Officials from Standard & Poor’s and other credit rating agencies told a gathering of Republicans this week that a default on the nation’s debt by the federal government could lead to a “death spiral” in the bond market.
We have enough tax revenue to make our interest payments so –not- increasing the debt ceiling should not lead to a default on the interest payments. The actual significance of what has taken place in this incident is being misinterpreted.
Pundits like O’Reilly, Kudlow, Charles Krauthammer and old guard Senators like James Coburn are championing the status quo. Krauthammer is contending that Republicans have “over played their hand” and “appear as unreasonable”.
The fundamental problem with all of their melodrama is they are all making the mistake of assuming that the proffered opinion of S&P and Moody’s is somehow an axiom. Nobody is asking the question, who are these people and –why- should we give their opinions automatic credence? I take issue with the very premise. The notion that our debt- should- be DOWNGRADED based upon the debt ceiling not being raised is erroneous at its core and here’s why.
The people at these ratings agencies are merely analysts with their own opinions and can be subject to their own personal biases like anyone else. One thing that I have found about financial analysts in my career as a Financial Advisor is that they are dead wrong at least as often as they are right. How soon we forget that many of these analysts slapped AAA ratings on CDO’s and CMO’s that were packed with tranches of pure garbage, liar loans. Most of the analysts all LOVED the general obligation municipal bonds that were recently hammered down in valuation. Several years before the meltdown, the municipal bond traders at a major global wire house told me that standard procedure was for these bond ratings agencies was to automatically slap a AAA+ rating on a GO bond if that state or municipality simply purchased an insurance policy from the muni bond insurers like MBIA & AMBAC. By the way, those insurers are not sound. One of the top bond insurers, AMBAC is now defunct and MBIA is weak at best. Most of these muni bonds trade steeply below their IPO prices in the secondary market and are being propped up along with the junk bond market by the Federal Reserve’s exceedingly low interest rate policy.
Sure, we could see a self-fulfilling prophecy where our bonds trade down on Monday after a week of apocalyptic rhetoric. But the major buyers of US Treasuries in the primary market now have MORE reason to bid the price of Treasuries UPWARD as a result. The indisputable fact is that thanks to the tea party movement, we have finally elected a group to congress who recognize the gravity of the situation and are willing to stand up to the demagoguery that has for decades led to the pitiful compromise that CAUSED this situation, which is appeasement of self-serving politicians who have raised the debt ceiling over and over and over again.
If the GOP led congress had capitulated and done what their predecessors have done for decades, follow the path of least resistance, they would have signaled to the world that we do not have what it takes to save this country from certain bankruptcy. We do not have TIME to make symbolic gestures with diminutive cuts and growth killing tax increases, Regardless of what some academic quants think at Standard & Poors, smart money, i.e. countries and entities who buy up tens of billions worth of US paper – should have MORE confidence than yesterday that we are going to be able to exercise the fiscal discipline requisite to maintain these obligations into the distant future. I maintain that despite the manipulative rhetoric of Barack Obama and Harry Reed, the outlook for Treasuries and the US dollar is much more positive today than it was yesterday as a result of Boehner walking away from business as usual.
The “smart money” do not make their commitments based upon the impetuous and prosaic reasoning of a Standard and Poor analyst. If prosperity truly was a corollary to reading an S&P report, the analysts at these agencies and the webmasters who publish the reports would be the wealthiest people on the planet because they get the “analysis” first. The strength of the US Treasury cannot be buttressed by Standard and Poors but rather the integrity of those who stand behind it.
Given the dismal track record of the analysts, I would no sooner solicit their subjective opinion on any financial instrument than I would that of an art or movie critic like Rodger Ebert. Ebert may be just as reliable. Concerning the scare tactics of the senate liberals, the last people I would listen to on fiscal matters is a group of elected ambulance chasers. The President would be much better suited to capitalizing on “slip and fall” victims. He and the rest of the lawyers should stick to that which they understand.
With the power of over-reaching government agencies like the SEC and a rogue Attorney General at his disposal, I can’t help but wonder what type of communication might be taking place between the Obama administration and executives at these ratings agencies that are profitable businesses in the highly regulated industry of Wall Street. “Just saying” - it might merit an investigation as the timing of their sudden proclamations could be perceived as somewhat peculiar.
As to the specious contentions of the establishment media pundits, they should be questioned as well. Krauthammer accusing them of “over playing their hand” (by not betraying us like they did before we lost our majority) - has a deceptive look of legitimacy because of the polls these pundits cite. In the same hour the pundits on Fox were was citing a poll that shows 60+ percent of Americans do NOT want the debt ceiling raised, these pundits cited a poll indicating that some 40%+ would “blame the Republicans if the debt ceiling isn’t raised”. Those two polls are actually somewhat consistent upon further reflection. The problem is that Krauthammer and the rest of the panel use their voice inflection to portray that as a NEGATIVE. If 60%+ of Americans DON’T WANT the debt ceiling to be raised – we should WANT the blame, especially if we actually BELIEVE in the cause which we advance!
- Scott Ryan
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