Zakaria: It's about democracy, not Obamacare

Some of my Republicans friends ask me, "Why can't Obama compromise just a little?"  His consistent refusal to negotiate on repealing, delaying or denuding Obamacare is the real problem, some of them honestly -- and mistakenly -- believe. 

Zakaria sums up best why President Obama and Senate Majority Leader Reid must not negotiate:

But what cannot be allowed to stand is the notion that if a group of legislators cannot convince a majority in both houses and the president to agree with them, they will shut down the government or threaten to default until they can get their way. That is extortion, not democracy.

I would be happy to see President Obama compromise on the budget, taxes, spending – even healthcare. But he cannot compromise on the principal that the rules of democracy must be respected, whatever the outcome. If Democrats had threatened to shut down the government to force the repeal of the Bush tax cuts or defund the Iraq War, I would have hoped President Bush would have also been uncompromising.

In our political system, negotiating is what you do when you don't have the votes to get everything you want. Obama has the votes to keep Obamacare. Republicans don't have the votes to repeal it. So why should Obama negotiate to defund or diminish a law he believes in, and has the votes to keep?  

For the sake of our republican democracy, Obama and Reid cannot establish a precedent by giving in to extortion. The Founding Fathers did not envisage Congress repealing laws through the budgeting process. If they get their way now, Republicans will do it again. You know it, I know it. If Obama caves and the Tea Party Republicans get their way, even Democrats might try this tactic one day, who knows?  

And it's not just about us -- it's about how others see us, warns Zakaria:

If American politicians start playing fast and loose with the rules, doing whatever it takes to get the results that they want, what does that say to people in Russia, Egypt, Iran, and Venezuela who get pious lectures on the rules of democracy? It tells them that something is deeply wrong with the American system these days.

We don't negotiate with hostage-takers, period. That's the lesson. There can be no waffling on this point. It will only encourage more unacceptable behavior.

How to solve the crisis in Washington

By Fareed Zakaria

October 3, 2013 | CNN

It is the defining moment of a democracy – an outgoing leader celebrates the election of a new one, from the opposing party. Think of George H.W. Bush welcoming Bill Clinton, or Jimmy Carter doing the same for Ronald Reagan. Across the world, this is the acid test of a real democracy. Mexicans will tell you that they knew that they had gotten there when President Ernesto Zedillo, after seventy years of one-party rule, allowed free elections and stood with his newly-elected successor and affirmed his legitimacy.

The basic and powerful idea behind this ritual is that in a democracy, the process is more important than the outcome. If a genuine democratic process has been followed, we have to accept the results, regardless of how much we dislike the outcome. The ultimate example of this in recent American history might be Al Gore’s elegant acceptance of the process – complicated, politicized, but utterly constitutional – that put George W. Bush in the White House.

It must also have been difficult for Richard Nixon to grin and accept the results of the 1960 election – a poll marred by voter fraud that John F. Kennedy won by a narrow margin – but he did. And as vice president, he reported the results to the Senate, saying:

“This is the first time in 100 years that a candidate for the presidency announced the result of an election in which he was defeated and announced the victory of his opponent. I do not think we could have a more striking example of the stability of our constitutional system and of the proud tradition of the American people of developing, respecting and honoring institutions of self-government. In our campaigns, no matter how hard fought they may be, no matter how close the election may turn out to be, those who lose accept the verdict and support those who win.”

That is what is at stake in Washington this week. The debate going on there is not trivial, not transitory – and not about Obamacare. Whatever you think about the Affordable Care Act, it is a law that was passed by the House of Representatives and the Senate, then signed by the president, and then validated by the Supreme Court as constitutional. This does not mean it cannot be repealed. Of course it can be repealed, as can most laws. But to do so, it would need another piece of legislation – one that says quite simply “The Affordable Care Act is hereby repealed in its entirely” – that passes the House and Senate and is then signed into law by the president.

But what cannot be allowed to stand is the notion that if a group of legislators cannot convince a majority in both houses and the president to agree with them, they will shut down the government or threaten to default until they can get their way.That is extortion, not democracy.

I would be happy to see President Obama compromise on the budget, taxes, spending – even healthcare. But he cannot compromise on the principal that the rules of democracy must be respected, whatever the outcome. If Democrats had threatened to shut down the government to force the repeal of the Bush tax cuts or defund the Iraq War, I would have hoped President Bush would have also been uncompromising.

So, how to solve the crisis? Many have wondered when the grown-ups in the Republican Party will force the House minority to call off this campaign. But that misunderstands the changed nature of American government. There are no more “grown-ups” in Washington, in the sense of a powerful political establishment that can get younger members of Congress in line. There are, instead, 535 political entrepreneurs, each seeking reelection and worried only about his or her fate.

Consider what happened with immigration reform, when almost the entire Republican establishment wanted to make a deal with the Democrats and yet a minority of House members once again were able to derail things. John Boehner is not leading his party, he is being led by its most passionate and radical wing. This crisis can only end when members of that wing understand that what they are doing is anti-democratic and harmful to the country.

Meanwhile, there is a way to turn this crisis into an opportunity. The debt ceiling is an absurd anachronism that should not anyway exist. Only a handful of countries around the world have anything like it. And the president cannot actually make sense of it.

