A Few Quick Thoughts

By James Kwak

It pains me to see so much blogging fodder passing before my eyes and not have any time to do it justice. But here are a few thoughts:

  • Why does anyone think that anyone cares about what a rating agency has to say about Treasury debt? Credit ratings matter for obscure companies because they represent new information that is not otherwise available to investors. In the case of the U.S. Treasury, all the information you need to know is plastered across the front page of the world’s newspapers, all the time. Your not going to change your opinion because of something that Fitch says.
  • Since the debt ceiling mess started heating up, the yield on the one-month T-bill has increased from about 2 basis points (the rough average for September) to 32 bp. It makes sense to me that, if you absolutely have to get your cash back on October 31, it might make sense to be nervous about a bill coming due on that day. But otherwise, there is no chance that you won’t get your principal back. Does anyone think that the government won’t get its borrowing authority back one of these days or months? And does anyone think the Treasury won’t go back and redeem all the bills that came due during the hiatus? Which is why I’m not particularly worried about my holdings of the Vanguard Short-Term Treasury fund.
  • I am probably one of the few liberals who don’t think the Tea Party caucus is engaged in irresponsible hostage-taking. Sure, I disagree with their policy objectives, and they are risking economic catastrophe by trying to force the government into default. But they are also fighting for a principle, misguided as it may be: Obamacare is evil, and should be stopped. The debt ceiling is an absurdity that should not exist. But since it does exist, it is leverage that conservatives can use to try to achieve their policy goals. The problem is that the debt ceiling exists; given its existence, you can’t blame people for using it for their ends. It’s like the filibuster: you can say that the 60-vote requirement is bad, but you can’t blame people for taking advantage of it. As Norman Ornstein said (quoted in White House Burning, p. 103), “If you hold one-half of one-third of the reins of power in Washington, and are willing to use and maintain that kind of discipline even if you will bring the entire temple down around your head, there is a pretty good chance that you are going to get your way.”
  • Warning: If we get through this crisis alive, it’s because there are just enough Republicans who are just moderate enough to get sixty votes in the Senate, and John Boehner is enough of a realist (or a coward) that he doesn’t want to be known as the man who single-handedly caused a default (by refusing to let a compromise bill come to the floor). One more round of Tea Party elections, and Eric Cantor or Paul Ryan as speaker, and all bets are off.


24 thoughts on “A Few Quick Thoughts

  1. You are making the same basic mistake that is seen in the press when dealing with politicians. You are crediting Tea Party people with telling us what they actually believe. There is every chance they are behaving as any other politician would, saying what they think serves their careers best.

    To be generous to you, you are reflecting your priors, and we all do that. However, I would expect you to both understand what your priors are and to flag them when they form the basis of your analysis.

    You say “principle”? I ask “evidence?”

    As to ratings, I am under the impression that ratings matter to funds that are required to hold a particular average rating across their portfolio. I don’t know how large a share of total debt holdings that is, but I understand it’s a common practice. If the top rated holding is downgraded, the only practical way to get back up to target is to dump the lowest rated holdings. The “who cares about ratings agencies?” grouse has been around long enough to be on its 3rd set of dentures, but that doesn’t mean nobody cares in reality. It’s a statement about the value of ratings, not their use.

  2. Then what was the point of “13 Bankers”? In both the Great Depression and the Great Recession, bankers and investment greedheads used the tools that were available to them, so now according to you, although you don’t like the tools, you can’t blame them.
    None of the “systems” we set up (democracy, markets, etc…) have any inherent virtue at all. They all depend fundamentally on the assumption that the people who act in them are (in some sense) good. I don’t know of any examples of systems that are large, complex, involve people, and are not susceptible in one way or another to “evil” people manipulating them to pervert their intents. If you can’t point fingers at them, then there is nothing for you to write about.

  3. Having thought further, I must object to your view that “principle” is justification for harmful behavior. All you have argued is that the end justifies the means. If that’s what you want to say, then go ahead. If it isn’t, then you haven’t shown yourself to think very clearly when it comes to ethics.

    Action taken on the basis of strong economic and social beliefs is a central cause of the largest mass killing in history. That’s the side of the argument you’ve taken here.

    You don’t get to hurt others just because you have strong beliefs. Most tempting is to claim collateral damage – “I didn’t mean for them to lose their jobs (homes, cars, families, savings). I wish it had been otherwise, but I just hate debt soooo much.” That is also just about the worst argument you can make. No amount of third-party suffering is a reason for me to stop, because that suffering was not my intent? Terrible ethics.

  4. I on the other hand, when the time comes, don’t mind being known as the person who single-handedly caused a default, constitutional convention, or worse. For we are currently living in the dirtiest, most evil times of all universal time, and that my friends, is a long time. It is only a matter of time before it all crashes in around it’s self.

