Opinion

The Great Debate

Rioters without a cause

By John Lloyd
All opinions expressed are his own.

On Sunday evening, a middle aged woman waded into a crowd of rioters in Hackney and shouted that she was ashamed to be black, ashamed to be a Hackney woman – because of the destruction and fear the rioters were spreading about them. But she went further. She said – Get real black people! I am ashamed to be a Hackney person! If you want a cause, get a cause! (See video below; contains graphic language.)

I had just spent a day, in Glasgow, with men who had had a cause. Forty years ago, workers at the Upper Clyde Shipyards in Scotland’s great old industrial city, where the workforce was being cut, voted to stage a work-in: a novel form of industrial action in which those laid off reported for work as normal, and continued to build ships. The action was led by two men, Jimmy Airlie and Jimmy Reid, both charismatic, both fighting for a cause – the right to work, the protection of the working class. They got huge support, in the city, in the country, even internationally. They won, for the shipyards on the Clyde, a temporary reprieve.

Both Jimmies are dead: the men I met, interviewees for a BBC program marking the anniversary, were fellow union representatives, well into their seventies. Yet, straight-backed and articulate, they knew what they were fighting for. As we talked after the interviews about the news from London, they expressed bewilderment: what were “the lads” fighting for? Why were they destroying their neighborhoods?

It’s a puzzlement shared in conversations across the capital. We can talk, still relatively lightly, about our lack of fear (except for those who have had a taste of it) based on the implicit assumption that the police will, tonight or tomorrow, take charge, show who has the power on the streets and bring the most egregious of the burners and the looters to justice. We exchange stories – of how near the riots got to us; of how we had friends caught up in it; of how shocked we felt. But beneath it all is the same puzzlement: what are they doing it for?

Most demonstrations have spokespeople, who sooner or later – usually sooner – seek to make their cause known and attract support to it. The cause might be, as in Glasgow, jobs and dignity; or it might be protests against racial discrimination, of which London has seen a few over the past three decades; or it might be against immigration. All of these, however much opposition they raise, had content  and demands.

Why does anyone take S&P seriously?

By Roger Martin
The opinions expressed are his own.

It drives me nuts that anybody treats the Standard & Poor’s downgrading of the U.S. government’s credit rating with anything but contempt.  I am, by the way, not saying that the circus in Washington didn’t deserve an immediate smack-down before the real one it will be getting in 15 months.  But it stuns me that people don’t ask themselves just what S&P is and who its credit raters are before actually paying one iota of attention to them.

So who are those S&P raters anyway – the people who actually determine whether the U.S. is AAA or AA+? The only thing that can be known about them is that if they are rating bonds at S&P, they can’t possibly be good at rating bonds.  The bond market is a multi-trillion market that is immensely lucrative.  Bond trading is a great way to make a buck because there are unlimited bucks to be made – if, and only if, you know something useful about whether the bond in question actually has a lower or higher risk inherent in it than level implied in the market’s current pricing.

So if you are any good at all at rating the riskiness of debt instruments, you will not be working for a couple hundred thousand a year at S&P, you will be working for yourself, or for the bond trading desk of an investment bank or a bond hedge fund making tens of millions of dollars per year – or a lot more if you are running the hedge fund.  Only if you are incapable of knowing something useful about the true risk profile of bonds will you take a job rating bonds at S&P. Or alternatively you actually know something useful but have no confidence whatsoever that you know do so you won’t put any personal financial risk behind your opinions.  In either case, the output is clear: because of the position you occupy, you are someone to whom no one should listen.

from Reuters Money:

Fury brewing at ratings agencies as markets gyrate

Carnival revellers are silhouetted as they carry a burning wooden wagon in Liestal, near Basel, February 21, 2010.  REUTERS/Michael BuholzerSo let me get this straight.

Ratings agencies helped spark the financial meltdown of 2008-9, when they deemed that steaming piles of mortgage junk were brimming with triple-A goodness. They were wrong – and epically so.

Now S&P downgrades the debt of the entire country, further threatens to do so another notch, teams with fellow ratings agencies to bring Europe to its knees with each new appraisal and gets an assist for wiping trillions in wealth from investors’ portfolios in just a few days.

Anyone else think the ratings agencies need a time out?

“If you had asked me a couple of years ago if they could do anything more destructive than the mortgage debacle, I would have said never,” says Roger Kirby, Of Counsel for New York City law firm Kirby McInerney, who is involved in a class action against Moody’s on behalf of shareholders. “But it seems they’re managing to do it again, right now. In order to restore their damaged reputations, they’re interjecting themselves unsolicited into sovereign markets.

from Reuters Money:

Retirement investors suffer as economy catches up to Wall Street

Retirement investors have struggled with a Jekyll and Hyde economy these past two years, where Dr. Jekyll lives very well on Wall Street while Mr. Hyde runs roughshod over a terrified Main Street.

On Main Street, the jobless rate tops 9 percent and 14 million residential mortgages are underwater – a figure Deutsche Bank thinks will hit 25 million, or 48 percent of all home loans, before the housing bust ends.

On Main Street, the economy hasn't respond to ultra-accommodative monetary policy. Near-zero interest rates don't matter because because there's so little demand for credit to hire people or to buy post-bubble real estate.

from Paul Smalera:

Downgrading democracy

By Paul Smalera
All views expressed are his own.

