why can’t the gubmint tax some of it back to pay down the deficit and debt.

  49. Oh, and just to give a giant hint on where to go:

    Eh, anyone notice that Minsky got it right? Yeah, read his stuff. Actually read it. Carefully. And you’ll notice that he viewed the economy in a wholly different way to nonsense mainstream economists. And this gave him a clarity of perception to actually see what was going on.

    His students have been working for years on this stuff. And they’re still ignored by people who dismay over how politicians are acting without giving them an alternative.

    This stuff has been figured out for years. And yet no one pays attention.

    There’s no point in calling out a zombie ideology if you don’t have anything better. But its all already there. Waiting.

  50. What you are missing James is the death of capitalism. Private ownership of industry that now owns everything, including the money to buy our government. Capitalism has no means by which it can reverse its own damage. We The People must figure out a way to change the paradigm from capitalism that worked somewhat, because local economies carried the capitalist on their backs, whether they deserved to be carried or not. All sensibility is lost; it has been lost for ten years. We the people must find a working alternative paradigm, and quickly. Meanwhile there will be one stupid turn of events like Moodys and S&P having their dangerous opinions after another.

  51. Gawd…it is not that complicated…Moody’s says what it best calculates to drive money it’s way.

  52. One of the biggest problems we have is that it is so difficult to accept that “expert” regulators appointed to such important places as the Basel Committee for Banking Supervision, the global bank regulator, can really come up with so fundamentally dumb regulations… but they did and they still do. Like the issue of their reliance on the credit ratings.

    Let me ask you. If you were a responsible regulator, would you lose one minute of sleep concerned with the credit ratings being right, or would you instead be tossing and turning about the possibility of these being wrong?

    If your answer, as I assume, is the latter, then try to explain the current capital requirements for banks that allow for very little bank equity when the credit ratings determine there is very little or no default risk at all, and they are therefore based on the premise of the credit ratings always providing correct risk information. Loony eh!

    As a result of this regulatory silliness the current crisis has left our banks with no capital simply because they were not required by the regulators to have any capital against what was ex-ante rated as “not-risky” but that “ex-post” turned out to be very risky.

    This is one of the fundamental regulatory issues that the owners of this blog don’t want to discuss… anyone is free to speculate on the why.

  53. Many insurance companies, pension funds, etc. have investment standards based on the rating agency grades written into their corporate charters and such. Drops in ratings can reduce the number of potential investors who are allowed to buy a security – though I don’t think a move from ‘AAA’ to ‘AA’ would do much. it can even force investors to sell securities. Look at the downgrades a few years ago of GM bonds as an example. Thresholds below ‘AA’ and particularly ‘BBB’ would be big.

    The bigger issue is how foreign investors perceive it. Look at the TICs reports on agency and Treasury bonds once the GSE’s went into conservatorship. In reality, both are backed by the US government. But I don’t think the Chinese like trying to read the nuanced tea leaves of US politics (they’ve got their own tea leaves to decipher). Will the drop in rating spook foreign investors?

    Although everyone has the same information to analyze US Treasuries, the difficulty in the analysis is more about US politics than the more quantifiable economics and finance. How much confidence do we have in analyzing other nations’ politics? Not much.

  54. It seems to me this is just a way for the ratings agencies to hit back at the government for criticism during the financial crisis. The raters can now extract a bit of revenge (or blackmail or threat) by downgrading US securities.

  55. Dear Singing By The Campfire. Thanks for your comment.

    As to Ed, name calling is easy. I’m not a big fan of conspiracy theories, but given what’s been going
    on in global high finance, why not assume the financials will use rating agencies for fun and profits
    as they have done and are continuing to do?

    Look at what the role the financial big dogs have played in Greece and here in America. Given the role played by the rating agencies in the Enron meltdown and in the sub prime market meltdown, do you really think they are honest and independent?

    Given recent history, why isn’t it reasonable to hypothesize the financial crowd will use the ratings agencies
    once again to feather their nests?