  5. ” But they are also fighting for a principle, misguided as it may be: Obamacare is evil,”

    Really? “Obamacare” is a Republican plan, devised by a Republican think-tank and implemented in Massachusetts by a Republican governor. The only principle involved is implacable hostility to the person in the White House.

    Republicans have repeatedly demonstrated that hostility to Obama in more important to them than the welfare of the country. They have faults, but an excess of patriotism is not one of them.

  6. I’m liberal, and I agree with you that the tea party was within its rights to use those legal tactics at hand
    so, there are at least two of us; Niall Ferguson math, one more, we will be a majority of western civilization

    however, why do rating matter ? cause people think they matter; if the Sov Wealth Fund managers listen to ratings agencys, then a down grade is an issue

  7. Personally, it seems to me that Chief Justice Roberts changed the Patient Protection and Affordable Care Act by calling the mandate a “tax” (so it would be constitutional as a taxation power of Congress) when in fact it appears to be a penalty, and, as I understand it, was passed by Congress as a penalty, not a tax. I think Roberts should have sent the case back to Congress to rewrite the legislation and see if the law passed by calling the mandate a tax.

  8. “…..Your not going to change your opinion….”

    uh, Professor, it is “you’re”, not “your”….

    Federal Reserve Board’s 99 year lease to print money ended 12/21/2012…

  9. Excellent point on the Tea Party “hostage taking.” I think commenters like kharris would have trouble explaining why Democrats (particularly the current President) funded the Iraq War—without saying that the war just wasn’t that important compared to the smooth payment of interest to bondholders.

  10. I consider myself to be a liberal altho i have voted 3rd party for decades…. i agree that the TParty was within their rights.

    The signal complaint is that they are harming others. Well, i think we can turn that around a bit. If the debt is so serious — as i think it is — then the perpetuation of the debt will be more harmful

    The fact seems to be that the debt ceiling/crisis/deficit reduction claims are 2 parties playing to their audiences to gain power and not to address the real economic problems – GROWTH!

    What i mean, if i am correct, is that it really doesn’t matter if the country defaulted yesterday or tomorrow or next year – its going to default and that will have terrible consequences on the lives of many people.

    The way i see it is: that some of the Congressionals came periously close to pullling the plug on the Ponzi Scheme in Washington — and thats the reality….

  11. ‘did someone say “mass killing”….as in “made a fortune”….?’

    NO, mass killing as in mass killing of human beings. By people like Lenin, Stalin, Mao, Hitler….

    Fortunes are made by people like Bill Gates, Steve Jobs and Henry Ford, by providing their fellow man with useful products.

  12. “The problem is that the debt ceiling exists; given its existence, you can’t blame people for using it for their ends. It’s like the filibuster: you can say that the 60-vote requirement is bad, but you can’t blame people for taking advantage of it.”

    I think that’s very much apples and oranges, for two reasons:
    1)The debt ceiling is a poorly-designed law that actually conflicts with Congressional control over spending- Congress can mandate spending which the President is obligated to carry out (Anti-Impoundment Act, Train v City of NY), but not authorize the borrowing or taxes to fund that spending. If Congress wanted to object to the spending, they have the purse strings. Objecting to the borrowing to pay for what you’ve agreed to spend is nonsensical- using it as a lever to wreck the American system of government is not a policy disagreement.
    2)Unlike the filibuster, the debt ceiling hostage crisis (and even eg McConnell has referred to it as a hostage situation) is a threat to hard America unless they get what they want. Not to negotiate X for Y, or even to hold out for Z, but to just flat-out hurt the USA if their demands aren’t met.

    Now, I disagree about most of the Tea Party’s goals, but Im fine with them using the levers of power to try to enact those goals- shut down the government, launch a filibuster, etc. I am *not* fine with them threatening the US economy in order to enact those goals. It’s a process question, not a policy goal question.

    Imagine a US President threatening that if he didn’t get the budget he wanted he’d order the 6th fleet to scuttle their ships or use the USDA, FDA, and CDC to halt or delay food and medicine shipments across the USA until he got what he wanted. Technically, those might be within his powers, but it’d be wrong as hell for him to use his powers to hold the US hostage to his demands.

  13. Technically then we shouldn’t have threatened to withhold hwy funds to force States to comply with the a mandatory car insurance or drinking age requirement, because that would be considered holding States hostage to US federal demands. And you can blame people for taking advantage of past bad laws, today’s debt ceiling debates are moot because the premises have been compromised a time long ago and the definitions have been changed as a result.