Brookings Institution scholar Henry Aaron points out that were Congress to refuse to raise the debt ceiling, the president would have to choose between two Congressional mandates on him. First, Congress passed spending and taxation levels for the year, which the president must faithfully execute. But then it does not raise the debt ceiling. So either the president must ignore the Congressional action requiring him to spend and tax at the levels they have set, or he has to ignore the fact that they did not raise the debt ceiling. Were this to happen, the president should declare that he is going to obey the more substantive law – actually asking him to spend money and levy taxes – and ignore the procedural one. He would then borrow the money he needed to, to enforce Congress’ will.

Were President Obama to do this, it would solve the current crisis, and also end the prospect that the crux of America’s financial power – its sovereign debt and the dollar’s role of the world’s reserve currency – could ever again be held hostage through thoroughly undemocratic parliamentary games.

Finance aside, America’s global influence derives in large measure from the strength of its democracy. If American politicians start playing fast and loose with the rules, doing whatever it takes to get the results that they want, what does that say to people in Russia, Egypt, Iran, and Venezuela who get pious lectures on the rules of democracy? It tells them that something is deeply wrong with the American system these days.

A well-run government has the leisure to debate zombies

No, this is not from The Onion, and yes, you are reading the headline below right.

OK, granted, it's another question why Canada's elected leaders don't have anything better to do than debate hypothetical illegal zombie migration. Then again, they're not wasting their time debating whether to pay for the bills they voted for, to "sequester" their budgets, or to disapprove of Cabinet ministers' nominations because those nominees agree with the Prime Minister who nominated them. 

So on the whole I still give Canada's parliament the edge.

Canadian Parliament: ‘Canada Will Never Become a Safe Haven for Zombies’

By Taylor Berman

February 13, 2013 | Gawker

URL: http://gawker.com/5984147/canadian-parliament-canada-will-never-become-a-safe-haven-for-zombies

GOP's 'Blazing Saddles' bluff on debt ceiling (AGAIN!)

By mocking CNN's Ali Velshi on the debt ceiling, Rush Limbaugh proved Velshi's point that Republicans don't understand the difference between the debt ceiling and the debt (which comes from spending authorized by Congress).

No, Rush and the rest of you, the debt ceiling is not like the spending limit on your credit card. Bad analogy. It might be a fitting analogy if you were allowed, in some crazy alternate universe, to set your own credit limit on yourself...and then decided to exceed that limit every 6-12 months without paying down your balance, and then "threatened" to default on your own debt and ruin your credit history as an inducement to yourself to stop spending so much, without really intending to cut any expenses except groceries for your kids and prescription drugs for your elderly mother, but not your gun club membership or ammo purchases. 

I know, I know... that doesn't make much sense, it's still a pretty bad analogy, but that's as close as I can come to describing, in household-finance terms, (since that's all Republicans will understand), what the Republican Congress keeps doing to itself -- and to us, by extension.

As Walter Dellinger, the former solicitor general under Bill Clinton, remarked, the House Republicans' stance on the debt ceiling is like that scene in Blazing Saddles when Sheriff Bart (played by Cleavon Little) takes himself hostage by pointing his own pistol at his head, where the townspeople are Wall Street, cable news and most of the media:

Bart: [low voice]  Hold it! Next man makes a move, the ni**er gets it! 

Olson Johnson:  Hold it, men. He's not bluffing. 

Dr. Sam Johnson:  Listen to him, men. He's just crazy enough to do it! 

Bart: [low voice]  Drop it! Or I swear I'll blow this ni**er's head all over this town! 

Bart: [high-pitched voice]  Oh, lo'dy, lo'd, he's desp'it! Do what he sayyyy, do what he sayyyy! 

[Townspeople drop their guns.  Bart jams the gun into his neck and drags himself through the crowd towards the station] 

Harriet Johnson:  Isn't anybody going to help that poor man? 

Dr. Sam Johnson:  Hush, Harriet! That's a sure way to get him killed! 

Bart: [high-pitched voice]  Oooh! He'p me, he'p me! Somebody he'p me! He'p me! He'p me! He'p me! 

Bart: [low voice]  Shut up! 

[Bart places his hand over his own mouth, then drags himself through the door into his office] 

Bart:  Ooh, baby, you are so talented! 

[looks into the camera] 

Bart:  And they are so *dumb*! 

Yep, Republicans sure must think we're dumb to keep pulling a Sheriff Bart on us again and again....

FORTUNE Ed.: For first time, no adults in Washington

I disagree with some of Sloan's observations, but he is right on the money that Obama seems to stand for nothing except trying (and failing) to please everybody, and Tea Partiers are primarily responsible for the recent debt crisis.

American Idiots: How Washington is destroying the economy

By Allan Sloan, senior editor-at-large

August 18, 2011 FORTUNE

What the hell is going on?

Standard & Poor's, the bond-rating agency, downgrades the U.S., and the world trembles. The markets here go nuts on the first trading day after the downgrade, losing $1 trillion in value. European Union finance chiefs are playing Whac-a-Mole with members' debt problems (see the story by my colleague Shawn Tully). And England … England was literally burning.

Only three short years ago we were all terrified when our financial system was on the brink of disaster after Lehman Brothers went broke in September of 2008. Those scary times seemed to have disappeared in the spring of 2009. But now those fears are back -- and things are even scarier, the stock market's "green" days notwithstanding.

