Saturday, August 6, 2011

The Standard and The Poor's

In spite of being told to take up knitting, I just can't help saying something about Standard & Poor's downgrade of U. S. credit. It downgraded the United States' credit rating from AAA to AA+, which is to say that it wasn't much. U. S. Treasury Bonds are still "investment grade" investments. From all the hype, you'd think the downgrade is a disaster. I thought so too initially. Who do they think they are? The S&P was one of those companies that inflated the grades on all of those collateral debt obligations (CDOs) mortgage bond derivatives that caused the mortgage loan bubble that burst in 2007 and crashed the U. S. economy. And, they inflated the CDO ratings for money and to get more market share of the rating business; they earned a fee for rating those CDOs that made it easier for the big banks like Goldman Sachs to sell them to unsuspecting investors. Goldman Sachs would not do business unless they got the high ratings and S&P's greed wanted the big fees so their own stock price would rise and they could pay big bonuses to their execs just like all of those other fat cats on Wall Street.

So, yes, who the hell do they think they are to downgrade the US credit? And, to top it off, they made a $2 trillion mistake when calculating the downgrade! $2 trillion! A mistake that if corrected favored a higher rating, not a lower one. But, they did it anyway. How can a few analysts make a $2 trillion mistake? That ought to stand out like gouty toe!

But, after thinking about it, maybe this is what we need. Maybe we need someone like the S&P to say, "get it together!" and to put a crimp in our ability to borrow money. We are IN DEBT! And we owe more that we make. We hear a lot of noise to run our country like a business, especially from Republicans running for president and those in Congress. Perhaps we should run it like a business. After all, if we look at the U.S. as a company, it would be a publicly owned company and we do own stock in it through the Treasury Bonds we buy and taxes we pay that return payment in interest and services, respectively. After the downgrade, the interest on Treasury Bonds should go up, but that may, and more than likely, mean higher taxes to pay the interest. We will pay more taxes if a couple of things don't happen anyway.

One thing that has to happen is that the U.S. has to get more revenue, right along with cutting expenses (spending). And, it would help a great deal if the revenue was more than expenses, like we had back in 2000 before Dubya gave it away or spent it. The Republicans believe that raising the GDP (Gross Domestic Product) is the way to raise revenue for the country, instead of raising taxes. That means that "The People" need to be employed, circulate money in their communities, spend money in stores, buy cars, buy homes, build homes, buy farm equipment and be good obedient consumers. Companies need to sell things. When all of that happens, then the GDP and economy engine hums along like a finely tuned clock. The caveat on all of that, however, is that unemployment needs to be minimal and that "The People" need to have living wages they can spend. If that is not the case, then the GDP/economy engine sputters and stops. I'd say that "sputter and stop" situation is pretty much where we are now. Unemployment is high and wages have been going down for years. And, the fact that wages have been going down caused a lot of borrowing by consumers that, in the end, just made matters worse. Too much consumer debt.

"The People" have stopped spending because, 1) they don't make enough, if they have a job, and 2) they still owe on the debt they've accumulated in the past. The unemployed, obviously, have nothing but an unemployment check, if they get that at all. They do spend it, but it's not nearly enough. Ninety percent of Americans have very little to spend primarily because money doesn't circulate to them and through their communities. The wealth that could circulate is held by the top one percent who owns approximately fifty percent of America. That's "The Gap" between the wealthy and middle-class or the less fortunate, the inequality gap.

Milton Friedman, a Nobel Prize winning economist, suggested the "trickle down" free market, deregulation economic theory in the 1960s that became popular when he was an adviser to President Reagan in the 80s and is now the religion of Republicans and Libertarians. He was big on accumulating wealth, no taxes on the rich and no inheritance tax and said that raising wages didn't really lead to increase production or consumption nor provide a better life for the wage earner. Supply-side economics, he said, drove the economic engine, not consumer buying. In other words, build it and they will come, even if they are broke I presume. I guess that works only up to a point before consumer credit runs out. Friedman is an impatient guy when his theory is questioned, as in the documentary "The One Percent" that can be seen on YouTube in eight segments. He was, during Franklin Roosevelt's New Deal time, a John Maynard Keynes follower, until he wasn't. He then refuted Keynesian economics with his trickle down theory to win the Nobel Prize and he is absolutely persuaded that he is right and the Republican/Libertarian philosophy is his legacy. Ironically, he said, "The most harm of all is done when power is in the hands of people who are absolutely convinced of the purity of their intentions." He also frequently quotes the old adage, "The road to hell is paved with people with good intentions." Of course you could say that of both sides of the coin, but since it is his philosophy that is primarily the source of our current economic problems, perhaps he shouldn't be so certain. His philosophy seems to work fine in good times, but utterly fails in bad times. I suspect that there is a middle way. Maybe it is the extremes that we need to stay away from.

I probably wouldn't have a problem with Friedman's theory of letting the chips fall where they may if those people less fortunate had a way to be involved in their own destiny. More often than not, they don't. They work for a non-living wage that does not provide enough to save for hard times or retirement. The mysteries of investing are mostly too complicated for the average educated person, and frequently for the well educated person, and programs like Social Security, that Friedman despises, become the best investment most people make in their lives. You have to wonder what would be if those social programs did not exist. Would we be more self-sufficient and more responsible for our own destiny, like Friedman claims, when volatile markets win and lose fortunes on the turn of a dime? I doubt it. Friedman also said, "Morally bad power triumphs over good intentions." That means that powerful greedy people can destroy the good intentions of people saving for self-sufficiency. "Oh well," he would say, "that's the breaks."

Supply-side doesn't work because it doesn't depend on true demand, demand that stems from what you and I, as consumers, really want. Supply-side is driven entirely by marketing; marketing that creates demand and creates a need that you and I only think we want. It just so happens that Professor David Kaiser, who writes a blog I read, wrote something about that apparently a few minutes ago. Just when I was about to finish this and publish it, I read Professor Kaiser's blog and Lo and Behold, he must be thinking my thoughts, but better. Read his blog here.

So, maybe a downgrade is a good idea to wake us up. Alan Greenspan, once an ardent Friedman disciple, appears to have changed his mind about a Friedman's "self regulating" market a little, and Ben Bernanke, Fed Chairman, has also changed is mind about the so-called Friedman free market. Perhaps even the Republican Congress will change its mind. Maybe we'll get a tempered approach that will reform us out of debt, bring in enough revenue, hopefully more from the rich than the middle-class and poor, and cut spending to make government better so that everyone is happy. I'm not holding my breath, though.

Maybe we'll have an insurrection, a good old fashion civil war or armed and bloody revolution.


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