As I write this, two year US Treasury notes are yielding .23%, down from the .30% that investors required to buy them on Friday. Needless to say, it would appear that the market is completely disregarding S&P which is appropriate since it’s staffed, almost entirely, with losers who couldn’t get a job any where else. These are the folks who couldn’t make it in retail brokerage. This is also the same crack team who managed to rate thousands of structured credit products (like toxic mortgage securities) as triple A, despite the fact that they were essentially piles of sub-prime mortgages. It’s unsurprising that the media talking heads and stupid politicos are taking it seriously since none of them know what a joke S&P really is. Which brings me to a funny place…
I’ve been thinking for a while that it was time for at least one of the ratings agencies to go down for the credit crisis because they enabled what was, essentially, a fraud to be perpetrated on investors all over the globe. Here’s the chain…
1) Bank assembles pile of subprime trash
2) Bank securitizes the pile into a marketable security
3) Bank pays a rating agency rate the security and the agency (say, S&P) takes on the job
4) S&P doesn’t even remotely do a proper or credible job of examining the security and the underlying credits.
5) S&P misrepresents to investors that they have done a thorough examination of the securities
6) S&P misrepresents to investors that the risk of default of the securities is just slightly more than that of the US government.
Now, what I’ve written above is completely true and S&P is still in business. Since they’ve now stuck their neck out with regard to the US credit rating, I think it’s time for the government to go ahead cut it cleanly.
Meanwhile, Moody’s reaffirmed their triple A rating on US debt. Moody’s is all about debt to GDP. So, how can we fix that? By growing the economy and adding jobs while disregarding short term debt concerns. In other words, what the President and Republicans have been obsessed about over the last year (the deficit) wasn’t the biggest concern… it was always jobs and economic growth. I’ve been saying that for more than two years. So have a large number of economists that range across the ideological spectrum. The President ignored them and listened instead to Peter Orszag who is, frankly, little more than an actuary.
So, what to do? Well, for starters, we should raise taxes on the wealthy and corporations as this will have almost no effect on economic growth (it’s essentially pulling excess funds out of the market) and will help reduce deficits giving deficit hawks something to love. We should then embark on large scale infrastructure rebuilding plan financed with the debt we can clearly sell into the market for super low interest rates. This accomplishes many tasks… it gives us fixed public assets we need (like roads, schools, courthouses, airports, etc) for our current and future economic growth, it boosts employment directly (by as many as 5 million full time jobs for the next 3-5 years), cuts spending on unemployment benefits, restores tax revenue and rebuilds confidence in business and consumers.
The problem is, the President doesn’t understand the need for this and has completely accepted Orszag’s garbage about the economic pain being necessary. Orszag is effectively taking the same position that Andrew Mellon and Herbert Hoover took in 1930, which was an out and out disaster. So, when I say he’s stupid, I’m not being rhetorical. There’s absolute proof.
Admittedly, pain is always the result of an economic downturn. However, there’s also tremendous opportunity. It’s time the President shook off the bad information he’s been using and started actually working toward better economic conditions in the US. The time for excuses and whining about the political climate is over. The President may not be a fighter naturally but he better learn quickly or he’ll find that losing an election isn’t fun and that’s direction in which we’re headed. Make no mistake, there is NO other issue next year and if the economy and employment aren’t improving, no matter what we do the President will lose. He has to take this action himself.
Finally, a word about the Chinese who popped up over the weekend and admonished the US to ‘stop it’s addiction to debt’. The Chinese can talk but in reality their threats carry no weight. China doesn’t have the internal demand to make up for a sudden loss of US or European demand. Frankly, China is still, in many ways a third world country. Without us, it’s quick trip back to the good old days of the Cultural Revolution.
With apologies to Public Enemy for the title.