S&P Downgrades US To AA+, Outlook Negative

[lisab]

My teeth hurt as I watch the Left Wing and media attacks on the credibility of S&P - wasn't dumping the blame on the TEA Party a big enough solution for them?

The Left Wing and the media have moved past playing political games - now they are playing chicken with the credit rating agency - IMO.

Keep in mind, S&P royally screwed up its rating of high-risk mortgage products for years. That incompetence was a huge contributor to this recession. I think it's totally legit to question their credibility.

 

[WhoWee]

Keep in mind, S&P royally screwed up its rating of high-risk mortgage products for years. That incompetence was a huge contributor to this recession. I think it's totally legit to question their credibility.

I think a comprehensive Congressional hearing into the matter is called for - let Barney Frank and Chris Dodd explain what happened - why they depended so heavily on the ratings agencies perhaps?

 

[czelaya]

Keep in mind, S&P royally screwed up its rating of high-risk mortgage products for years. That incompetence was a huge contributor to this recession. I think it's totally legit to question their credibility.

Didn't all the major credit rating agencies rank high-risk mortgages as AAA because they were backed up by the government?

 

[Proton Soup]

http://www.nytimes.com/2011/08/08/opinion/credibility-chutzpah-and-debt.html?src=recg

the problem did not start with the ratings agencies on mortgage backed securities. the problem started when financial industry people lobbied the US Congress to deregulate it, removing the restrictions on "gaming". Gaming means gambling. the US Congress decided that wall street could now legally operate as a casino. did we ever change this back? I'm not sure, to be honest. the other issue i think would be the lack of transparency in the system. how about making all transactions in securities public? that might help ratings agencies do their job. how are they supposed to do it now?

 

[WhoWee]

the problem did not start with the ratings agencies on mortgage backed securities. the problem started when financial industry people lobbied the US Congress to deregulate it, removing the restrictions on "gaming". Gaming means gambling. the US Congress decided that wall street could now legally operate as a casino. did we ever change this back? I'm not sure, to be honest. the other issue i think would be the lack of transparency in the system. how about making all transactions in securities public? that might help ratings agencies do their job. how are they supposed to do it now?

The derivatives market (unregulated) has prospered off-shore - as discussed in other threads - follow the bailout funds to European banks (if you took your blood pressure medicine this morning) - label IMO.

 

[Proton Soup]

The derivatives market (unregulated) has prospered off-shore - as discussed in other threads - follow the bailout funds to European banks (if you took your blood pressure medicine this morning) - label IMO.

yeah, and why was the federal reserve bailing out those bozos? I've been meaning to try and dig through what was the Ron Paul FED audit, but got frustrated the first time on not finding the details.

 

[DevilsAvocado]

The President is addressing the downgrade in 10 min.

 

[DevilsAvocado]

The downgrade could backfire on S&P because it is political in nature. So they may run into a situation where they are not seen as relevant.

True, I think "political" is the keyword here, in several 'dimensions'... it seems this is not mainly about the dollars.

 

[DevilsAvocado]

http://www.nytimes.com/2011/08/08/opinion/credibility-chutzpah-and-debt.html?src=recg

Thanks Lapidus, very interesting!

 

[DevilsAvocado]

Didn't all the major credit rating agencies rank high-risk mortgages as AAA because they were backed up by the government?

I think it was mainly S&P and Moody's when it comes to subprime loans and the 2008 Financial Crisis, but it looks like they all have http://en.wikipedia.org/wiki/Credit_rating_agency#Criticism" when it comes to credibility.

Whether S&P and Moody's were backed up by the government or not, the services they provided were not (understandably) appreciated:

Part 1 -- 2008 Financial Crisis: Credit Rating Agencies commit fraud/ incompetence

https://www.youtube.com/watch?v=19amWOc1GJ8

Part 2 -- Credit Rating Agencies Scandal: massaging numbers/ I.B.G.,Y.B.G.

https://www.youtube.com/watch?v=eYdTnNzttxk

 

[Greg Bernhardt]

Obama now speaking live
http://www.cnn.com/video/flashLive/live.html?stream=stream2

 

[DevilsAvocado]

Dji < 11,000.00 !