Our current mess is different from the Lehman-related horror because it stems primarily from politics, not economics. The previous fear-fest came about because Lehman's bankruptcy disrupted financial markets in unanticipated ways. Today's crisis was completely avoidable. You can blame it directly on the fools who brought our country to the brink of defaulting on its debts in the name of saving us from … I'm not sure what. Yes, the Tea Party types bear primary responsibility -- but they couldn't have done it without the cowardice and incompetence of the Obama administration, which let things get way out of hand. This whole fiasco just enrages me. And it ought to enrage anyone who wants the U.S. to act like a real country rather than some third-rate failed state run by fanatical factions that hate one another.

So why is today scarier than 2008-09? Because this time not only have we got troubled financial institutions to deal with, but we have serious, substantial countries facing possible default on their debts. Including, heaven help us, the U.S.

Things were already bad because of fear and financial fragility afflicting Europe. But the problems took a quantum leap because of fallout from Standard & Poor's totally justifiable Aug. 5 downgrade of U.S. long-term debt. The U.S. economy was already listless enough, with gross domestic product barely growing -- and maybe even shrinking -- plus record long-term unemployment. (One telling statistic: The percentage of U.S. adults with jobs is down to 58.1%, from 64.7% in 2000, according to the St. Louis Fed. That, my friends, isn't good -- see chart below.) The fear, loathing, and political divisiveness are going to make things worse, not better.

Now, a few facts. The S&P downgrade is not -- as some hate-filled knuckleheads inside the Beltway and in the hinterlands keep repeating -- from fear that the U.S. is "broke" or lacks the financial ability to meet its obligations. S&P's primary worry is that the U.S. may not summon up the political will to pay its debts. (Read the analysis for yourself here.)

The escalation of our problems can't be attributed to Angelo Mozilo of Countrywide Financial, a favorite villain. You can't blame it on the other favorite bad guy, Goldman Sachs (GS), or on the other usual suspects: Wall Street in general, greedy lenders and speculators, irresponsible borrowers seeking a free lunch by taking out mortgages they had no chance of repaying.

The root of our current problem is that there are no grownups in positions of serious power in Washington. I've never felt this way before -- and I've written business stories for more than 40 years, and about national finances for more than 20. Look, I certainly don't worship Washington institutions. I called former Federal Reserve chairman Alan Greenspan the "Wizard of Oz" when he was known as the "Maestro." I've said for more than a decade that the Social Security trust fund had no economic value and would be useless when the system's cash flow turned negative -- which I also predicted. But despite being an irreverent professional skeptic, I never felt there was a total absence of adult supervision in our nation's capital. Now I do.

I spent July on family leave, not writing columns, and watching with increasing horror as market-illiterate know-nothings, abetted by the craven leaders of the Republican Party (from which I'm about to resign) and the unspeakable ineptness of Obama and his minions, brought our country to within an inch of defaulting on its debts.

Washington's foolish politicians thought they'd reassured everyone when they stepped back from the brink of default with a deficit-trimming deal that's so absurd that you have to laugh when you think hard about it. Then S&P did what it had previously warned it would do when it became clear that the U.S. might decide not to pay its debts. It downgraded our country's credit. Triple-A credits are supposed to be rock solid. If there's a more than remote chance of default, a security shouldn't be AAA. End of story. I have no love for S&P or its competitors Moody's (MCO) and Fitch, whose influence vastly exceeds their competence; they should have been stripped of their special regulatory standing because of the AAA ratings they bestowed on trashy mortgage-backed securities. But I respect S&P for standing up and alerting investors to the idea that the once unthinkable -- a default by the U.S., the only country in the world that can use its own currency to pay external creditors -- has become thinkable. Fitch and Moody's have kept the U.S. debt triple-A, which I sure wouldn't have done.

Adding to the current sense of foreboding, at least for me, is the fact that the Federal Reserve, which rode to the rescue last time, is legally constrained by provisions of Dodd-Frank legislation little recognized outside the world of regulators and financial techies. Back in 2007, the Fed could invent programs to bail out solvent but illiquid institutions. It could also turn investment banks like Goldman Sachs and Morgan Stanley (MS) into bank holding companies with access to unlimited Fed funding -- and even infuse cash into nonbank basket case AIG (AIG) directly and indirectly to forestall an uncontrolled collapse, which could have made the Lehman Brothers disaster look like a mere rounding error.

The Fed's actions had their own set of problems, which I've written about at length. But once the Fed began acting in the summer of 2007, you knew there was an institution around that could bail out the world, if needed. Now, at least in theory, the only government institution that's supposed to do this kind of thing is the Federal Deposit Insurance Corp. I respect the FDIC, but it's got nothing like the Fed's power and international clout. We've got this problem because our leaders rolled over to pressure from big companies instead of breaking them up into pieces small enough to be allowed to fail.

If I sound angry, it's because I am. Think of me as an angry moderate who's finally fed up with the lunacy and incompetence of our alleged national leaders -- and with people stirring up trouble from which they hope to benefit politically or financially. Some policies and statements you hear from Tea Party types about the economy and the debt markets are utterly insane. Any competent economics instructor would give you an F if you asserted the same sort of nonsense on an exam.