    Also consider the huge fees the big dogs will extract when they assist states and cities in privatizing their
    assets to pay their bills? Which is exactly what’s happening now in Greece. Which of the big boys is
    facilitating negotiations to privatize the Ohio turnpike and how much are they making on the deal? Unregulated profit motives are driving this bus, not a conspiracy. Its just that the big dogs are so huge
    they can use not only the rating agencies, but US government policy to cash in big time.

    Simon and James were correct to insist the too big to fail big dogs need to be reined in. I’m simply adding
    that the damage they do is not only because their high leverage, high risk profiteering can damage the
    whole global economy. It is because they are able to use their huge, unregulated financial power to
    create huge profit opportunities via shorting and privatization.

    Steve from Cranbury

  56. @Dan who wrote, “What you are missing James is the death of capitalism. Private ownership of industry that now owns everything, including the money to buy our government. Capitalism has no means by which it can reverse its own damage. We The People must figure out a way to change the paradigm from capitalism that worked somewhat, because local economies carried the capitalist on their backs, whether they deserved to be carried or not. All sensibility is lost; it has been lost for ten years. We the people must find a working alternative paradigm, and quickly. Meanwhile there will be one stupid turn of events like Moodys and S&P having their dangerous opinions after another.”

    There really is a science to *currency* watering the interactions of labor with the “material world”, if you will, to sustain life – life maintenance activities – so take out the word *money* and all it’s fetishism (ie. “in the beginning there was MONEY, and then came life….”).

    Fiat money in the hands of derivative math geeks is completely delusional! We can’t LIVE out a delusion. It don’t work :-)

    From the time Paulson shoved that 3 page note on to the USA citizen – “…give us all your money…”, there has been nothing other than a WAR in the streets already! Goons knocking down doors and throwing people out of their homes, SWAT teams in AZ justifying their intake of millions by sending 20 people to shoot down one drunk and despairing home owner, enforced unemployment until nothing MOVES….c’mon – that’s not a WAR being conducted by wandering hate-filled drunken and drugged Orks?!

    Read the war manual out there by our military about putting down an “insurgency”….they’re playing it by the book….

    People’s minds are made up – we’re pulling a “Rosa Parks” – sitting there, not moving from our seat because the one telling us to move DOES NOT HAVE THE RIGHT TO DO SO. I never gave an Ork permission to come destroy me…

    We NEED a Constitutional Convention. Period.

    They don’t have the RIGHT to do what they are doing in D.C. No one gave them that right. We said they were to represent US – “we the people”…

    It’s a DELUSION of the media to pretend we are stupid, unorganized and not acting, already, to work building the future to which THEY will have no access.

  57. James, man who listens to Moody’s, Fitch, or S&P when it comes to deciding the direction of the US debt or economy. What is happening right now surrounding the debt ceiling increase is a tragicomic kibuki of the first order. If we could only assemble a progression of sound bites coming from all parties it would be a truly momentous occasion in the history of political comedy. Even Bill Maher couldn’t do better. What will happen? Essentially nothing earth shattering. Once again, the can, as it were, will be kicked down the road. Despite massive opportunities to put our fiscal house in order, the gross dogmatics makes such things absurd to consider. But, Moody’s, it turns out, is just a bit player in the plutocratic charade that goes on and one, just one more fiddler playing off key while 99% of our population is under threat of death or worse.

  58. @Steve from Cranbury ”Simon and James were correct to insist the too big to fail big dogs need to be reined in.”

    Though I would not call them dogs, you are correct. Nonetheless in these days the regulators, by classifying some huge banks as Global Systemic Important Financial Institutions, G-SIFIs, are formally awarding them a too-big to-fail franchise, and of course, thereby, making it so much more difficult for the then de-facto declared “Globally Systemic Unimportant Financial Institutions”, G-SUFIs, to compete, and Baseline Scenario is mum about it, because its owners do not want that criticism of the regulators may in any way or form overshadow their criticism of the “banksters”

  59. 99% of the population is going to EAT the fiddler.

    even the mercenaries walk away, taking the money without doing the *protection* when the 99% finally show up…there is no honor among thieves….

    biggest heist in history

    of *fiat* money….

    is that still not insane enough for the “intellectuals”…?

    cheezeloiuse – all this because we can get off of oil FASTER than they want….

    @Jeff – “think of the FOX news matrix as an IV drip of cow crap” – I just spit up coffee on my monitor. Thanks for the chuckle.