 

[Astronuc]

Interesting commentary here -
http://finance.yahoo.com/blogs/breakout/u-gets-downgrade-deserves-133206142.html

One of the comments: "One Nations, underwater"

With respect to the subprime junk (MBSs and CDOs) that was rated by Moody's, S&P and Fitch (ratings require two of the agencies) as AAA, that wasn't incompetence as much as negligence, if not downright fraud. However, they were offering an opinion, which is apparently protected by the first amendment, and apparently not an objective assessment based on any thorough analysis. Or they simply took the money (effectively a bribe or kickback) and gave undeserved ratings.

The subprime mortgages were generated by unregulated mortgage originators, some of which become subsidiaries of the big banks or Wall Street investment firms. Those subprime mortgages were not guaranteed by the Federal government.


Countrywide had a pipeline to Fannie Mae. Fannie Mae and Freddie Mac contributed to the housing bubble, but they weren't the whole story. There was widespread fraud among primary mortgage company and complicity on the part of Wall Street, the financial industry and the ratings agencies, as well as regulators who didn't regulate.

Read Gretchen Morgenson's and Joshua Rosner's Reckless Endangerment.
http://www.nytimes.com/2011/05/29/b...-by-gretchen-morgenson-and-joshua-rosner.html

S&P was generous. The US credit rating should probably be AA- or less.

At $14 trillion in debt, it would take 140 years to pay off the debt at $100 billion/yr. Actually the payments would be more, so the debt could be paid down faster, although not as quickly if interest rates rise considerably. On the other hand, the US could default on some or all of the debt.

 

[Greg Bernhardt]

Obama now speaking live
http://www.cnn.com/video/flashLive/live.html?stream=stream2

Obama had absolutely nothing of value to say. wow!

 

[WhoWee]

Did anyone else hear the President call for more spending, the extension of the reduction in funding to Social Security (about $10 per week for people who have jobs), and tax increases? At least he's willing to talk about fixing Medicare and Social Security - I just can't figure out how a decrease in Social Security payroll deductions does that - can anyone explain it?

 

[DevilsAvocado]

Obama had absolutely nothing of value to say. wow!

Agree, except the obvious fact we all know – common sense & compromises – will solve this problem. Time to act like adults, and deal with the problem!

 

[Proton Soup]

Did anyone else hear the President call for more spending, the extension of the reduction in funding to Social Security (about $10 per week for people who have jobs), and tax increases? At least he's willing to talk about fixing Medicare and Social Security - I just can't figure out how a decrease in Social Security payroll deductions does that - can anyone explain it?

i think in calling for an extension of payroll tax deductions, and of unemployment insurance benefits, he was suggesting that we need this to stimulate the economy right now. he was pretty clear on that point, IMO.

 

[WhoWee]

i think in calling for an extension of payroll tax deductions, and of unemployment insurance benefits, he was suggesting that we need this to stimulate the economy right now. he was pretty clear on that point, IMO.

The DJI is down almost 5% for the day -567.70 at 2:25 Eastern.

The payroll tax deduction reduces cash flow to Social Security and keeps about $10 per week in the pockets of people who have jobs - in the same speech he's talking about fixing Social Security. Why not start by prying his fingers away from it?

His estimate that a .5% decrease in GDP will be realized if his additional spending isn't approved by Congress - is more fearmongering and needs supported.

 

[Jimmy Snyder]

I give Obama and Congress an A+ for their performance.

 

[WhoWee]

I give Obama and Congress an A+ for their performance.

You want to downgrade further?

 

[Proton Soup]

The DJI is down almost 5% for the day -567.70 at 2:25 Eastern.

The payroll tax deduction reduces cash flow to Social Security and keeps about $10 per week in the pockets of people who have jobs - in the same speech he's talking about fixing Social Security. Why not start by prying his fingers away from it?