But all that aside, at least the Tea Party people have a story and a message. The Obama people have none -- at least none that I've been able to discern. They don't even know how to spread good news, which actually does exist. One example: This spring I was assigned to figure out how much taxpayers would lose on the Troubled Asset Relief Program -- the much-maligned TARP, that supposed financial sinkhole. To my surprise, I discovered that TARP actually stands to make money for taxpayers. During my research, I found that the Treasury had reached a similar conclusion, but had put the information into the public domain in such a low-profile way that few people saw it. Why wasn't the Obama administration spreading the word that taxpayers had made money saving the world financial system? Beats me.

[If you take TARP in isolation, yes, it looks like a great success. But TBTF banks had at least $1.2 million at their disposal in addition to TARP, and used it to pay off their TARP debts easily. It was a sleight of hand by the Fed and esp. Tim Geithner. - J]

The one saving grace we have is that the rest of the world seems to be run by midgets too. I don't want to think what would happen if the U.S., in its current disarray, had to deal with the likes of Mao, Hitler, or Stalin at the height of their powers. Maybe there is some divine power watching over us.

Now that I've finished venting , let me make one more attempt to be reasonable -- and show how relatively easy it would be to solve our problems while allowing both the Tea Party and the left wing to claim victory and go home. This requires (1) that we survive the 2012 election cycle (boy, that's going to be a blast) and (2) that the winners recognize that our current federal income tax rules and rates, Social Security benefit formula, and Medicare provisions are historical and political accidents rather than holy writ handed down to Moses by the Lord on Mount Sinai.

We need more jobs, more growth, and more tax revenue. Note that I said more revenue, not higher rates. There are lots of proposals kicking around that would cut rates, eliminate the alternative minimum tax, and broaden the tax base by drastically reducing itemized deductions. Only about a third of taxpayers, primarily higher-income types, itemize deductions, so only they would be affected. Do this right, and you end up with more tax revenue from high-income people (which allows the "tax the rich" types to be happy) but lower rates (which lets the Tea Party folks claim victory). Making the system fairer should be doable.

[Reducing itemized deductions? Come on. The fairness and revenue-growth formula is simple. Freeze taxes on anybody making less than $1 million. Raise taxes to at least 40% on anybody making over $1 million; and to at least 50% on anybody making over $10 million. This would revert us to the historical norm. - J]

On the entitlement front, we modify Social Security and Medicare formulas, imposing higher costs on higher-end retirees (which would include me, should I ever retire). What's in it for the right-wing fanatics? Those programs' projected costs drop. For liberal wingnuts? They can claim victory because people are living longer than when these programs were introduced and will collect more benefits over their lifetime than originally intended.

Yes, rationality is out of style, and fanaticism is the new normal. But do we really want a national life like the one we've had the past few years? All shrieking and no thinking? Today's problems are horrible, but what are they compared to the Civil War, the Great Depression, and World War II? Enough screaming. As for me, I'm going back to the beach to finish my vacation.

Simon Johnson: U.S. has a growth crisis

Note at the end that Simon Johnson uses the "o"-word to describe today's America; and he's not some flaming liberal, he's an MIT professor and former chief economist at the IMF.

The Real U.S. Crisis Is Not the Debt Downgrade

By Simon Johnson

August 15, 2011 | Bloomberg

The U.S. has a fiscal crisis, but not the one that everyone is talking about. Standard and Poor's proved beyond a reasonable doubt that the U.S. still has the world's preeminent reserve currency. When shocks hit -- and investors have no idea who or what might be next in line for a downgrade -- they buy U.S. government securities.

Downgrades don't usually have this effect. For example, if S&P or other rating companies downgraded France, that would set off a crisis within the euro region -- pushing up interest rates on French government debt, undermining euro-area banks, and perhaps putting pressure on the fabric of the European Union itself. With a one-notch downgrade of the U.S. government, on the other hand, S&P inadvertently managed to lower the U.S.'s borrowing costs, both at the federal level and for homeowners who refinanced their mortgages.

The U.S.'s fiscal problem is not that the market questions the country's ability to pay its debts. The willingness to pay was clearly proved by the outcome of the debt-ceiling debate, when even a majority of Tea Party adherents in the U.S. House of Representatives voted to lift the ceiling (though it would have passed without their votes). We most definitely do not have the kind of solvency crisis experienced by some emerging markets and now, for the first time, parts of Western Europe.

Growth Crisis

Instead, our crisis has two dimensions. First, we have a growth crisis. My MIT colleague, Daron Acemoglu, in a blog post on the Harvard Business Review website, makes the point vividly. In his view, one percentage point extra growth per year for the next 20 years would fix the U.S.'s budget problems. If we could manage to increase our growth rate from 2 percent a year to, say, 3 percent over the long haul, that would greatly boost average incomes, as well as tax revenue.

Acemoglu also argues that the U.S. economy can grow through innovation, but only if U.S. policies foster more basic scientific research and more effective commercialization of technology. The U.S. also needs to improve its patent system and allow more skilled foreign workers into the country, Acemoglu says.

The general policy mood may be shifting in this direction. Jeb Bush, the former Florida governor, and Kevin Warsh, a former Federal Reserve governor, made similar points in a Wall Street Journal op-ed last week. Bush's rhetoric was suitably vague for someone who is likely to run for president in 2016. Bush and Warsh felt the need to repeat the mantra of the day, "Cutting spending is essential," and then quickly made the right point: "But we will never cut our way to prosperity."

