Moody’s: Why the U.S. Is Still AAA

http://economix.blogs.nytimes.com/2011/08/08/moodys-why-the-u-s-is-still-aaa/

by ekm2 • 15 years ago

82 102 15 years ago

economix.blogs.nytimes.com

VladRussian3• 15 years ago

pathetic state of the industry as everybody is still forced to care about output of the [ algorithm + business process it is embedded in ] combo that produced AAA for mortgage bonds junk

Cushman• 15 years ago

Srsly. I cannot fathom how these people are still in charge of our future.

hugh310• 15 years ago

If you think you can invent an algorithm that produces a more accurate picture of default risks on various types of assets, then I'm sure the world will beat a path to your door. Until then, this is the best we have.

patrickk• 15 years ago

Whatever about inventing a better algorithm, it's clear that the ratings agencies didn't do any kind of due diligence before slapping AAA ratings on junk mortgage securities...they were afraid of losing business from the investment banks! They should have been the ones telling the banks what was what.

Those in the know would describe the ratings agencies as "brain-dead", the lowest on the totem pole on Wall Street...traders who made money would game the credit ratings scores so S&P and Moods would rate the junk they were peddling AAA. A modern form of alchemy - turning junk into investment gold.

For a nice, easy-to-read account of those who made a fortune from the mortgage market collapse that tells you how exactly the ratings agencies were played for fools: The Big Short, by Michael Lewis (of Liar's Poker fame)

gwern• 15 years ago

The world has produced such a procedure and beaten a path to its door - it's called the CDS swap markets, and they are extremely active.

gaius• 15 years ago

This is a silly critique. We all know the weather forecast isn't absolutely 100% accurate, but it's still worth having.

enqk• 15 years ago

First the impact of a false prediction on a weather forecast is not as dangerous as that of a false prediction in default rates, second, even an erroneous weather forecast isn't too far from the observed weather.

rayiner• 15 years ago

But how much do you trust it?

Coming from the east coast I trust the forecast less than just looking out the window. It's just too inaccurate.

When you look out the window and see that the US is still the healthiest big developed economy out there, what do you do? Do you trust your own eyes or the ratings agency?

cemerick• 15 years ago

If that weather forecast said it was going to be sunny and warm, you'd be pretty pissed to encounter hailstorms and hurricanes when you arrived at the beach. Similarly, you might not trust it so much when the weatherman was bleating about thunderstorms while all you can see are high clouds and blue sky.

VladRussian3• 15 years ago

>We all know the weather forecast isn't absolutely 100% accurate

forecasters who forecast "sunny" paid handsomely, while forecasters who forecast "fog" aren't paid at all - what would be accuracy of a given forecast for London from these forecasters?

jbooth7• 15 years ago

http://fivethirtyeight.blogs.nytimes.com/2011/08/08/why-s-p-...

Over the last 15 years or so, you could have made a lot of money with an investment strategy of "bet against S&P".

netmau5• 15 years ago

It bums me out that a single press release can cause so much of the world's wealth to evaporate. Worldwide capital was something like $80T iirc, 2% of that would have solved every budget crisis in the world.

sliverstorm2• 15 years ago

Was it real wealth if it can evaporate so? Before you immediately jump to your guns, roll the question around in your mind: was value destroyed?

hugh310• 15 years ago

Indeed, no real wealth was destroyed. Well, a few cars were set on fire in London, but that was unrelated.

Part of the secret to my happiness is this: I permit myself to feel happy on days when my stock portfolio goes up, but not to feel sad on days when my stock portfolio goes down. In this particular case I'd much rather be happy than consistent.

3pt14159• 15 years ago

A guy named Silver Storm knows better. A magnifying glass and a bar of bullion is worth a magnifying glass and a bar of bullion.

A magnifying glass and a $1B Bond is worth more than a $1B Bond, depending on the perceived stability of the economy's other banking institutions. When things get a bit less stable reserve ratios tighten up.