    It started in the late 70’s when Paul Volker raise rates claiming inflation, (which there was none of, other than the price inflation caused from the tripling of gas prices), but it was actually an illegal act done to cross a time line, of the separation of the rich and the poor. If your family didn’t have money during that nearly 6-8 year period, you were most likely to become a slave to money from that point forward. Just as the slaves were about to be exported back home legislatively, ( they were already being sent to Haiti) they were granted emancipation from President Lincoln. We also should have been financially emancipated from these chains of the past, yet there has been no politician, up to and including today, strong enough to achieve that need. Hence democracy and it’s laws have been compromised, without notice from it’s citizens as flawed premises are used as an ends to justify all means.
    So you see, talking about the fixes is useless without understanding the foundation of the problem. It will end quickly and violently when it does end though, so what i’m trying to say here is that, someone really needs to take the sin out of business, in order to correct today’s evils.

  14. “But they are also fighting for a principle”? The Taliban are also fighting for the principle.

  15. “….Fortunes are made by people like Bill Gates, Steve Jobs and Henry Ford, by providing their fellow man with useful products…..”

    @Paddy – NEVER will there be an app that you can download on your smartassphone that will clean a dirty diaper if you wave the diaper over the phone. And there’s a minimum of 7 BILLION diapers to clean up per day that NO ONE has made a “fortune” doing!

    We obviously have a different definition of “useful”.

    Economic genocide is genocide. Using FIAT $$$$ to take away people’s RIGHT to make their lives less miserable through HONEST WORK is something that even the psychotic megalomaniacs of the 20th century did not dream up. Wall Street using the “inventions” of Gates, Jobs and Ford came up with that schtick – CRIMINALS love what they can pull off in *virtual* reality. And just how great is it to have *tribes* who never even had an agriculture age as a culture leap frog to being filthy rich from trashing the planet with oil used to run that Ford?

    Ford was the only one who went on record understanding that unless you paid the people manufacturing the “product” enough of a salary so they could afford the product, his “fortune” would also be limited.

    Go have another beer….

    Trillions i taxes ripped from citizens to fund a pre-emptive war where only the 1% got the booty from the war and are now shutting down the “trickle”, you are INSANE if you think it isn’t going to get VIOLENT.

    One last “peaceful” attempt:


    btw – I did not get FOREVER distracted from the POINT of the “killing” – the quadrillion TOXIC derivatives….

  16. Annie is such a great economic historian, but she hasn’t heard of ‘diaper services’? There aren’t so many around any more–but Annie gives every indication of being old enough to remember when they were common–thanks to other entrepreneurs inventing the disposable diaper, but they still exist. Because entrepreneurs respond to the needs of people, rather than make fools of themselves ranting and raving at econ blogs.

    Btw, the derivatives weren’t toxic. It was the mortgages from which the derivatives DERIVED their value, that were toxic. That toxicity didn’t exist prior to the government interfering in the mortgage markets, in the 1990s. The entrepreneurs who came up with the non-traditional, low or no down payment mortgages were just doing what the government demanded they do; lend to people who wouldn’t be able to repay.

  17. I made my point, Paddy. No matter how many ways you want to spin it.

    Millions of comments, from non-paid schills like you, since the economic genocide was *programmed* and set on *EXTRACTION* have all said the same thing. There is NOTHING useful, nor were the entrepreneurs even trying to be *useful*, when the billions were poured into the virtual reality bankster highways and the algorithms therein.

    Just the FACTS, Ma’am.

    Look at the fiasco with the website for health insurance *exchanges*….there is NO EXCUSE for that. IRS software to hunt down people to fine is EXTRACTION, and that’s where the programming is set to on that “exchange”….the little detail about the programmers setting up the direct feed into IRS databases BEFORE the Supreme Court ruled it was “legal” is proof, for many, that the ACA is nothing but a new type of embezzlement.

    November 5th in D.C. And then it’s really over….

  18. I liked this film. It’s called “Occupy Love”. Kind of a cornball title, but the film is pretty good. I think the gentleman who made it is from Vancouver Canada.

  19. Very good point on the credit rating agencies and rating the U.S. Treasury debt. It’s a great point that there is no need for disclosure, we all know the status of the government and don’t need an analyst to explain to us why they think it merits some new (proprietary) rating. Also, another point that could be made here is that if for whatever reason the debt of the U.S. Government did start getting marked lower and lower, which in turn would be warning to both foreign and domestic not to invest in U.S. debt instruments. And that in turn would erode the incentive / concept / idea of investing in assets that were denominated in U.S. dollars. So where does the downgrading of U.S. debt ultimately lead to? What is the point? We can be warned, by a private corporation that does nearly all of their business in dollar denominated assets, that the entire system they (and everyone else in the nation) conduct business in is in no longer as safe / valuable / good quality. This would be like the brain sending analysis to the lungs that the heart is not as strong as it was before. Well, that might be the case, but what’s the difference – if the heart doesn’t keep pumping then the whole show is coming to an end anyway. If we critique our own debt down then we are basically shooting ourselves financially, as a society.

  20. if prayers worked, would we also need the priestly class?
    if politics worked, would wee also need professional politicians? or would just the honest ones do?

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