Income Distribution

Restoring growth is not easy because of a second, more debilitating element -- a paralyzing fight over the distribution of income, in which powerful people can block the government from doing anything sensible if that is against their narrow interest.

This dynamic can be seen in the debate over who will foot the bill for the 2008 financial crisis, which caused a deep recession that pushed up the federal government's medium-term debt -- what we should expect by 2018 for example -- by about 50 percent of gross domestic product. (You can check the Congressional Budget Office numbers yourself; start with points 9 and 10 in my testimony to a July 13 joint hearing of the Senate Finance and House Ways and Means committees. The testimony was not refuted.)

Someone Pays

To control future debt levels, someone has to pay for that fiasco. But people in high-income brackets, working with various allies, have dug a brilliant defense against tax increases in the form of the Tea Party. Backed by 30 percent of the population, this group exploits the broad design of the U.S. Constitution, which gives well-organized minorities an effective veto power over major policy changes. The result is that, instead of letting President George W. Bush's tax cuts for the rich expire, we are headed for deep spending cuts that disproportionately affect the less-well-off.

More generally, powerful lobbies have amassed great privilege in the political system, and they can't be easily moved from their positions. For example, Jeb Bush and Warsh say, quite reasonably, "If banks are 'too big to fail,' they are too big. They must be allowed to succeed or fail on their own merit, without any hint of government support." But there is precisely no chance that Congress, the Federal Reserve or the executive branch will end the subsidies that undergird big banks, and that keep them in business through essentially free insurance against downside risk. Watch Bank of America in the weeks ahead for the next demonstration of what it means to be too big to fail.

Innovation and Growth

Acemoglu and James Robinson of Harvard University have a forthcoming book, "Why Nations Fail: The Origins of Power, Prosperity, and Poverty," that attributes economic success to political institutions that support innovation and growth. (Disclosure: I had nothing to do with writing the book, but they draw on research the three of us did jointly.)

The U.S. has done well over 200-plus years in most of the areas Acemoglu and Robinson stress. But the country now seems to be in the grip of an oligarchy that is determined to protect its position at the expense of spending for the public good on things like education and scientific research. Nations frequently fail when powerful interest groups block change. If this is the U.S. situation, it's more serious than any rating company's view on debt levels.

S&P (Stupid and Poor) ratings

I'm not able to watch the squawking cable news media or listen to talk radio, so I wonder... Are Americans being told the truth, are they indeed absorbing the irony of what happened over the past few days?

Background, in case you've been living in a cave in Tora Bora: Last week, S&P downgraded U.S. Government debt from its highest rating of AAA one notch down to AA+. Deficit fetishists remarked with poorly concealed glee that this was proof of America's imminent day of fiscal reckoning. And of course Obama got most of the blame, even though idiotic S&P cited Washington politicians' inability to craft a coherent fiscal policy as the other main reason for its dubious downgrade -- and, as we all know, fiscal policy (spending, debt, and taxes - Section 8) is, constitutionally speaking, Congress's job.

I'm just ignoring for a moment the S&P's $2 trillion error in its math; or that S&P may broken SEC regulations by leaking news of its imminent downgrade to favored hedge fund traders who stood to make a buck on insider knowledge; or the fact that S&P was rating subprime crap AAA and gave Lehman an A rating a month before its collapse, which was a big reason for the Great Recession and the subsequent fiscal crisis which caused S&P to downgrade U.S. sovereign debt.

No, I'm ignoring all that for now.

What I want to highlight is the irony of how the markets reacted. You know, those all-knowing, self-correcting, magical markets which are best at everything? Yeah, well, after a panic of selling off stocks (the Dow, S&P 500 and NASDAQ all tanked, not to mention international indexes), which was spurred, in part, by the S&P downgrade of U.S. Treasuries, investors tripped over themselves to put their money into... U.S. Treasuries. And so interest rates on U.S. Treasuries dropped to new lows.

In other words, a ratings crisis for U.S. Treasuries led to an abandonment of stocks and a boost in U.S. Treasuries.

I'm no market guru by any stretch, but if there's a time to buy stocks it's probably now, because this makes no f***ing rational sense.

Credit rating agencies' conflict of interest

America's slavery to the credit rating agencies is even more lamentable considering that these agencies have a huge conflict of interest: they're lobbying the same U.S. government which they're threatening to downgrade to keep their (private) ratings embedded in U.S. financial regulations.

Even the recent debt ceiling deal has not ended their threats to downgrade America's credit rating. Coincidence? Is there really any doubt among reasonable people that the U.S. Government can't or won't honor its debts? I mean, short-term U.S. Treasury bills are synonymous in finance with risk-free assets.