OstiaAntica4• 15 years ago

It wasn't a single press release, but an "official" recognition that the U.S. is hurtling along on an unsustainable budgetary path. We're borrowing more money each year than we spent as the ENTIRE federal budget each year in the 1990s.

Also, in many ways, Europe and Japan are in even worse shape, and the recent sell-off is probably more driven by European events.

scarmig4• 15 years ago

If you read S&P's actual paper, it focuses on political dysfunction, not economic. For instance, they said that if the Bush tax cuts for people making 250k/year were allowed to expire, then they would have allowed the USA to retain its AAA rating, but the American political system seems incapable of making the necessary revenue adjustments to attain fiscal consolidation.

Of course, S&P is really just a bunch of corrupt idiots, so either way you shouldn't pay much attention to them.

trotsky• 15 years ago

It's unlikely that much of today's market action relates to the downgrades. Bonds rallied, and equities extended losses that started in July, not friday night. Don't get caught in the trap of connecting events because they happen about the same time, this is a global event: Germany is down 5% on the day, London 2.5%, japan 2%.

scarmig4• 15 years ago

The downgrade didn't cause this. At least, you need a rather complicated model to explain how it did. Interest rates fell on US Treasury bonds; this means investors think they're the safest instrument to invest in. Today we saw equities crumble, not bonds.

I would guess it's mostly the evolving European situation that's throwing us headlong into the abyss, with a hefty serving of realizing the USA is run by clowns who are utterly incapable of addressing any important problems. Note that this is beyond simple "politicians are teh stupid," which applies in any country, but in the USA particularly. Europe's facing serious problems, but that's because they're burdened with very tough choices as a result of badly thought out institutions from the 1990s. The USA faces very easy choices, but we're facing serious problems because... well, we want to? Because we have a dysfunctional government? Who knows. Regardless, it's an unforced error.

chriserin2• 15 years ago

Its worth noting that some investors are thinking this is a liquidity event because someone got a margin call rather than concern about euro economic concerns. I'd think its both. But yeah, u.s. bonds are doing fine despite the downgrade.

http://brontecapital.blogspot.com/2011/08/who-has-got-margin...

dualogy3• 15 years ago

Evaporate? When you buy a stock for $10, that is the moment when your $10 are gone -- not the minute it plummets. If you can sell it later for $15, congrats, that is the moment where you can realize a profitable "exit". But in the meantime -- every second of it -- don't ever count on that stock, bond or other 'vehicle' to "hold your $10 through the winds of change" or protect it against changes in the perceptions and opinions of all the other gamblers, investors, savers, market participants around the globe. Any given day, its "ticker value" merely reflects the value judgments of the relatively small number of co-owners that happen to buy or sell the same asset that day -- it never reflects "your net wealth". Your net wealth is your cash, house, car, brain, any other physical asset -- minus any money you spent on counter-party future obligations, promises, thoughts, hopes -- speculation. That stock you bought? It can be $1 or $100 tomorrow or in 10 years, and you only ever know it when it's time to sell.

Was money lost? Sure -- but not last week or today -- rather, on the day the individual investor bought into these markets.

Anecdotically, I made a few nice profits with Bitcoins back in May/June when they were all the rage -- but I never ever confused them with physical wealth, I knew the nature of my gamble and I timed my exit -- not perfectly, but good enough to convert this "digital profit" or "paper profit" back into "physical goods". I'm not a full-time trader or gambler and I believe in investing my time more productively, but at the same time, sometimes it's fun to play money games. Too bad so many people on a world-wide scale believe it's a smart idea for their retirement estate to "take on debt to 'invest' in others' debts". This has been going on for a long time but it's not especially sustainable or otherwise inspiring -- especially since the debts are now backed by the children of your children. Think I'm off-topic by now? Think again!

dpark4• 15 years ago

You do realize that cash is not a true physical asset, right? You can hold it in your hand, but it has no intrinsic value. The only value it holds that that which others assign to it, not unlike a share of stock.

ams6110• 15 years ago

Some percentage of the worlds "wealth" has been standing on a foundation of bad debt which is, as it always eventually does, working its way out of the system. Sad that it's going to be painful, but it has to happen, and really the sooner the better.

hugh310• 15 years ago

It's natural that different ratings agencies should disagree sometimes. That's why we have different ratings agencies.