His estimate that a .5% decrease in GDP will be realized if his additional spending isn't approved by Congress - is more fearmongering and needs supported.

i think you know. it's still about 2012. people vote on the economy, so it's important to delay further downslides as much as possible. if gas prices start approaching a $4/gal national average, i would even look to see a repeat of strategic petroleum reserve dumping.

 

[WhoWee]

i think you know. it's still about 2012. people vote on the economy, so it's important to delay further downslides as much as possible. if gas prices start approaching a $4/gal national average, i would even look to see a repeat of strategic petroleum reserve dumping.

I expect the gas prices to drop a bit in the short term - given the price of crude - but $4.00 in 2012 seems realistic. A depletion of the strategic reserve SHOULDN'T help him - given the purpose of the reserve - but it might?

 

[Proton Soup]

I expect the gas prices to drop a bit in the short term - given the price of crude - but $4.00 in 2012 seems realistic. A depletion of the strategic reserve SHOULDN'T help him - given the purpose of the reserve - but it might?

president clinton did it. seems here the motivation was claimed to be heating oil prices, though.

http://www.cbsnews.com/stories/2000/09/21/national/main235327.shtml

bush spent a few years to bring the SPR back up, and now that it was nearly full, senator clinton was proposing tapping the reserve again to manipulate prices. skip to about 4:25. forum software doesn't support timestamped youtubes, apparently.

https://www.youtube.com/watch?v=ZBqahsm8NV8&feature=player_detailpage#t=264s

 

[SixNein]

His estimate that a .5% decrease in GDP will be realized if his additional spending isn't approved by Congress - is more fearmongering and needs supported.

[PLAIN]http://web.epi-data.org/temp727/gdp_debt_ceiling.JPG

His numbers are lower than most.

 

[WhoWee]

[PLAIN]http://web.epi-data.org/temp727/gdp_debt_ceiling.JPG

His numbers are lower than most.

Please post a link to your source.

 

[SixNein]

What does that chart have to do with his speech today? He specified that if Congress doesn't pass his new spending initiatives - they will be responsible for a .5% decrease in GDP.

He's just asking for an extension on the tax cuts.

Here is an estimate by JP Morgan:

http://www.zerohedge.com/news/jp-morgan-fiscal-policy-will-cut-our-27-2012-gdp-forecast-sub-1

 

[jtbell]

S&P today also downgraded five major US insurers from AAA to AA+, including the Teachers Insurance & Annuity Association (TIAA). Many, perhaps most, academics in the US, including me, have 403(b) retirement plans that include TIAA annuities.

http://money.cnn.com/2011/08/08/news/economy/SP_credit_fallout/index.htm

 

[BobG]

Please post a link to your source.

Right click and check properties. Plus, the sources for the data are on the chart.

But it is good etiquette to just post the link where everyone can easily click on it.

 

[WhoWee]

He's just asking for an extension on the tax cuts.

Here is an estimate by JP Morgan:

http://www.zerohedge.com/news/jp-morgan-fiscal-policy-will-cut-our-27-2012-gdp-forecast-sub-1

He called for more road and bridge building to create construction jobs - amount unknown?

 

[CAC1001]

If you believe household debt is bad AND you believe government debt is bad, then you must also believe a trade deficit is bad.

A trade deficit means that on average, the country is buying more expensive products then it sells. To do this, it must be accumulating debt. It is impossible to run a trade deficit without government deficits or increasing household debt.

Neither household debt nor government debt are bad, just in excessive amounts. A trade deficit itself is not a bad thing. What it means is that the various individuals and businesses are engaging in exchanges with one another that overall leads to the country importing more than it is exporting. Trade deficits almost always occur when the country is prospering. The trade deficit shrinks usually during times of economic recession.

Imagine if New York City is running a big trade deficit. Yet, let's suppose the city is also running a large budget surplus. The trade deficit wouldn't mean the city is heading over a cliff economically, it is just the summation of the economic activities of the individuals that make up the city.