Moody's Junkies

By Bethany McLean

August 2, 2011 | Slate

Everyone hates the big credit rating agencies—Standard & Poor's, Moody's, and Fitch. Europeans resent the clout that they wield. Democrats hate them for their complicity in expanding the subprime mortgage market that brought down the economy and left us with a 9 percent unemployment rate. Republicans, though they're generally opposed to the Dodd-Frank financial reform legislation, have no love for the credit rating agencies, either. The conservative Wall Street Journal columnist Holman Jenkins, in a July 27 column headlined "Who Elected The Rating Agencies?," called section 939A of Dodd-Frank, which requires federal regulations to be stripped of all references to credit ratings, a "rare useful provision." Citing section 939A, David Zervos, the head of global fixed-income strategy at Jefferies, calls the noise the credit raters are currently making about downgrading U.S. Treasuries a "last gasp of hot air."

Yet the stock performance of the rating agencies doesn't suggest that they're losing their relevance. Moody's stock is one of the best-performing for any big U.S. company this year. There may be a good reason. Last week, the House financial services committee held a hearing about the rating agencies. Much of it was devoted to the possibility that the agencies would downgrade the United States, but the various witnesses brought prepared statements about the progress of section 939A. After reading these, I'm not convinced that this important reform is going to happen.

The ratings agencies would like you to believe that the source of their power is the accuracy of their opinions. But in fact, its true source is the extent to which their ratings have been embedded in various rules and regulations across the financial world. It all started back in 1975, when the Securities and Exchange Commission began to use such ratings to calculate how much capital broker-dealers should be required to hold. To prevent the proliferation of fly-by-night raters, the SEC designated a handful of firms as "nationally recognized statistical rating organizations," or NRSROs. By the time the financial crisis hit, NRSRO ratings were embedded in thousands of regulations and private contracts, if not more, determining what securities money-market funds would be permitted to own, how much collateral counterparties would have to put up in trades, and countless other arcane matters. At the hearing, Mark Van Der Weide of the Federal Reserve testified that Fed regulations contained no fewer than 46 references or requirements regarding credit ratings. In theory, section 939A will bring an end to the NRSROs' regulatory power. Every federal agency is required "to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine as appropriate."

"With the elimination of regulatory reliance on ratings, the entire NRSRO superstructure should be dismantled," testified Larry White, a professor at New York University and a longtime critic of the agencies. Moody's and S&P themselves say they want to be taken out. The agencies say their ratings should speak for themselves and not carry the force of law. Why they should favor a law that weakens them is a bit of a mystery, but perhaps the answer is that so many others are willing to argue their case for them. Several witnesses at last week's hearing voiced resistance to section 939A taking effect:

"Just as it is not feasible or practical for us or other institutional investors to simply stop using credit ratings altogether, it may not be feasible or practical for federal agencies to strike, in one fell swoop, ratings from all of their rules and regulations," said Gregory Smith, the chief operating officer and general counsel of the Colorado Public Employees' Retirement Association. "We encourage regulators to take a careful, deliberate approach to eliminating references to ratings over time. "

Consider the issue of removing ratings from the process of determining how much capital banks must hold against various exposures. The banks say that there isn't a ready alternative. Smaller banks argue that they don't have the resources to use anything other than credit ratings, which are relatively cheap and easy, and that if forced to find alternatives they'll have a harder time competing against large banks. The large banks argue that if they can't use credit ratings, they'll have a harder time competing against foreign banks, which still use ratings. Indeed, the Federal Reserve reported that replacing credit ratings could "lead to competitive distortions across the global banking system and the domestic banking landscape."

That reference to the "global banking system" gets to another problem: Despite European dislike of the American rating agencies, ratings are ingrained in the global capital standards--even those implemented after the 2008 sub-prime crisis, which exposed the ratings agencies' unreliability. As the OCC's David Wilson pointed out, the latest global regulatory framework ("Basel III") continues to use ratings to judge creditworthiness. "U.S. regulators cannot conform our capital standards to those agreed to internationally if section 939A precludes any reference to or reliance on credit ratings," wrote Wilson in his statement.

One year ago, as U.S. regulators began soliciting comments from the banking industry about what they should use instead of credit ratings, the gist of what they heard back was this: Don't mess with our ratings. "Generally, comments received did not concretely identify or suggest alternative standards of credit-worthiness," the FDIC said in its hearing statement. "Most commenters … argued that credit ratings are valuable tools in evaluating credit risk." The OCC's Wilson reported that "a majority of the commenters said that the OCC should continue to use credit ratings in its regulations."

This lingering attachment to the ratings agencies isn't limited to banks and regulators. Investors—yes, the very same people who got burned relying on the rating agencies three years ago—don't want to see them go. As Gellert, the CEO of Rapid Ratings, put it, "There are many market players who benefit from, and support, the status quo." If investors no longer have ratings to rely on, then they'll have to do the credit analysis themselves. If they're wrong, they won't be able to blame those accursed rating agencies! And as Gellert explained, the allure of ratings goes beyond the avoidance of responsibility. Ratings actually help investors game the system. In what's known on the Street as "ratings arbitrage," funds that are statutorily prohibited from buying non-investment-grade bonds buy the highest yielding bonds with the lowest investment grade rating that they can find, thereby juicing their returns. That creates an artificial demand for securities that don't merit the rating they received, at least by the market's judgment. Ratings arbitrage is what put the most dangerous mortgage-backed securities in greatest demand at the peak of the subprime madness.