    Lord of the Babushka BusyBodies – talk about parasites!

    cow crap is a very useful commodity – it’s a waste to give it as an IV to Orks…

    I’ll bid on it – need some more of it now that I am marketing my homemade tofu kielbasa….

  60. from site – finally a way to get my message to the MotherShip that left me behind – funny practical joke – NOT! :-) SOS – “there’s no intelligent life on earth – get me outta here”

    “Rupert Ursin of the Institute for Quantum Optics and Quantum Information at the Austrian Academy of Sciences explained to me that the laser was part of an inter-island quantum-cryptography experiment,” says Hattenbach. “Physicists send entangled UV-photons from the Roque de los Muchachos observatory (ORM) on La Palma to the European Space Agency’s Optical Ground Station 144 km away on the island of Tenerife. The goal is to demonstrate the feasibility of quantum communication over very long distances in space–e.g., to the International Space Station or other satellites.

    “entangled UV-photons” and we don’t know how to manage electrons better….?

    I have a bridge for sale in Brooklyn…oh wait, can’t use that line anymore as an OBVIOUS lie, huh?

  61. What are you missing? That the owners of Moody’s, billionaire Warren Buffet prominent among them, are in essence issuing marching orders to the political class on how much they should cut the budget by. If the government doesn’t control its own budget, then it’s not really sovereign, is it? That’s the point of the exercise: To give the top 0.01% explicit control over government fiscal policy. Sure, that delegitimizes like, Article I, but… So what? They call it “political” “economy” for a reason….

  62. Someone at the Ministry of Propaganda has recently issued an order to turn this thing up to 11. Leonhardt today with his stick a fork in us article, Krugman who is actually using the D word now. Whatever the direct mechanical/contractual effects of the ratings, you have to look at it like you would the NBER declarations of “recession” and “depression.” They are controlling the mood of the country with these levers, and the mood is getting very very ugly indeed.

  63. It was known that as time approached its end on Earth, say 12 o’clock, that each second would be longer than the second before it. All the way until you got to the last second, which then would take forever. I trust we are better than 1/2 way through that last second.

  64. From another “business” blog, a poster bottom lines it – “If they investigated the foreclosures THEN that would show the tarp money was THE single biggest scam ever put upon the American people by the government and that it covered all those loans so THE LONESHARKING BANKS could foreclose on the loans.”

    And to take things even further into the weird zone – in EU countries, workers used to go on strike to protest the taking of unearned wealth by *money lenders*….but here, if everyone who still has a job went on strike, the $$$ from not paying the salary of the strikers would be sucked up in nanoseconds – there would actually be a *jubilee* if no workers were left to pay…

    Make no mistake about the level of the insanity – their monkey brains want it ALL.

    The cost of the cheap ME War was put on the books the day Paulsen handed that stick up note just as the notorious Bush cabal was packing up and leaving D.C. – “mission accomplished” – we worked the system to get it ALL….

  65. @Carla – If you stop and really think about it – what *they* have is not $$$, they have the psychological advantage. They got everyone to BELIEVE that “….in the beginning there was *MONEY* and then came life…”.

    You can’t LIVE out a delusion.

    Who gave them permission to ACT with malice and hatred against the human species and Planet Earth?

    Bottom line – since they’re DOING whatever the hell they want, guess we can ALL do that – whatever the hell WE want….pen to paper – let’s draft *LAWS* just like they do….

    Economic disobedience….they don’t have enough mercenaries to enforce poverty in USA beyond the here and NOW…So far, the Orks in USA funded by Koch have only beat up on women…

    It’s not going to be that easy in USA, I can promise you that…not only are we ALL armed and dangerous with a fire in the belly to defend the fruits of our labor – but a HUGE portion of the military are on OUR side…and they know where to take out the *strategic* centers should anyone start droning We the People…

    It’s a psychological advantage….”…in the beginning there was *MONEY* and then came life….”