 

[CAC1001]

Then it would appear that the US is not as wealthy as many perceive. One solution to the trade deficit would be to significantly reduce oil imports and replace by domestically developed resources, e.g., natural gas (assuming it can be done without polluting the environment, particuarly drinking water supplies), wind, solar, hydro and nuclear energy.

Not right now, no, because of the recession, which is a result of the financial crisis which destroyed a lot of wealth. Regarding alternative energy, wind and solar are not viable alternatives right now and nuclear energy I think is dead because of the Japanese disaster.

A tiny or intermittent deficit would not be necessarily bad or problematic - IF there was a corresponding surplus.

A trade surplus is rarely good. when you look at the times historically when the country has had a trade surplus, it was not doing very well economically.

The federal debt/deficit is structually linked to the trade deficit (which are substantial, not tiny). The trade deficit represents money leaving the US economy, significant loss of tax revenue, significant expenditures to cover the unemployment associated with the job loss, . . .

You are going by mercentalism with regards to this issue. Mercantilism was discredited all the way back in the 19th century by various economists. The mercantilists were concerned that the U.S. is "losing money" or could even run out of money if we continue to buy more abroad than foreigners are willing to buy from us. The view is that money is the source of prosperity and that the trade deficit means more money is flowing out of the country than it, and that this indicates a deteriorating economy. The solution according to the mercantlists is for the government to step in and "fix" the problem.

You could look at it in this sense: if it is found that the state of California buys more goods from New York than New York buys from California, should the governor of California take immediate action to try to reverse this? Or you could look at it this way: an accountant runs a trade deficit with all the restaurants in his area; i.e. he spends more money at the restaurants than the restaurants spend paying for his accounting services. Does this mean that the accountant is having his wealth drawn away by the restaurants though? What happens is that the accountant's trade deficit with the restaurants is covered by his "trade surplus" with the business that employs him; i.e. the business spends more money on him than he spends on the business's products/services.

Some may point out that the U.S., overall, runs a trade deficit right now, but the nation's trade deficit is just the summation of the trade deficits of the various individuals and businesses within the country. Some people and businesses run trade deficits temporarily, but these can be for various reasons (student loan debt, issuing stock to buy things to expand, etc...).

The money associated with the trade deficit is invested in those countries from which the US imports. Some of that money is then spent on US exports, e.g., aircraft, military hardware, technology, etc. But a subtantial amount of that money is lent back to the US. Chronic deficits lead to accumulated debt/obligations. Defaulting on debt is problematic because of the loss of confidence in the process.

Foreign countries only loan money to the U.S. government if the U.S. government is spending more money than it takes in, which is due to the budget deficit, not the trade deficit.

The debt has to be paid down, because it is unmanageable as it is! The economy/GDP has rarely, if ever, grown at the rates required to reduce the debt, i.e., eliminate the deficit.

A federal debt is not a bad thing, it is only bad when it grows to an excessive size.

Supposedly it did during the latter years of the Clinton administration.

With a large trade deficit. The trade deficit grew very large during the 1990s, when a budget surplus was reached, partially due to the strong dollar.

Modern US federal deficits have exceeded 8% of GDP, and in 2010 it was about 10% of the GDP. The GDP growth is rarely above 5%, and more recently has been around a rolling average of ~3%.

This is due to a combination of an unprecedented financial and economic crisis, along with excessive government spending.

 

[Astronuc]

Neither household debt nor government debt are bad, just in excessive amounts. A trade deficit itself is not a bad thing. What it means is that the various individuals and businesses are engaging in exchanges with one another that overall leads to the country importing more than it is exporting. Trade deficits almost always occur when the country is prospering. The trade deficit shrinks usually during times of economic recession.