Investors don't just want to keep credit ratings around—they want to keep credit ratings from the current big three. After the crisis, in 2010, Jules Kroll, a well-known investigator, formed Kroll Bond Ratings in order to provide investors with an alternative. But Kroll noted in his testimony that investors often require before they'll buy a security that it have not just a rating, but a rating from Moody's, Standard & Poor's, and/or Fitch. Kroll Bond Ratings took an informal survey of the top 100 pension funds, and found that of the 67 that published their guidelines, almost two-thirds required a rating from at least one of the top three firms. "It is self-evident that this practice further entrenches the incumbent rating agencies," wrote Kroll in his prepared remarks.

In fairness, the regulators, or at least the SEC, do still seem to be plodding gamely ahead. In March, the SEC proposed to remove credit ratings from the rules that govern which securities a money market fund may purchase. Gellert says that his business is doing very well, because although investors may still be using ratings from the big three, they're also eager for another opinion. That can only help. And he says that at the hearing he saw bipartisan support for removing ratings from regulations.

Then again, on July 21, in a little-noticed vote, the House financial services committee approved (over the objections of Massachusetts Rep. Barney Frank, ranking Democrat on the committee and one of the named authors of Dodd-Frank) a repeal of the part of Dodd-Frank that (quite reasonably) subjects the credit rating agencies to "expert liability," meaning that if the ratings agencies screw up they'll face the same legal risk as accountants and other third party advisers in bond sales. The July 29 Wall Street Journal reported that various business groups, including the Chamber of Commerce, are suing the government to overturn various parts of Dodd Frank that they don't like. The Journal piece didn't mention section 939A, but it would seem a likely target. According to the OCC's testimony, some in the industry are already recommending a "legislative change" to the section. Loathe them though everyone does, reliance on the credit rating agencies turns out to be a terrible habit that almost no one is willing to break.

Simon Johnson: What caused nat'l. debt, how it concerns banks

Like it or not, the CBO is the budget deficit scorekeeper cited by Republicans and Democrats alike. For all you who think Obama blew up the deficit and our national debt with his reckless spending, read and understand this: as for the difference (increase) between the CBO's 2008 national debt estimate for 2018 and its 2010 debt estimate for 2018, 57 percent was due to decreased tax revenue resulting from the financial crisis and recession, 14 percent was for entitlements (including increased unemployment insurance and early retirement/Social Security), and only 17 percent was due to increases in discretionary spending, including the stimulus bill.

In other words, the Bush's Great Recession pulled the chair out from under our economy, and therefore our tax revenue base. At the same time, it increased people's need for entitlement spending when they lost their incomes. That is why our debt is projected to skyrocket, because revenues have crashed, but spending has only increased.

The main part of Johnson's article, however, is about the need to increase regulation on financial firms, namely to increase their capital requirements as a buffer against risk-taking which hurts all of us, both through bailouts and lost tax revenue, when those risks result in a financial crisis. Republicans in Congress oppose higher capital requirements for one reason only: Wall Street pays them to oppose it. They've learnt nothing from the past 3 years.

Low Bank Capital Is Next Fiscal Crisis: Simon Johnson

By Simon Johnson

August 1, 2011 | Bloomberg

The summer debate that has dominated Washington seems straightforward. Under what conditions should the U.S. government be allowed to borrow more money? The numbers that have been bandied about focus on reducing the cumulative deficit projection over the next 10 years, as measured by the Congressional Budget Office.

But there is a serious drawback to this measure because it ignores what will probably prove to be the U.S.'s single largest fiscal problem over the next decade: The lack of adequate capital buffers at banks.

The Congressional Budget Office was created in 1974 to provide nonpartisan analysis of budget issues. This was a major breakthrough. It's hard to exaggerate the lack of serious and timely budget information that existed previously. The CBO still does great work, but it has a major blind spot. (Disclosure: I'm a member of the CBO's panel of economic advisers; I don't speak for them here or anywhere else.)

The CBO is very good at explaining how the U.S. got itself into a fiscal mess. The primary cause of the government debt surge in recent years was a huge recession. A big loss of gross domestic product and a fall in employment in any country will collapse tax revenue. To appreciate the magnitude of this disaster in the U.S., compare the CBO's baseline forecasts immediately before and after the financial crisis.

Debt Projections

In January 2008, before anyone thought the crisis would spin out of control, the CBO projected that total government debt in private hands -- the best measure of what the government really owes -- would reach only $5.1 trillion by 2018, which was then the end of its short-term forecast horizon. That represented a fall in real terms to just 23 percent of GDP. Some House Republicans might argue that even this level of debt relative to the size of the economy is too large, but there is no evidence that such debt levels by themselves stall growth or cause other ill effects. The U.S. carried government debt at or slightly above this level throughout the 1950s and the decades that followed.

As of January 2010, once the depth of the recession became clear, the CBO projected that over the next eight years debt would rise to $13.7 trillion, or more than 65 percent of GDP -- a difference of $8.6 trillion. In January 2011, CBO moved the forecast for 2018 to $15.8 trillion, or 75 percent of GDP, primarily because the damage to growth had proved even more prolonged than anticipated.