    Uh, sure, buddy, whatever you say – and sotto voce, drawing circles around my ear – universal symbol for “that person is frrkin looney tunes”….

    uh oh, my dagger is glowing blue – Orks near :-)

  66. Lyrics by William Blake. He hated what was happening to England as the industrial revolution was started. The music is by Sir Hubert Parry. The melody is based on an English folk song. The song was first used as the anthem of the Suffragettes but after they got the vote, I guess, it became an anthem for England and English footballers. IMHO one of the most beautiful songs ever written. Maybe some one could change a few words in the lyrics, eg, England for _____(??) and this could be an anthem for a better world where it is one vote one person and democracy functions as it should. There is a philosopher who even advocates that children get a vote (their mother’s vote for them) because of population decline in the “first world” and the state we may be leaving it behind in. :)

  67. Blake’s poem

    And did those feet in ancient time.
    Walk upon England’s mountains green:
    And was the holy Lamb of God,
    On Englands pleasant pastures seen!

    And did the Countenance Divine,
    Shine forth upon our clouded hills?
    And was Jerusalem builded here,
    Among these dark Satanic Mills?

    Bring me my Bow of burning gold;
    Bring me my Arrows of desire:
    Bring me my Spear: O clouds unfold!
    Bring me my Chariot of fire!

    I will not cease from Mental Fight,
    Nor shall my Sword sleep in my hand:
    Till we have built Jerusalem,
    In Englands green & pleasant Land


    A neighbour who studied at Marlborough and Cambridge (he said his former wife had danced with the Edward the Prince of Wales and was secretary to some prime minister but not Churchill :) explained that when the poem was written it captured the spirit and optimism of the time.

  68. Tippygolden–thank you for that beautiful rendition of “Jerusalem” which sounded a little familiar, but I have to admit, I didn’t really know.

    When I thought of something that might become an anthem for the masses — well, I’m definitely dating myself– but what came to mind was Helen Reddy’s “I am Woman.” If Ms. Reddy and Mr. Burton would permit the substitution of “Human” for “Woman,” do you think it could work?

    I Am Woman (Revised for the Worldwide Financial Collapse) Lyrics by Helen Reddy and Ray Burton, with the identifying noun ONLY changed in the version below.

    I am human, hear me roar
    In numbers too big to ignore
    And I know too much to go back an’ pretend
    ‘Cause I’ve heard it all before
    And I’ve been down there on the floor
    No one’s ever gonna keep me down again

    Oh yes, I am wise
    But it’s wisdom born of pain
    Yes, I’ve paid the price
    But look how much I gained
    If I have to
    I can do anything
    I am strong (strong)
    I am invincible (invincible)
    I am human.

    You can bend but never break me
    ‘Cause it only serves to make me
    More determined to achieve my final goal
    And I come back even stronger
    Not a novice any longer
    ‘Cause you’ve deepened the conviction in my soul

    Oh, yes, I am wise
    But it’s wisdom born of pain
    Yes, I’ve paid the price
    But look how much I gained
    If I have to
    I can face anything
    I am strong (strong)
    I am invincible (invincible)
    I am human

    Just a thought…

    Oh, God, I can only imagine the cr*p I’m going to get from various quarters for posting this. (Sigh.)

  69. P.S. @tippygolden: I’m well aware that my suggestion doesn’t have the majesty of Blake and Parry, but it’s interesting that both songs were anthems for women seeking equality, is it not?

  70. Some night time music for Carla and Earle.Florida (and early please do not get slavish you are absolutely fine as you are :) Yes, torch music but sooOOOOoooo beautiful. Stuff the oligarchs :)

  71. typo: meant to say Earle (not early)

    from tippyG in the land where we have universal health care and a prime minister who wants to remake Canda into the Republican vision of past decades. We need more prisons, we need to dismantle our national gun registry, privatize medicine, build more warships buy more fighter jets … and on it goes. We may be the last bastion in the world that still has a bit of cash to spare on that complex one of your presidents told us about.

  72. Let’s just say Lucia and Chris’s beautiful piece will be the requiem for the oligarchs. We’re nice people we do not believe class warfare. We just want our democracy back.

  73. To Lloyd Blankfein (or whatever his name is),

    Please go away. Do the right thing and dismantle your bank. Move to Greece with your money and give the soon-to-be reborn drachma a boost. $50 million max is fine for anyone. Anything over should be taxed the way it used to be at 90%. Cheap money from the Fed and too much liquidity (?) is the recipe for an international disaster. Greece has some very nice islands they may have to sell.


