I sat helplessly last weekend on my couch holding my baby in awful anticipation of the carnage that would surely be wrought in the stock markets Monday. Sometimes I knock capitalism, but I do so as a grudging participant. Full disclosure: I own mutual funds and get sick when I see my savings plummet in a couple of days of panicked selling.
My Clark Kent job during the day is financial reporting, and I’ve gained some perspectives over the years about economics. But what I’ve learned mostly is that it’s a difficult subject that one wants to approach with curious humility. As Jesus said in “Paradise Regained,” the wisest of us admit we don’t know anything, and although he was likely not talking about U.S. Treasury bonds, he could well have been. Why? Because the financial experts with the Ph.D.s also didn’t know what would happen if the U.S. were downgraded; the best of them admit that they can only guess based on their experience and incomplete data and pure prognostication. No two experts will agree about what the sovereign debt going from the holy AAA to AA+ really means.
So let’s go over what we do know.
1) Monday, panicked investors, scared of downgraded government bonds, fled the stock market … to invest in downgraded government bonds. That’s a bit like burning a village to save it.
A bit of finance 101: There are two values to a company–its stock price and then its intrinsic value based on what the value of all its inventories, cash flows, etc. are. Everybody panicked not based on the intrinsic value of the companies they held but because they knew other people would freak out. Not knowing the price of catastrophe, they created one. They decided out of pure fear to abandon stock holdings regardless of whether these companies actually held bad government debt on their books.
In actuality, the credit of many U.S. corporations is probably better than that of America right now. Chances are, a lot of these companies we fled Monday had good balance sheets, growing sales and less debt than they did a couple of years ago. But the one thing that ties liberals and conservatives together, evidently, is an adrenal gland. Monday, we all turned into rats in a burning building and cleared out. After buying high, we sold low. Some investors figured it out Tuesday and went back. But it was likely rich people taking advantage of suckers, getting deals, and getting richer.
Government debt will indeed become more expensive–for the government that is. It will now cost more for the United States (i.e., you and me) to borrow, which could indeed chill the economy at a crucial time. But most of the world hums along assuming that the mighty U.S., the biggest economy in the world, can still pay its bills. Double AA is still a far cry from deadbeat dad. Sure, more expensive debt could mean money doesn’t flow around as much. But there are a lot of economists who say that’s not such a bad thing. Having a world awash in cheap money forever, the way we have in the past few years, is not possible or desirable. In fact, it’s one of the reasons we are in our current economic crisis, because we can’t use interest rates already at zero as an incentive anymore by lowering them. A weak dollar means that everybody is looking for better places to park their money. Could be stocks. Could be gold. In any case, those assets will become inflated again–priced at something beyond what they are really worth, exhorting suckers to buy in and create, to wit, a new recession scenario.
2) Standard & Poor’s cannot be entirely trusted when it downgrades U.S. debt. The company made not merely an analytical decision to downgrade on Friday, but a political one–and I’m talking about the politics of S&P. I used to work at Standard & Poor’s, not as an analyst but as an editor, and though I wouldn’t dare create my own credit analysis of the United States, I did read the company’s press release, and I do know a few things about the culture there and the hurt pride in its ranks when it was caught with its pants down in 2008. The company had before the financial meltdown given high ratings to mortgage backed securities that were not remotely deserved, and this echo chamber of positivity allowed a lot of shitty paper to be passed around like botulism to some of our biggest financial institutions. Standard & Poor’s, as well as the other credit agencies, are in a strange position. They can behave like quasi-government organizations, because they serve a quasi-regulatory function: U.S. corporations must by law have credit ratings if they want to borrow. For the same reason, it is assumed that S&P, Moody’s, etc., offer completely objective opinions on companies’ creditworthiness. But that myth was shattered in 2008. Standard & Poor’s is not a monastery; it is the single most profitable subsidiary of McGraw-Hill. And the public is not its main customer–the companies being rated are. I would never attack the integrity of my former colleagues or slight their intelligence and probity, but the whole process at the credit agencies is fraught with conflict of interest in the agency’s desire to please the corporations writing the checks. Since the credit crisis struck, obviously S&P has had to do a lot to improve its image. So it had something to prove two weeks ago when it slashed U.S. credit. The stakes were raised when the U.S. government (who, we find out, did get to review their own rating) found mistakes in the accounting and the agency had to backtrack. At the end of the day, S&P couldn’t look like the borrower was again dictating the terms, and so Standard & Poor’s practically admitted in its press release that Washington in-fighting had as much to do with the downgrade as the financial facts on their face. S&P said a pox on both your houses (of Congress). It sounds awfully superficial and defensive.
