As a procedural matter this was the practice/is the practice in normal times. Prior to the Obama administration debt ceiling fights were very rare I think one happened in the 1980s, and none during the Bush or Clinton presidencies–but Congress and the President did refuse to approve either a budget or a CR during the Clinton Presidency and that resulted in a partial government shutdown, but that’s different than hitting the debt ceiling. So the practice was to make sure you set your debt ceiling correctly for whatever budgeted shortfall you had. Now, that’s never perfect as actual revenues or expenses can be different from projections in the budget–but it’s a good place to start from.
It’s been the practice because it’s sound policy, on that I think most people agree who reasonably look at this issue.
I don’t think we’re really in substantial disagreement, I’ll apologize for not replying to your post earlier–you see a very bad poster was running amok on this thread (and still appears to be doing so) when I last read it so I had written this thread off.
I also think your analysis of deltasigma the poster is deeply flawed. While you seem to have a good head on your shoulders for economics, it actually causes me to question you where otherwise I would not that you think deltasigma is particularly informed on this topic. Every thread I’ve seen him participate in I’ve just seen the veneer of someone who understands market economics but the underlying core is rotten or not fully fleshed out. A key point for me was when he insisted that whether or not specific mortgage backed issues failed or not was governed by their ratings as determined by analysis firms–he fails to understand that they were actually controlled by how those underlying mortgages actually performed–the ratings were an analysis (were supposed to be) of those underlying loans, they are not deterministic.
I’m not sure what you think my stance is, if you believe I’m saying the credit downgrade is an indication of “no problem”, that is not my stance. My stance is really compound, firstly–and this was the focus of a significant portion of my posts in this thread, is that traditional credit ratings largest impact is on borrowing costs as investors are not willing to accept for example the same interest rates on issues from Apple (a super blue chipper) as they are issues from a Greek shipping firm–and the ratings agencies offer a convenience service to bond investors to help them decide which companies are risky versus safe. Even if you don’t know much about Apple, their high credit rating might make you want to buy their very low-yield bond. You don’t know if Safe Bulkers (a Greek shipping company) is a great company, but the fact their recent 8% yield preferred series was issued without even being rated indicates this is probably a very high risk investment since it is not even rated and the yield is much higher than you’ll see from most entities issuing credit-rated instruments.
So my first point was that a similar effect was not seen with our actual credit downgrade, our debt issuance did not demand higher yields. That point is really not in dispute, and can be confirmed by looking up historical Treasury auctions as I’ve indicated earlier.
The second part of my stance is that the credit downgrade is the result of serious dysfunction in our political system that absolutely has serious impacts on our economy. But I don’t believe the downgrade in itself is a “wound”, it’s the actions that lead to the downgrade. If I jump off of my roof tomorrow and break my leg, the injury is the bone of my leg actually breaking. It’s not the doctor diagnosing me with a broken leg. So my second point was that at most the credit rating agencies are diagnosing something that has already happened, the rating downgrade itself is not an actual injury. I think it can be, but not for the United States, and not in the situation in which S&P actually downgraded us. For smaller countries I think the actual downgrade can be part of the actual bad situation going on.
Our view don’t seem that divergent, I agree that failing to come to a grand compromise was a strong and dangerous confirmation of our political dysfunction. It “wasn’t nothing”, but I do not strictly agree with you that the following credit downgrade in and of itself hurt much if anything.
I’d agree with this.
Right, but most modern democracies have a system in which the executive is also the head of legislature, this is true for most of the OECD–is it not? Off the top of my head I believe France has a separate executive with real power, but I struggle to think (just off the top of my head) of other OECD countries that have a truly separate executive. So there is no systemic problem with the head of the legislature doing whatever the hell they want with debt or whatever, they are subject to the whims of their legislative power base. The President is only subject to the whims of voters–once, as an incumbent running for reelection. For that reason I think it unwise to give him full power of the purse. I see that you do understand that Constitutionally it isn’t actually that easy to get rid of Congressional pre-approval of the debt, and I think anyone claiming to know anything about this matter is well aware of the various exotic legal theories about how the President could “interpret” hitting the debt ceiling and the things he could do.