  74. @Anonymous: the fear of Elizabeth Warren is hilarious. And President Obama is so obtuse that he can’t even see the strategic value of throwing a sop to “the people.” He is not just captured by financiers; he is completely brainwashed.

    Richard Cordray was a fine Attorney General for the state of Ohio. Too bad he’s going to be an also-ran because the bankers nixed Warren. Unless Dick Cordray decides to shock the heck out of everyone and just do what Warren would have done. But I’m sure he had to sign in blood that he wouldn’t, just in order to get the job. It’s a shame. But while 25 million Americans are unemployed, these politicians must have their high-paid jobs, you know.

  75. James,

    You’re right that it perhaps shouldn’t matter, but it does because a lot of regulated mutual funds, pension funds, and other entities are required to hold AAA-rated securities. It’s in the indentures and prospectuses of a slew of financial products and investment vehicles—trustees often can’t invest in paper that hasn’t been blessed by an NRSRO. So as in the previous crisis, a downgrade has snowball effects irrespective of the fundamentals.


  76. “So What”,… Nothing changes except the Wind’s Constant?

    Can’t help myself tippgoldenpress,…

    “the winds of change
    from whence they come
    tundra or furnace i’ve yet to explain
    bathed in a spring or baptise by desert

    alas the embryotic mimicry of winter
    hybernates no more
    as the visiting nadir bows from the scene
    the swirling of mirth dancing in the air

    springtimes adolescence foments
    as the sounding artisian’s swell awaking
    growing pains perpetuate the tumultuous curious lamenting
    this palliate destined by youth
    thus only to be wasted by youth
    how strange
    the winds of change

    tis the summer solstice
    which blossoms hence
    their wings of flight
    this morphing changeling
    now a zephyr
    gifted of amorphous flight
    testing the winds

    twilight approaches
    tis time to dance and mate
    before mother reigns in her offsprings fate
    unstable as change
    the gales hasten to fornicate
    lest mother nature not scatter their seeds
    fermenting a season of ill contempt

    whilst is time
    as mother’s breath blusters aloud
    hence the winds become as frozen in time
    once again this equinox shutters the presence with the past
    when time has no meaning but for destinies blowing in the wind
    these winds of change

    beautiful as it is
    the message the four winds bring
    tis worth remembering
    we as humans
    would be not worth mentioning
    if not for the changing of this restless and meandering wind”

    PS. Is Obama shaking down the Agricultural/ Commodities Industry? (what we eat, and drink, etc. etc.,…?)

    Ref: “United Kingdom bans corporations from political donatinos after BP, and ENRON! (1/30/02)

    Thankyou James and Simon

  77. @earle, florida: Ref: “United Kingdom bans corporations from political donatinos after BP, and ENRON! (1/30/02)

    From the current Murdoch/Brooks/Cameron mess, doesn’t look like it did them a lot of good.

    Tough times ahead, but per the Chinese curse, interesting ones.

  78. @ Carla

    The most powerful person in the mafia is/ was the ‘vice` lieutenant of the boss, period!
    “Lucky Luchiano” was the most powerful man in America,… holding/ looking up J.E. Hoover’s dress?


  79. I’m not going to spoil Earle’s poetic licensing :-) by explaining the simple science behind *wind*

    And, Ladies, that’s the problem. You want to be men’s *equal*.


  80. What you are missing, Mr. Kwak, is that all these money people (e.g., Wall Street-ers) are soulless space aliens who have an endless appetite for wealth (by any means necessary). Presumably, someone stands to profit handsomely by a ratings downgrade of U.S. treasuries. Someone (or some entity) is right now “shorting” Uncle Sam and (perhaps) “rewarding” Moody’s for “pulling the trigger.” Isn’t this sort of thing a treasonable offense?

    BTW, I’ve developed a plan to jump-start the U.S. economy by creating a tsunami of new business ventures by tapping the financial power of Wall Street to create jobs on Main Street. This approach ramps up employment quickly and puts money directly into the hands of the people who need it now: the consumers (whose spending represents 70 percent of GDP). This enormous financial turbo-boost to the economy will reinvigorate economic activity and quickly return the eight million jobs lost during the Great Recession. The purpose of this mechanism is to take a private-sector proactive approach to address the expected long-term high unemployment problem.