The Washington debt ceiling debate over these past months was the throwing open of the doors to the democratic slaughterhouse -- let’s please not ever complain again about not being able to watch the sausage get made. Though our media window onto the killing floor surely contributed to the S&P’s downgrade of U.S. debt, that’s not an entirely bad thing, as I’ll explain in a moment.

The preemptive downgrade of U.S. debt breaks a disturbing ratings agency pattern: Too-late downgrades from S&P and the other ratings agencies in the cases of Bear Stearns, Lehman Brothers, AIG, Greece and Ireland among many others. In the econoblogosphere, reliably hind-sighted ratings-agency downgrades, whether of sovereign debt or a teetering company’s bonds, have come to be something of a dark joke. It’s overdue that S&P got itself back into predictive rather than reactive mode. Yet the company’s sovereign debt committee surely chose the wrong target in U.S. Treasuries and broke the late-downgrade pattern for all the wrong reasons.

The ratings agency’s decision reads like nothing other than a fit of pique towards the government institutions and American people that had come to blame it as a prime enabler of the global financial crisis. The agencies, as my colleague Christopher Whalen just wrote, “prostituted themselves and their special position of trust with respect to mortgage-backed securities and exotic derivatives.” To get a little more anatomical, executives at the ratings agencies churned out AAA ratings on CDOs and other risky debt -- debt that their analysis should have shown to be junk-bond quality at best -- because they risked losing business if they were too critical. (Call it the, “every John is the best lover ever” theory of credit rating.)

Market musings with David Rosenberg: we’re in a depression

I spoke with David Rosenberg, chief economist at Gluskin Sheff, today to get his take on what’s happening in the markets after Friday’s US credit rating downgrade by the S&P. Here are the highlights of our conversation.

What’s the biggest surprise of the S&P downgrade of the US’s credit rating?
The timing of it. They already had stated their intention, but the timing of it was early.

Why did it come early?
The budget agreement to get the debt ceiling raised is light.

Recession protection

By David A. Rosenberg
The opinions expressed are his own.

Moving increasingly to immunize portfolios from the rising prospect of a recession scenario while providing returns that cash, deposits and T-bills just can’t rival what we are doing at the investment committee and asset mix level of our firm.

Let me begin by saying I don’t think this will be classified as a “double dip” per se since so much time has elapsed since the last downturn. Be that as it may, it is evident that we will be going into another recession — I think at this point it’s only a question of whether it has already begun — with the levels of output, employment and income all lower now than they were prior to the last contraction phase.

Plain-vanilla, garden-variety business expansions and contractions that are influenced by the manufacturing inventory cycle tend to have recessions separated between five and 10 years apart. That was certainly the experience that economists came to understand and appreciate in the post-WWII era. But in balance sheet cycles, which involve deleveraging, rising savings rates and asset deflation, recoveries are fragile and susceptible to the smallest of shocks and typically, recessions occur every two to three years. This puts a recession by 2012 squarely in the spotlight.

Is the debt-ceiling deal hated because it will work, or won’t work?

By James Ledbetter
All views expressed are his own.

As is so often the case when markets drop vertiginously, the explanation you get for what is happening depends almost entirely on whom you ask. There is, for example, a broad consensus that the debt-ceiling deal was a major contributor to the market plunge that kicked in last week.

But, what, precisely, are investors objecting to when they sell in reaction to the debt deal?

That depends.

To hear the deficit hawks tell it, the problem is that everyone can see that the deal was an effort to delay real decision-making on the U.S. debt. My colleague Gregg Easterbrook calls the deal “as phony as a $3 bill,” and argues that stocks dropped precipitously when “markets learned that people at the top of the government of the United States were going to do nothing at all about the national debt, beyond acting like windbags.”

The S&P downgrade: is the sky falling?

By Mark Thoma
The opinions expressed are his own. Paul Krugman on the S&P downgrade:

S&P and the USA, by Paul Krugman: OK, so Standard and Poors has gone ahead with the threatened downgrade. It’s a strange situation.

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

Can China afford to downgrade the U.S.?

By Joseph S. Nye, Jr.
The opinions expressed are his own.

After the rating agency Standard & Poor’s downgraded America’s long-term debt, China said that Washington needed to “cure its addiction to debts” and “live within its means.” It must have been a delicious moment in Beijing, accustomed over the years to lectures from Washington about its management of the yuan.

But actions speak louder than words. The real test will be whether China moves away from the dollar in any significant manner. While it makes modest adjustments to its reserve holdings, there are few good alternatives to the dollar. And while it calls for an international basket of currencies to replace the dollar, there are few takers. Of course, China might move toward opening its currency and credit markets in an effort to make the yuan a reserve currency, but the authoritarian political system is unwilling and unprepared to move to that degree of economic freedom.

Many commentators see the downgrading of American debt as a great shift in the global balance of power between the U.S. and China. Some wags have warned the American navy not to sail too close to China, because if the Chinese captured our ships, we would no longer have enough money to ransom them. But such jokes misunderstand the nature of power. Analysts point to China’s seemingly unstoppable growth and its holdings of United States dollars. But as I show in my latest book, The Future of Power, they fail to take into account the role of symmetry in interdependence in creating and limiting economic power. If I depend on you more than you depend on me, you have power. But if we both depend equally upon each other, there is little power in the relationship.

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