OstiaAntica4• 15 years ago

In the US, ratings agencies and the bond rating system are a legacy of the New Deal-- the ratings agencies are approved by federal regulators and are protected from real competition.

Contrast that with stocks, where anybody can be an analyst and issue a rating, and where there is no mechanical, legalistic system of downgrades and upgrades.

The feds created the bond ratings agency oligopoly to "protect investors", but I'd argue we'd be better served by true ratings competition and more due diligence by investors.

shareme2• 15 years ago

wrong.. just ask Henry Blodget if he can be analyst.. Stock analysts are regulated by the SEC..

hugh310• 15 years ago

the ratings agencies are approved by federal regulators and are protected from real competition.

I'm confused. Surely if I decided to set up my own bond rating agency nobody could stop me?

losvedir• 15 years ago

Contrast that with stocks, where anybody can be an analyst and issue a rating, and where there is no mechanical, legalistic system of downgrades and upgrades.

I think this statement is a little stronger than is accurate. For a time I was on the career path of a stock analyst, and before my name could be on any notes urging investors to buy or sell, I had to take and pass a number of licensing tests: Series 7, 63, 86, and 87. These tests were mandated and run by FINRA, as ordered by the SEC.

So not just "anybody" can issue a rating.

However, I understand your larger message that there aren't larger legal implications surrounding your rating; other than simple anti- market manipulation type things.

nradov• 15 years ago

Bond rating agencies are superfluous when it comes to liquid bonds such as US Treasuries. The only reason their ratings have any impact right now is because of outdated SEC rules related to Nationally Recognized Statistical Rating Organizations. http://www.sec.gov/answers/nrsro.htm The market itself is a better judge of future value than any more-or-less arbitrary rating by S&P or one of its competitors.

The bond raters do still add some value by evaluating new issues or thinly traded securities. In those cases the markets don't give us useful information.

tybris2• 15 years ago

Both S&P and Moody's make good points, but have a different assessment of the uncertainty. Compared to other nations, The U.S. has a surprisingly healthy budget. Cut out the bush tax cuts, end the wars, stabilize health care spending, and you could create a surplus in no time. Few other countries have that luxury. However, it has not only become questionable whether Washington will be able to make the necessary changes in the foreseeable future, the corruption that underlies this inability is very hard to get rid of and may cripple the government even further.

I think these two different ratings appropriately reflect the uncertainty of the situation.

itaborai83• 15 years ago

http://en.wikipedia.org/wiki/List_of_sovereign_states_by_cur...

hugh310• 15 years ago

More meaningful if you look at it as a portion of GDP.

http://en.wikipedia.org/wiki/List_of_countries_by_current_ac...

ArbitraryLimits• 15 years ago

There's a saying that goes, "If you owe the bank $100, that's your problem. If you owe the bank $100 million dollars, that's the bank's problem." (I've seen it attributed to John D. Rockefeller, but certainly other people had the same idea before hime).

s/million/trillion/g, s/bank/China/g and s/you/United States/g and you've got my take on the current situation. Lots of the rest of the world's economy is based on selling things to the United States; it's pretty much China's explicit strategy for growth. If the US goes to everyone in turn and says, "Hey remember that $50 billion I said I'd get you last week? Yeah...I can give you $10 million," there will be a lot of grumbling, and hopefully some restructuring in the long term, but they'll still take the deal. Where else are they going to go?

TL;DR US has a monopsyny on monkey shaped shower curtain rings.

hugh310• 15 years ago

However, it has not only become questionable whether Washington will be able to make the necessary changes in the foreseeable future, the corruption that underlies this inability is very hard to get rid of and may cripple the government even further.