    You can read the proposal (“A Modest Proposal to Save the American Economy: Entrepreneurial Blitzkrieg as Job Creation Vehicle”) and its companion piece (“The 75 Percent Solution? A Moral and Economic Imperative to Create Good Jobs NOW!”) here:

    Joseph Patrick Bulko, MBA

  81. @Joseph Patrick Bulko. You say in your blog “We already know that massive amounts of money are located in – or are passed through the machinations of – Wall Street by one means or another. We know that if some percentage of this money could be diverted directly to jobs creation, the entrepreneurial blitzkrieg could be achieved.”

    The only real anti-entrepreneurial machinations I know of, are the ones concocted by the bank regulators when ordering the banks to have massively more capital when lending to small businesses or entrepreneurs than when lending to the government or the triple-A rated… and all that machination for no good reason at all… just the opposite.

  82. @Per Kurowski. The whole point of a ratings system is to assign risk to an investment vehicle (to assist investors in choosing among investment options). In the case of triple-A ratings – the safest rating – it would seem reasonable that capital requirements would be lower for these types of investments than for relatively risky entrepreneurial ventures. That’s why I propose the creation of a venture-backed security to be sliced and diced in a manner similar to the much abused mortgage-backed security (set up in a manner to distribute the risk across a wide range of new business ventures). The VBS would become a conduit for massive transfer of investment funding to entrepreneurs (while allowing the Wall Street barons to continue amassing huge profits to feed their insatiable hunger), thus creating a massive number of jobs (for regular people) and helping to jump-start the flagging U.S. economy. There’s nothing I can do about the dithering of Congress or the trend during the past 30-plus years of watering down and/or eliminating financial industry regulations (i.e. the systematic removal of “referees from the playing field”). My only goal is to create a non-government dependent private-sector mechanism to create enough jobs to return the country to full employment. I find it disgraceful that we allow the super rich (i.e., the space aliens) to destroy the livelihoods of millions and millions of hard-working Americans, leaving a mess of broken lives and broken dreams that will require many years to overcome. Thanks for your comments!

  83. @Joseph Patrick Bulko “In the case of triple-A ratings – the safest rating – it would seem reasonable that capital requirements would be lower for these types of investments than for relatively risky entrepreneurial ventures”

    That is if we suppose that the relative were entrepreneurial ventures were paying the same interest rate risk premiums, which is obviously not the case. What these regulations did was to increase dramatically the return for banks on what had the safest ratings, by means of dramatically reducing the capital requirements for the banks when going there… and that was why the banks stampeded into sovereign and triple-A rated waters and abandoned small businesses and entrepreneurs.

    You want to look at the video where this is explained with some illustrative numbers.

  84. @Per Kurowski. I see your point. You might be onto something with this! However, my offer of the entrepreneurial blitzkrieg and the accompanying venture-backed security is recognition of the fact that we can’t control the capital requirements for banks (or any other regulatory matter). The “powers-that-be” set those requirements and we have no means to change them. It just seems waaaaay simpler to implement a jobs creation mechanism that uses existing financial industry architecture, thereby eliminating the ongoing headache of whining and complaining about too much or too little or too ineffective government regulation. I’m not part of the elite who spend time on golf courses etc with our elected officials convincing them to make favorable policy decisions. I’m just a member of the American serfdom, looking for a way to empower the middle class without doing battle with the ruling plutocracy. Thanks again for your insight and comments!

  85. @Joseph Patrick Bulko. At this particular moment on top of the risk and cost of transactions adjusted extra spreads the small businesses and entrepreneurs have to pay they need to pay about 270 basis point (2.7%) in additional interest rates just to provide the banks with the same return on equity that a triple-A rated client does. This odious and arbitrary regulatory discrimination is no minor issue… and especially when bank capital is so scarce they just cannot lend to anyone for which lending there is a high capital requirement.