Collectively, we're not exactly prospering, and haven't been for quite some time. I think $14 trillion in debt, with another $trillion or two, with no substantial surplus in view is a wee bit excessive. I think chronic trade deficits (since 1977):

            Balance 
 Period      Total $millions  
  1960       3,508  
  1961       4,195  
  1962       3,370  
  1963       4,210  
  1964       6,022  
  1965       4,664  
  1966       2,939  
  1967       2,604  
  1968         250  
  1969          91  
  1970       2,254  
  1971      -1,302  
  1972      -5,443  
  1973       1,900  
  1974      -4,293  
  1975      12,404  
  1976      -6,082  
  1977     -27,246  
  1978     -29,763  
  1979     -24,565  
  1980     -19,407  
  1981     -16,172  
  1982     -24,156  
  1983     -57,767  
  1984    -109,072  
  1985    -121,880  
  1986    -138,538  
  1987    -151,684  
  1988    -114,566  
  1989     -93,141  
  1990     -80,864  
  1991     -31,135  
  1992     -39,212  
  1993     -70,311  
  1994     -98,493  
  1995     -96,384  
  1996    -104,065  
  1997    -108,273  
  1998    -166,140  
  1999    -263,160  
  2000    -376,749  
  2001    -361,771  
  2002    -417,432  
  2003    -490,984  
  2004    -605,357  
  2005    -708,624  
  2006    -753,288  
  2007    -696,728  
  2008    -698,338  
  2009    -381,272  
  2010    -500,027

http://www.census.gov/foreign-trade/statistics/historical/gands.txt
have become a wee bit excessive.

And it's been pretty obvious that the US has been heading in this direction for a decade or two or three. It was certainly obvious in the threads on "What is wrong with the US economy?"

The country (government and economy) has incurred obligations it cannot possible pay unless there are dramatic changes.

 

[CAC1001]

Didn't all the major credit rating agencies rank high-risk mortgages as AAA because they were backed up by the government?

Fannie and Freddie paper was rated AAA in part because it was believed it was as solid as U.S. treasuries. There was some more to it though. My understanding (which is probably incomplete) which was that the securities backed up by mortgages were rated AAA because the mortgages were divided up enough so as to statistically make it where in each package of mortgages, only a few would be truly high-risk. Part of this was done by using mortgages from all over the country, because up until 2007, there had never been a national real-estate bubble. There had been local real-etate bubbles, but none nationally, so it was assumed a national bubble could not happen. Also, there was the mistaken notion that "housing prices always go up." There's a word for what htat's called, but basically it is when because something has happened a certain way for a long time, it becomes assumed as something that will always happen. Because housing prices went up year after year for over forty years, it became assumed this was just something that would always happen, no matter what.

Each security might have had a few bad mortgages, but most were solid enough to make up for any losses from bad ones, so overall they were considered solid. This also was done with regards to securities based off of debt collection (one guy became a billionaire from this, then lost it all). Basically securities based off of debt collection it was the same thing, as long as the debts were divided up properly, then there might be a few debtors who would default, but overall, the debts were solid, and these were also rated AAA. They also have done the same thing with regards to student loan debts too, making securities based off of them.

And I am way oversimplifiying how these mortgages and debts are divided up for these securities, they will do things like divide up a mortgage into parts for example, and then use the parts to form different securities, and then they do even more dividing, it is really mathematical and complex, but in the end, all these securities were tied to the housing market, in which a national bubble developed, then burst.

 

[CAC1001]

Collectively, we're not exactly prospering, and haven't been for quite some time. I think $14 trillion in debt, with another $trillion or two, with no substantial surplus in view is a wee bit excessive. I think chronic trade deficits (since 1977):

Yup it is, $14 trillion is too large for a national debt. But the $14 trillion debt, the trade deficits, and the country's running a chronic deficit, are not what caused the financial crisis.

And it's been pretty obvious that the US has been heading in this direction for a decade or two or three. It was certainly obvious in the threads on "What is wrong with the US economy?"

The country (government and economy) has incurred obligations it cannot possible pay unless there are dramatic changes.

The debt can continue to be serviced, and with a surplus, the debt even will shrink as a percentage of the economy as the economy grows. But $14 trillion in debt is definitely too large. The major problem for that though is the deficit, which is too large. But this again is due to bad fiscal policy by Washington and the economic crisis.

 

[Astronuc]

A trade surplus is rarely good. when you look at the times historically when the country has had a trade surplus, it was not doing very well economically.

China is bucking that trend.