Just about all of them remind me of Bismarck, after failing to come to an agreement on the budget with the Prussian Diet just decided to continue running government as he was, collecting taxes and appropriating funds as necessary. That really confirmed that the German Empire, was simply not a democracy. Bismarck was accountable only to the Kaiser, and not at all to the democratic institutions of the Empire. That is why I’m not keen on the President following a similar path.
This is probably true, I think fights over the debt ceiling are probably easier for Congress because Americans understand “shutdown” more than they understand talk of a debt ceiling. However, since we’ve had several debt ceiling crises in short order I think the truth of this is waning, any American who was going to care about such matters at all has at least been exposed to the situation a few times now and should be somewhat aware of failing to raise the debt ceiling being a bad thing.
I’m perhaps optimistic, but I’ve seen signs from Boehner and Cantor that they recognize they can’t really be as obstructionist as they were before–and there is evidence they’re willing to work to pass bills now that they weren’t before. But I’m pessimistic because Boehner is a weak Speaker with little control of the worst elements of his own caucus.
I suspect it won’t happen, but that’s just a guess–I don’t think there is a scientific means of coming to odds on this issue.
I think the only reason you manage to say that in a what appears to be a serious tone is because you realize that no one bothered to read anything you’ve posted here in anything approaching a critical manner. I think we both know the only reason you and most of the other repeat posters in this thread are here is for the purpose of jerking yourselves off. And you’re pompous enough to think that if you toss some jargon around you’re fooling people. Well, you probably are. Most people are idiots as it turns out I’m sad to say. But if you think that actually makes your gibberish in anyway meaningful, then I hope you’re living in a group home or some sort of institution because you really shouldn’t be on your own.
Aside from myself, the only other person here I know to have a genuine interest in these topics is Hellestal. And while I may not always agree with him, I at least respect the fact that he has a passion for the discipline and isn’t just a poseur.
Well there’s a decent example upthread. septimus says, “One government agency (Treasury) issues a trillion dollars of debt; another agency (Federal Reserve) buys it up.” deltasigma replies, “You idiot. You actually think that the Fed buys US paper from the Treasury?” Now most posters in this thread are familiar with Treasury auctions (issueing debt) and open market operations by the Federal Reserve (Fed buying US paper as well as notes and bonds). Deltasigma appears to think that septimus was claiming that it was direct transfer without intermediaries, for reasons that are unclear to me. Now it’s true that the Fed holds no US T-Bills at the moment. But that’s a little unusual: they certainly kept them on tap during the 2000s. Anyway, I trust deltasigma has had some economics coursework and reads the business press now and then: otherwise he couldn’t dispense this manner of wrong-headedness.
Anyway, I just had an impression of deltasigma’s general knowledge from GQ. I don’t believe I’ve made any outlandish claims about it. I characterize your examples as “Specialist knowledge”, though frankly that’s being kind. However they are certainly not, “General knowledge”.
Then I think we are actually in sync. What the credit rating change did is a bit of a side issue (though it’s topical given the thread title). I’m actually leaning towards agnosticism on the issue, given the immediate market response to it and the working paper abstract I quoted upthread.
Now we get to more interesting stuff, or interesting to me anyway. Once again, I’m going to dodge some of the real and relevant complications:
To which I say “C’mon”. We’re not discussing giving him the full power of the purse: we’re essentially discussing Steve MB’s proposal. I’ll add a caveat to your comment that while debt ceiling fights were pretty rare, debt ceiling posturing was a recurring and pointless theme since at least the 1970s and I’m guessing since the early 1900s. Once it led to a snafu which I referenced in post 146.
Bismark: Ah, I get it. You want to force Congress to play ball: otherwise they might just pass the buck to the Presidency. That’s a nice point, but I lack the historical background to evaluate it. I’d like to see a serious treatment of it. Executive term limits are one layer of protection we have, though I won’t claim it is sufficient. Worth thinking about.
Well what motivated me to come back to this thread was McConnell’s looming primary challenge next year and the added incentive he has to obstruct.
The 2nd issue is that I fear that McConnell has cracked the code of US democracy. In a divided government, the minority party has incentive to commit economic and legislative sabotage, because credit and blame will flow to the White House. I think McConnell understands this. So he does things like filibuster his own bill to lift the debt ceiling. He also talks pretty candidly about what he does, at least for a politician. Before 2007, I thought that we would never again have a Great Depression, because the public knew that it was unnecessary and would throw out any party that did not embrace textbook economics. This thinking was wrong, given the possibility and reality of economic sabotage without accountability. It’s also wrong for separate reasons observed in Europe, but that’s for another thread.