  86. @Per Kurowski. I have no argument with you on any of this. [Incidentally, I watched your “financial crisis” video where you explain this matter in some detail.] My point, simply, is that we (=regular citizens) cannot control the policy decisions of our “leaders” (nationally or globally) and, so, I propose a private-sector entrepreneurial blitzkrieg patterned after the mortgage-backed security craziness that contributed to the 2008 financial meltdown [see The difference being that Wall Street money would create jobs (=income) directly on Main Street in my proposal, instead of providing mortgage loans (=debt) to consumers. Wall Street would still have ample income opportunities in the secondary market, in a manner similar to the (ill-fated) use of the MBS and its many derivatives and exotic “financial instruments,” while the U.S. economy would return to full employment. Clearly, much reform is needed to create a set of banking regulations that make sense for all stakeholders. In the mean time, millions and millions of otherwise hard-working Americans are jobless, with few (if any) prospects on the horizon. Thanks again for sharing your comments and analysis!

  87. @Joseph Patrick Bulko. If there really is a stimulus, or an entrepreneurial blitzkrieg as you call it, and that could do the economy much good that would be, temporarily at least, to drastically reduce the capital requirements for the banks when lending to small businesses and entrepreneurs. That it would be unwise in view of the recent crisis? Absolutely not! Small businesses and entrepreneurs, precisely because they are viewed as more risky, have never ever been excessively lent to and much less caused a crisis. That dishonor belongs entirely to either some fraudulent bankers and their assistants, or excessive bank lending to what is not perceived as risky.

  88. “Moody’s…blowing up the global financial system..” If you have doubts about that remember that hisory tends to repeat itself. If Moodys did the unthinkable how would Moody’s be affected?

  89. @Per Kurowski. I agree that it would be nice to “free-up” money for small businesses and entrepreneurs. Reducing capital requirements for investment in those types of businesses would certainly incentivize the entire process. However, to do so still requires a regulatory body to make the change. My Entrepreneurial Blitzkrieg plan [see can be implemented within the existing regulatory framework and with the current rules in place.

    Here’s an outline of the plan: (1) Groups of new business ventures seeking funding are assembled into bundles (of 30 or more individual businesses). Based on historical success probabilities for such ventures, the bundle is assigned an expected return. (2) Then, thru the magic of securitization, the venture-backed security (VBS), based on the business bundle, is created along with an array of VBS-based AAA-rated financial products (CDOs etc). These AAA-rated products benefit from existing capital requirements, which is key to unleashing mass quantities of Wall Street money into the original business bundles (which produce mass quantities of new jobs) in a relatively short period of time.

    The VBS-based process is a complex mechanism that would quickly bring the unemployment rate down to acceptable levels and jump-start the overall economy (by injecting huge amounts of new consumer spending into the economy, as a result of all the newly created jobs). The danger, of course, is that reckless abuse of VBS-related securities would lead to another financial industry meltdown. In this case, though, the U.S. economy would be left with millions of new jobs (=incomes) instead of massive mortgage debt. So, regardless of the action of the Basel Committee or the U.S. government’s 30-plus year assault on New Deal-era financial & banking industry regulations and safeguards, the American citizenry benefits by massive job creation and a booming economy.

    My plan might be deemed as cynical (or utterly naïve) but it can be implemented right here and right now, with banking rules that are currently in effect (regardless of how ill-advised those rules may be). I don’t think the American people can wait any longer for the finance/banking authorities to solve the high unemployment problem. So, I’m proposing to offer Wall Street the VBS-based line of financial products (and the associated income-producing potential) in exchange for jobs on Main Street for regular hard-working Americans. I’m willing to give Wall Street another opportunity to destroy the financial industry in exchange for the turbo-boost to the flagging U.S. economy that the entrepreneurial blitzkrieg would produce. I’m willing to put the solution to the high unemployment level (and the associated hardship) solely in the hands of the private sector simply because the pertinent legislative and regulatory bodies have forgotten the impacts of their decisions on ordinary human beings and are unaware of the urgent necessity to alleviate the ongoing economic hardship.