The issue in the US is that there is a genuine ideological split between the two parties about what the US government should look like. The Democrats want a big government, which takes in a lot of taxes and provides a lot of services to everybody. The Republicans want a small government, which takes in minimalist taxes and provides minimalist services. (I'm not interested in debating the relative merits of these two ideologies today.) And this isn't just the parties' ideologues, either -- the same ideological split genuinely exists in the US public (contrast to many other countries where the "big government" types seem to have largely won the argument).

Either party could easily balance the budget on its own, given unlimited power. However, because of the way the US political system just happens to work, it's very hard to do anything without getting at least some of the other guys on board.

The Republicans have for many years had a "starve the beast" strategy, figuring that if you keep on cutting taxes then eventually the Democrats will have to agree to cut spending as well. In recent years the Democrats have invented the opposite "gorge the beast" strategy, in which you figure that if you keep on increasing spending then eventually you'll be able to pressure the Republicans into agreeing to tax increases. And the poor beast being starved at one and and gorged at the other starts to... wait, no, this analogy is breaking down.

What's the solution? There really isn't one. The ideological split in the American public is real and it isn't going away any time soon, and folks need to stop proposing "solutions" which basically just come down to "all we need is for the other side to come over and agree with us and it'll all be rosy." That's not gonna happen.

But perhaps the first step is to acknowledge that this ideological split is genuine, and real, and does actually reflect the ideological split within the US population. Perhaps we can compromise, but first we have to acknowledge precisely what it is we're compromising about.

edit: Wow, I can't believe this got modded down. I guess the true believers in the "No really, it's the other guys' fault" die hard.

DevX101• 15 years ago

I'd caution against taking the Republican's word that they want a 'small government'. History contradicts this assertion -- the last 3 republican administrations increased the budget deficit.

I think Republicans want to allocate funding differently from the Democrats, but I'm not so sure they want to do any kind of 'small government'.

18pfsmt• 15 years ago

In genereal, I agree with what you have written. However, it seems the OP's debate, and most of others, overlook an adjacent idea that used to be one of the more serious disputes of our country. That is: The debate over Federal vs. State governments, and which entity should be concerned with which issue(s).

I would prefer that states that want more government involvement implement that at the state level. The states could then better compete as more people (and companies) would move to the states where they agreed more fully with the rest of the population.

If one looks at the US Constitution, it appears (IMO) most concerns were originally and explicitly intended to be left to the states, and reading Jefferson's writings it appears even more so. This has the added benefit that we can probably bring more transparency and accountability to state legislators because of the smaller network size.

MrHobbes• 15 years ago

I don't know, but I think that you are reading far too much into each party's alleged ideological stances. As far as I can tell, both modern political parties seem to agree that spending is the best way to go about governing.

Yes, I know that one party talks about cuts a lot and the other party talks about spending a lot, but what do they actually do?

Wars? Wars are expensive. Entitlements? Well, entitlement spending is also quite expensive. Neither party will be the first one to threaten social security. Neither party will be the one to threaten medicare. Sure, there will be lots of hand-waving and other forms of gesticulation, but no elected politician in their right mind will take a hatchet to the programs that benefit America's senior citizens. It's just not good politics in a nation with a rapid electoral cycle. (Who votes? Answer that question and you can usually go from there.)

Ideologies - they don't matter. Grandiose claims of some great idealogical divide are wonderful to hear (and great for motivating the base), but what is actually done in practice? Well, the answer is whatever gets you re-elected. Which tends to be lots of sound and lots of fury but very little in the way of action.

jbooth7• 15 years ago

Can you find me a recording of any Democratic officeholder saying they're "for Big Government"? I don't think even Bernie Sanders is on the record with something like that. Fox News saying what democrats think is not what democrats think.