One obvious point is often overlooked or not clearly understood. That is, US treasury debt is THE benchmark by which all other debt is rated. Yes, sure, there is a fudge that other sovereigns can also be AAA rated. But think about it, there is no bond market as deep, liquid, long term and frankly safe as treasuries. Germany, Japan, Switzerland may all be sovereigns and have AAA ratings (they have in the past, I’m too lazy to look up if these are still AAA), but if some really bad shit happens, the US is the safest haven there is. All debt get ranked against US treasuries.
If any of you were in the markets in 1997 before it ended in tears, you may remember that Slovakian government debt was trading IIRC ~75 basis points above comparable duration treasuries. That was just one of many huge warning signs that the Asian Crisis was about to begin.
The investment banks in the 90’s and maybe now do often set up specialty banks that had AAA ratings for specific fund/trading/bond/financial product issuance purposes. It didn’t work well because the cost of capital tended to outweigh the premium they gained from the AAA rating. Credit Suisse Financial Products for example had a AAA rating. Heck, Swiss Bank Corp had a AAA rating before losing it IIRC in 1994. It was the last of the big 3 Swiss banks to lose the AAA rating, and the last major global bank to lose it. Swiss Bank Corp took the rating and risk management procedures to keep it extremely seriously. In the aftermath of the UBS/Swiss Bank Corp shotgun marriage after the ruble crisis, those risk management practices went out the window.
That’s a long winded way of saying that whilst one could kinda sorta maybe insure like crazy to make something AAA, it still won’t really be AAA because it isn’t a US treasury. Hell, Greek sovereign debt could be made AAA, but the cost would be astronomical. Brady bonds were something a little more practical with the purpose of becoming investment grade and not AAA.
Yes. But in theory a benchmark doesn’t have to be top quality. The S&P 500 isn’t especially safe. Brent Crude isn’t an especially high quality form of petroleum, though it’s used to price around 2/3 of the world’s oil supply.
While we’re discussing less-known facts: S&P reportedly isn’t as good as Moody’s and they are possibly inferior to Fitch. Furthermore S&P rates bonds on the basis of the probability of any sort of default while Moody’s rates them on the basis of expected financial losses. Obviously the latter is a lot more useful. One could imagine a sovereign doing poorly by an S&P metric due to a propensity for politically motivated technical default but fine by Moody’s scale, if it was believed that investors would ultimately be made whole. Why S&P doesn’t apply Moody’s criteria is unclear to me.
This is a perfect example of why I’m not even going to waste my time responding any more. First: the statement on it’s face is simply absurd. That any of you poseurs could even spell FOMC would surprise me. But it gets better. The people here are so intimately familiar with US Treasury auctions that MFM has to explain to the reader exactly what they are, i.e., issueing [sic] debt. LOL.
Regarding the thread title, Matt Yglassias provides a brief refresher about past extortion efforts by congressional Republicans.
The current plan is to force the government into default if the Affordable Care Act is not repealed. There’s no longer any attempt to replace the ACA with anything. Which sort of shows how out to lunch they are: pretty much any businessman grasps that our health care system is an expensive drag on US economic strength. Luckily we’re phasing in reforms.
Yglassias goes over the First Debt Ceiling Crisis, the Second Debt Ceiling Crisis and the latest Debt Ceiling Crisis. He touches on the platinum coin loophole.
The sequester made irrational crazy cuts in spending in the hopes that Congress would pass something better. They didn’t, so we have it. So the Center for Disease Control loses $323 million, military research is cut $6.3 billion, border security drops by $581 million, airport security goes down $323 million, NASA loses $970 million, The Energy Department’s program for securing our nukes is cut by $650 million, National Science Foundation $338 million, FBI $480 million etc. Bernanke came pretty close to denouncing it last month.
A governmental shutdown is different that either of the above 2. It is bad, but at least the US pays its bills. It may follow from the initial stages of a GOP default crisis.
With record low interest rates, the US should be spending vast amounts on our sub-standard infrastructure. After all, when borrowing costs are low, smart people invest. Instead we get third world antics from the GOP. Americans deserve better, as do main street conservatives.