Comments on: Why Spain’s in worse shape than Greece A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: yr2009 Thu, 20 May 2010 14:11:21 +0000 @RHS,

Indeed, rating agencies have a record, and it’s hard to imagine a more dubious one, as these organizations failed totally.

The problem is neither Greece nor Spain: It’s the very economic, political and social fabric of the EU as an organization, and of its member countries on an individual basis.
Everyone’s intentions were good, and the vision was beautiful and exciting, but they no longer can be sustained economically, unfortunately.
The European system is neither productive nor competitive enough for today’s world. The European way of life and standard of living are unrealistic.
Euro socialism should evolve rapidly into a more competitive form, or the union would disintegrate.

By: lubumbashi Thu, 20 May 2010 11:06:01 +0000 Well, the Economist blog Charlemagne totally busted you as a doomsayer.

I think you may be one of Taleb’s empty suit economist who thinks he knows the future.

By: DanHess Thu, 20 May 2010 03:28:38 +0000 @David

It seems there is an economy-wide distaste for leverage right now. Is there anything wrong with that? For most of American history, growth was gangbusters and leverage was less.

It seems that the big losers if the economy was less levered (balanced by a bigger monetary base) would be banks that profit from lending.

Some new currency base need to get straight into the hands of consumers (i.e. money-financed tax cuts and helicopter drops). Suddenly delinquincies would go down, impaired assets of banks would heal. Indeed banks would be able to start lending again.

This western standoff is silly and getting old.

By: dWj Thu, 20 May 2010 00:41:12 +0000 Along these lines, I kind of found it odd that Enron was ever downgraded to BB (if I remember correctly) when I thought it was fairly well known that a downgrade to junk would trigger all kinds of solvency demands that they couldn’t meet. If you’re a rating agency and know this, don’t you just go straight to C?

By: crazynutjob Wed, 19 May 2010 23:42:58 +0000 Felix, did you suddenly forget the existence of feedback loops?

Circular reasoning isn’t a problem when describing feedback loops. An increased liklihood of default should lower a credit rating, and the lower rating feeds back and further increases the liklihood of default. Yes, there are also other factors at play. Did you want to see an exhaustive list?

By: david3 Wed, 19 May 2010 22:33:18 +0000 @DanHess

Older folks aren’t the only ones holding cash.
Excess bank reserves are extemely high. ies/EXCRESNS
Depository institutions are doing this with a good reason. They cannot afford to make consumer loans in a probable deflationary enviroment and many B/S items have not be marked down.

All this expansion in the currency base (which I would agree seems necessary) only has brought about flat-flation.

A system built on credit, needs an expansion of credit. Hence, we need a pick up in velocity.

By: RHS Wed, 19 May 2010 19:31:47 +0000 Felix

Your understanding of credit ratings relationship to the market is wrong. First the market treated Greece as AAA for many years even though it rated A by the three agencies. Now the market is more bearish than the agencies as only one agency has it in speculative grade.

Also I am having a hard time following criticism of agencies. You think it will default and blame the one agency for thinking the same thing you do. They just cant win with you, now can they? In fact you seem to be completely ignorant of the fact any rating, anywhere can be criticised like any editorial can be criticized. It can be too high, too low, too volatile, too slow, too quantitative and too subjective. Rarely though do I see criticism that takes both sides of these dichotomies and not even notice the contradiction. Bravo, that takes chutzpa.

Second, if ratings had no impact on the market than , you could argue they are useless. Of course you took the other side of the argument and said since they impacted the market, they are dangerous. I bet you, if there was no market reaction to the Greek downgrade, you would have ran a piece arguing the other side without any intellectual qualms about it.

Third, simultaneous causation around ratings is a problem if agencies were not aware of it and downgraded it several times in a week. That is not case with Greece. If S&P was wrong then speculators would have driven the spreads back to where they should be. Not all serious money is constrained by ratings. A constraint that the agencies themselves do not like either by the way and is not their fault.

Look Felix, if wondering why agencies have so much power, its because unlike the rest of the media, we have criteria to make our opinions. When we perform an analysis we stick to the criteria. We have a track record which we publish. You on the other hand pull it out of your ass. And I bet you if we were to create a track record for the media, I am sure it would perform worse than rating agencies. The media can easily run agencies out business if they did these things, but they wont because its boring and bruising on their egos. Your entertainers, not analysts.

Also Felix your piece Re-REMICs singled out the wrong analysts. If you, Bloomberge and Calculated Risk wish poor opprobrium, rightfully so in this case, on the analysts, you should have done it on the New Issue Analysts. The Surveillance Analysis, the people you singled out, were doing their job. In fact you would not even know about this if did not tell you, you should be thanking them. What you should have done was singled out the ratings you thought were wrong and then found the New Issue Analyst who made that rating and embarrassed them. Preferably with some analysis of your own.

By: DanHess Wed, 19 May 2010 18:12:52 +0000 @David3 —

We have to look at the dollar velocity in a global context.

The world is aging rapidly and this is particularly true in the wealthier countries.

In young societies the natural money velocity is higher as new households are ramping up their borrowing for houses, educations and so forth. In older societies, the natural money velocity is lower as mature households are not borrowing and are instead paying off debts and saving for retirement. In a mature society, the average desire to borrow will be much less, naturally.

The solution should not be to try to get velocity / leverage higher. Simply accept that in a mature older society, it will be lower. Consequently, the monetary base will have to be much higher to avoid deflation.

What I think we are seeing is the cumulative effect of millions of rational older people all over the world trying to simultaneously hold a lot of cash for their retirement. There isn’t enough cash to go around for this purpose.

By: david3 Wed, 19 May 2010 17:22:51 +0000 @DanHess

You mean like this? Page 10 (Monetary Base Growth Rate and Inflation) ons/mt/20100501/mtpub.pdf

How do you get velocity to pick up? The rate is still declining in the U.S.

The recent PPI and CPI figures suggest even this mammoth increase in the monetary base may not be enough to prevent deflation.

By: DanHess Wed, 19 May 2010 16:10:47 +0000 If only Milton Friedman were alive today.

He would be shouting from the rooftops that we (the world) need Friedmanite helicopter drops and tax cuts financed out of printed money.

Moving debt from one place to another just cannot work any longer. Sovereigns need to delever. The private sector needs to delever.

The only was for this to happen is for the monetary base to increase dramatically.

It won’t be inflationary because the debt overhang is gigantic all over the world.