Which Democratic spending initiatives are contributing to the current deficit? The Democratic war in Iraq, or the Democratic Homeland Security Dept? The Democratic Medicare Part D? You can argue the stimulus but that spending was all temporary and is gone by next year. The healthcare bill reduced gov't healthcare spending (and the tea party ran against it on a obama-is-taking-away-your-medicare scare campaign, I remember the attack ads, irony is not dead).

1999 wasn't that long ago. We had a surplus. The ideological split is mostly the result of opportunism by Tea Party commentators/legislators and the complete illegitimacy of any Democratic president in the eyes of about 50% of Republicans. Democrats will bend over backwards to not be perceived as ideological, as we saw last week.

someone13• 15 years ago

Without touching on your main point at all, it's a shame you got downmodded. I gave you my upmod, for what it's worth.

daniel_solano• 15 years ago

While I agree that there is a fundamental division of ideologies of what precisely the federal government ought to be amongst the American people, I disagree that it is a division between the two parties.

In my opinion, the establishment in Washington consisting of the bureaucracy and life-long politicians is generally pro-government and pro-spending. The Republicans pay a lot of lip service to small government, but it is only the Tea Party types like Ron Paul that actually fight for smaller government.

sliverstorm2• 15 years ago

It's like California, but on a larger scale!

Makes you wonder if the real answer is to split up the US.

Happened plenty of times to other countries over ideology- though each half could stand to lose a lot, seeing as various capabilities and industries are not evenly spread across the nation.

subsection1h2• 15 years ago

  Wow, I can't believe this got modded down.

You wrote, "the Republicans want a small government." Do you believe that the attributes of a "small government" include endless wars, redition, torture, warantless wiretapping, racial profiling, police brutality, merger of church and state, etc.?

tybris2• 15 years ago

I don't recognize your description of the political landscape. Republicans don't do any more to shrink government than Democrats do to expand it. This has never been true. They do have different priorities. Republicans think the government should be like your father who protects good citizens from harm by fighting bad citizens and foreign threats. Democrats think the government should be like your mother who nurtures and cares for all of its citizens.

As science and economics are showing us a mixture of father and mother turns out to work best, the political differences between Republicans and Democrats are shrinking every year. As a consequence, the parties feel it is necessary to distantiate themselves more and especially the Republicans have spent several decades creating a vast narrative around where their priorities lie. Unfortunately, this has led to big changes in voter's habbits and ideological perspectives.

Wealthy opportunists have helped promote and taken advantage of the narrative to push an agenda of lower taxes for the rich in return for lavish campaign funding. A group of people bought into the narrative too deeply and now think that the myths about taxes they heared over the years are the hard facts, and that Democrats have misguided beliefs. Supported by the wealthy opportunists, these people have taken control of the Republican party and its policies. This is a corruption that has taken many years to develop, but now runs deeply into the belief systems of voters and the wallets of politicians.

markyc• 15 years ago

it wouldn't have anything to do with buffet's stock in moody's (and him already losing billions as an effect of the recent downgrade by S&P)?

mcphilip• 15 years ago

In theory, no, but buffet being moody's largest shareholder along with his comments about S&P downgrade being in error sure is tempting fodder for conspiracy theory :)

ahi2• 15 years ago

S&P's position doesn't make any sense. If U.S. defaults what happens to the world economy and every other AAA rated debt? So long as US Treasuries shore up the balance sheet of every government and corporation, a default takes down everything. If the US can't have a AAA, then no one can.

Havoc2• 15 years ago

I don't think these ratings are intended to still hold true in a global meltdown type scenario.

Your point does show though how ridiculous the current situation is. A country that is up to its eyeballs in debt really should not be the measuring stick.

ChuckMcM• 15 years ago

"I don't think these ratings are intended to still hold true in a global meltdown type scenario."

That was Vlad's point. The US debt is, for the time being, 'too big to fail' in the sense that things like oil is priced in dollars. So almost by definition, the US debt is AAA and everything else is the same or less risky than that. (Talking strictly about soverign debt here, corporate debt is a different kettle of fish)

"Your point does show though how ridiculous the current situation is. A country that is up to its eyeballs in debt really should not be the measuring stick."