  90. Your plan is no plan. First you need have Moral Sense, no one on wal street or in politics has any. All you are proposeing is to enable the rich to sort out who is richer. The jobs you speak have mostly gone overseas, and the entrepreneurial spirit has gone with it. You would do just as well graveyard hunting and taking your chances with the pristine probate judges, who have squeaky clean hands, and sleep well at nite knowing thier nest egg is protected by thier own kind. And if this works so fast why hasn’t anyone felt the effects by now, you’ve been at it since at least April and seem to have all your ducks in a row.

  91. @Joseph Patrick Bulko There is nothing wrong with your plan and efforts. That said I do not like it much because it means “cheating” so as to live with the current capital requirements instead of changing them. I believe there is something so extraordinary pernicious with these capital requirement that it has to be understood and eliminated.

    In the “home of the brave” where you risk the lives of son and daughters on foreign ground… you discriminate with arbitrary regulations against bank lending to small businesses and entrepreneurs just by cause these borrowers are perceived as “risky”? You can’t be serious.

    The regulation for banks of a country that wants a future cannot look like silly and exaggerated beyond reason pool-safety regulations invented by an overanxious property manager.

  92. @Per Kurowski. Again, no argument here! I agree that the capital requirements need to be changed to discourage the type of investment behavior that led to the 2008 finance industry meltdown. However, to reiterate, I have no control of the process by which the banking/finance rules are set. I am just a voice crying in the wilderness. I can spend all day and all night wishing for sensible rules/regulations, but I can do nothing to change them. To “rage against the machine” is a noble endeavor, but without power to control or modify the “machine” we are merely spitting in the wind or simply guilty of wishful thinking. I have no influence over the Basel Committee or the U.S. government. In the mean time, millions and millions of people are without jobs and without means to support themselves, with their very survival heavily dependent on the graces of friends, family, and (dwindling) government support programs. I find this condition unacceptable. My entrepreneurial blitzkrieg plan (which purports to end the joblessness) can be “piggy-backed” onto the existing finance/banking structure to address the ongoing high unemployment problem immediately. Indeed, this may be a Faustian bargain, but what value is one’s soul when one is starving?

  93. @owen owens. I’m going to presume that you are addressing my Entrepreneurial Blitzkrieg plan (although you do not indicate to whom you are responding). Your comments are valid, in either case. I agree that “no one on Wall Street or in politics” has (or seems to have) any “moral sense.” It is with this understanding that I designed my plan to conform to existing political-economic policies and Wall Street structure. I cannot instill “moral sense” into Wall Street anymore than I can put “blood into a stone.” So, either I do nothing (to combat the calamitous level of unemployment) or I devise a program that works in the world as it is (hmmm, sounds rather Machiavellian), because I can’t craft an unemployment solution for a hypothetical morally upright world that doesn’t yet exist. Millions and millions of unemployed Americans cannot feed their families with hypothetical food! The jobs at the core of the entrepreneurial blitzkrieg are American-based, derived from the technologies developed in our research laboratories and in forward-looking industries set up to address future energy needs, energy conservation, and related. Plus, all sorts of other types of products and services derived from American ingenuity [perhaps, a better mousetrap?] would naturally be part of the massive entrepreneurial putsch. The speed of new jobs creation from implementation of the entrepreneurial blitzkrieg would indeed be astonishing; however, the plan has not yet been implemented. For the plan to take hold, I must “sell it” to the folks on Wall Street (where money and power are located). I do not have direct access to any of these people, which is a bit of a problem. So, while I work on creating access, the plan lies dormant.

  94. As your dreams slip into unconsencious, nothing is being done, how are you going to address the need to feed people as costs rise and resources dwindle in the sun. Buy up all the cattle and corn you can, but it is wiser to teach a man to fish rather than giving a man a fish. And perhaps you didn’t notice

    The jobs at the core of the entrepreneurial blitzkrieg are American-based, derived from the technologies developed in our research laboratories and in forward-looking industries set up to address future energy needs, energy conservation, and related.

    that this was just kicked out the door and sent to a country that is forced to tax everything to death because it competed with the [(Wests) todays] technology. And let me warn you that “must” is a tough nut to crack.

  95. @Joseph Patrick Bulko That is quite alright. You go there with your aspirin that can help alleviate some symptoms, and I will keep on trying with the surgical knife needed… Good luck!

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