3) But hey, as long as we’re blaming politics, let’s finally admit: The Tea Party Republicans are psychos.
Remember, the debate over the U.S. and its creditworthiness has to do not over whether the United States can pay its bills (it certainly can) but about whether it will. Lots of people, including the Congressional Budget Office, said very plainly last year that if you want U.S. debt as a percentage of GDP to skyrocket to 80% and beyond, all you have to do is keep George W. Bush’s odious tax cuts in place. People mistakenly think that the blame is equal here: Democrats spend, Republicans won’t tax. But only one side of the Congressional aisle showed its agenda so egregiously, using the threat of economic collapse to get its way: the GOP. Not hard to expect, since Republicans have not compromised on tax issues in, I don ‘t know … ever. Barack Obama (who, like Bill Clinton seems to draw bigger ire from crazy Republicans even as he does exactly what they want) has thus found himself trying to make medicine not with responsible, moderating budget balancers but with a Manson Family elected to office using the simplest, stupidest, most meretricious rhetoric there is on out of work American gulls. Michele Bachmann, et al., have now practically admitted they are willing to destroy the American economy for ideological reasons (protecting the rich with the absurd conviction that they are protecting all of us). Here’s news, Republicans: income taxes have not gone up in years and years and years. In fact, Barack Obama cut them in 2009 and extended Bush’s deep cuts at the end of 2010.
And it hasn’t helped at all. The economy does not care. What is needed is economic activity to create jobs, and the government spending you so despise IS economic activity. Your piggish unwillingness to concede this fact, something understood by most business people and most economists (if you bothered to read one book or earnings call), has you teetering on a bizarre precipice between cognitive dissonance and schizophrenia. Many Republicans were outraged that Newsweek ran a picture of Michele Bachmann this week with crazy eyes. Well, the news, this week, is that professional pregnant woman harasser Michele Bachmann is crazy.
The New York Times is as confused as ever about the Tea Partiers and what they want. Two years ago, the paper wrote a piece on these scrappy town hall rebels and decided they were just honest libertarians disgusted with both parties and government overreach. Now, evidently, the paper or the Tea Partiers themselves have changed their mind. The movement is just rock-ribbed Reaganites, who didn’t really care about spending that much, they really just wanted low taxes and a strong military. In other words, they don’t want the government to spend money unless it’s on things they want the government to spend money on. I’m not the New York Times, so I don’t have to patronize them: Tea Partiers are stupid. They are stupid down to the crust on their toenails and the slime on their outhouse doors. Libertarianism as they define it is anarchy. Socialism as they define it is 8 hour work days and child labor laws and affordable health care and banking regulations. They have no philosophy other than disgruntlement, no basis for the arguments they make other than faith. They demand Social Security and a strong military and refuse to pay for both. They demand entitlements for themselves but call any other form of government assistance “wealth redistribution.” It is likely that their aging parents, if still alive, are getting 50% of their income from Social Security, and their answer to that is: “Government is the problem.”
4) And so I come to the last point. Comedy works in 3s, but I’m adding a fourth because this is unfortunately not funny: Last week was your own fault, America. Blame Congress. Blame Barack Obama. It’s a waste of time. It’s you, America. You clearly wanted a war in Iraq you would not pay for, along with a prescription drug benefit you would not pay for, and these things are still source of most of our budgetary woes. (No, it’s not Barack Obama’s health care plan.) You wanted affordable health care but changed your mind when presented with the ugly details. You protect rich people because you think one day you could be Madonna. Yet you, as if your eyes were warped by an optical illusion as you stand under a skyscraper, don’t really understand how big it is–how much richer the rich are and how much they have the game stacked against you.
John Boehner is not the devil. He’s just an elected reflection of your confusion. Barack Obama is not the antichrist. He’s a man you ask to do everything, and whom you hate when he doesn’t accomplish it … and sometimes hate when he does. So stop griping, America. Own up to your own part in this and enjoy the second job you’re going to have to take at night to live the way your parents did.
Beauty is Imperfection 