This seems to be a common misperception, which is where our 'eyeballs' are, relative to the amount of debt we are carrying as a country. Compared to the GDP and size of the economy, we're not in bad shape at all. Further, even at the anemic growth rates of 2%, if the Government cut nothing, which is to say kept the same budget this year (in terms of dollar expenditure) as they had last year (basically actually made the budgeting process 'net zero' so any new spending was matched by an equivalent cut) the country would be running a surplus in slightly more than 15 years. With 3 trillion in current revenue, 2% growth compounded over 15 years gets us to 4 trillion in annual revenue. Even running a half trillion dollar defict we 'win' by not spending any more. But it does depend on us having the discipline to do that.

Someone• 15 years ago

I think it makes perfect sense. We have a debtor who contemplates for weeks whether to default on its obligations. Why on earth would you give such a debtor an AAA (~="absolutely trustworthy", _not_ "as trustworthy as it gets") rating?

nknight• 15 years ago

Paying one cent less than is due constitutes a default. This is what people don't seem to understand.

The US defaulting doesn't mean all the bonds disappear. It doesn't mean nobody gets any of their money. It means the US doesn't fully meet its contractual obligations.

Scale this back: You only pay half of your mortgage payment one month. That means you're in default. Does your obligation disappear? No.

Were the US to default, the important questions are "By how much?" and "How long will it take to fix this?". Only once those questions are answered can you begin to answer the question of what other entities' debt ratings should be.

EDIT: Not all bonds would go into default at once, either. The US could pay some in full and not others, and could pick and choose which got paid how much. Country X that only has a limited amount of US debt might get shafted, while country Y that depends heavily on US bonds gets paid in full. What's the actual consequence there? Not much. Country X is mildly inconvenienced, Country Y has no problems.

This is way more complicated than 2+2=4.

ahi2• 15 years ago

You make good points, but the comparison to a mortgage payment is not one of them. My missed mortgage payment affects my credit rating, but not the credit rating of the bank who holds my mortgage because they hold thousands of other mortgages. Despite the bank's leverage, my mortgage is still a tiny portion of their balance sheet. I could stop paying altogether and no big deal. Not so with US Treasuries. They are the foundation for basically every conservatively managed balance sheet. It's the old saying: if you owe the bank a million dollars you have a problem. If you owe the bank a billion dollars the bank has a problem. I agree this is way more complicated than 2+2=4, but Standard & Poor's inability to do even basic math (http://uk.reuters.com/article/2011/08/07/uk-usa-rating-sp-wh...) leads me to assume they are incapable of figuring out the network effects of a US default of any kind or degree.

Havoc2• 15 years ago

>basis of our decision [...] size of the U.S. economy

These guys missed have missed all that drama about to big to fail.

georgieporgie• 15 years ago

I suspect that Warren Buffet has a glint in his eye, watching stocks dropping right now. It's a fire sale in what is fundamentally the greatest economic engine on the planet.

praptak• 15 years ago

This sounds a bit suspicious:

"The United States has unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments."

"We think it's safe to lend them money, because they can borrow lots of money."

reirob• 15 years ago

The question is not why Moody's thinks that U.S. still deserves AAA, but how long it will take until Moody's will have to downgrade U.S.

timedoctor• 15 years ago

There is one reason why the US cannot go bankrupt .... it can just print more money to pay the debts. This is very different to Greece which does not control it's own currency. This is one reason why Euro states are more under threat than the US.

Also Japan has far higher debt levels than the US, and it has an significantly more aging population, negative growth in population and is in more trouble than the US. However Japan is currently a safe haven from the US? Who decided that Japan is a safe haven? If the Japanese government had to pay much higher interest rates it would be in a lot of trouble, but at least it too can print it's own money.

Moody’s: Why the U.S. Is Still AAA

Related Stories