Fiscal Impact

Most of this fiscal impact is not due to the Troubled Asset Relief Program -- and definitely not to the part of TARP that injected capital into failing banks, most of which has been repaid. Of the change in the CBO baseline (comparing 2008 and 2010 versions), 57 percent is due to decreased tax revenue resulting from the financial crisis and recession, and 17 percent is due to increases in discretionary spending, including the stimulus package made necessary by the financial crisis (and because the "automatic stabilizers" in the U.S. are relatively weak). An additional 14 percent came from increased interest payments on the debt, and the rest from increases in mandatory spending, otherwise known as entitlements. Some of the entitlement spending, which includes food stamps, unemployment, and other support payments, is also due to the recession.

Why was the financial crisis so devastating to the real economy? The answer is that, in large part, financial firms had become so highly leveraged, meaning they had very little real equity relative to their assets. This was a great way to boost profits during the economic boom, but when the markets turned, high leverage meant either that firms failed or had to be bailed out. Many financial firms in trouble at the same time means systemic crisis and a deep recession. In effect, a financial system with dangerously low capital levels creates a nontransparent contingent liability for the U.S. budget through the fall in GDP and loss of tax revenue.

Important Paper

The single most important paper to read on future fiscal crises is actually about bank capital -- why the U.S. and other countries need to increase it and why arguments to the contrary are wrong. The paper was written last year and revised in March by Anat Admati, Peter DeMarzo, Martin Hellwig and Paul Pfleiderer, and is called "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive." The work by Admati and her colleagues is not partisan. In fact, her work has drawn support from finance experts across the political spectrum, including John Cochrane, a professor of macroeconomics and finance at the University of Chicago, who recently wrote an op-ed supporting the Admati approach.

Larger Buffers

Low levels of bank capital are just one way to measure the extent to which banks endanger the broader economy by financing themselves with debt rather than equity. Higher capital in any system means more equity and larger buffers against losses. In a brilliant speech recently, Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, connected the dots by showing the extent to which the U.S. Tax Code encourages dangerously excessive use of debt by households, companies and banks.

Kocherlakota argues persuasively that U.S. policy should aim to reduce the use of leverage -- and that there are much safer ways if the U.S. wants to subsidize first-time homebuyers or business investment. Tax reform that encourages financial firms to use equity instead of debt should be scored as lowering likely future government deficits.

Fiscal Risk

Many House Republicans -- including some who say they are fiscal conservatives -- as well as some House Democrats remain strongly in favor of lowering capital requirements.

But any true fiscal conservative should fight to strengthen the legislative and regulatory safeguards that aim to make the financial system less prone to collapse. Pushing for lower capital requirements in the financial system poses a major fiscal risk. It is unfortunate that fiscal risks arising from the financial sector are not currently scored as claims on the federal budget by the CBO. This introduces a false separation between financial and fiscal issues on Capitol Hill.

The CBO is only as good as Congress allows it to be. The CBO itself should push hard in this direction. The agency is good about scoring other contingent liabilities and implicit guarantees. Future health-care costs, for example, are assessed on the basis of probabilities. No one knows what the world will look like in 2050, but the CBO should be able to warn taxpayers and lawmakers what will probably happen in the future, based on the immediate past.

Where our national debt came from (Hint: it starts with a W)

All grown-up readers must take note of these conclusions about where our national debt came from, understanding that G.W. Bush inherited a budget surplus in 2001 and turned it into a huge deficit:

First, the Bush tax cuts have had a huge damaging effect. If all of them expired as scheduled at the end of 2012, future deficits would be cut by about half, to sustainable levels. Second, a healthy budget requires a healthy economy; recessions wreak havoc by reducing tax revenue. Government has to spur demand and create jobs in a deep downturn, even though doing so worsens the deficit in the short run. Third, spending cuts alone will not close the gap. The chronic revenue shortfalls from serial tax cuts are simply too deep to fill with spending cuts alone. Taxes have to go up.

How the Deficit Got This Big

By Teresa Tritch

July 23, 2011 | New York Times

URL: http://www.nytimes.com/2011/07/24/opinion/sunday/24sun4.html?src=me&ref=general

MB360: FDIC staff nearly doubled, troubled banks quadrupled since 2008

Folks, take note: the FDIC has double its staff compared to 2007 to deal with troubled banks, and the number of troubled banks is higher than ever -- almost 900.

The banking crisis is not behind us, and the bailouts did not "work." Well, actually they accomplished their real goal (in my opinion) of keeping Wall Street's biggest banks in business, but other than that -- FAIL. Remember this was all about keeping credit flowing to small business? Remember October 2008?

MB360 hits the nail on the head what the real problem is:

"Frankly, both parties are beholden to the checkbooks of large financial institutions. On a bigger level, if we want politicians to represent the interests of the people without worrying about financing a campaign we should seek radical reforms in our political financing system. [That means publicly financed federal campaigns! - J] There is little desire to do this from Wall Street investment banks since their return on investment (ROI) has yielded a fantastic sum. Nothing better than guaranteed taxpayer money when all you have to do is funnel a tiny percentage of this back into the political machine every two years."

Assuming we can get Wall Street out of Congress here's what we must do:

"We need to bring Glass-Steagall back. We need to split commercial and investment banking once and for all."

And here's MB360's take on the debt ceiling brouhaha:

"The debt ceiling debate is comical in many ways. After decades of spending like maniacs we all of sudden want to find restraint especially after we've given the banking system trillions of dollars! [$2.84 trillion is currently stored on the Fed's balance sheet. Remember that next time you hear somebody say, "The bailouts (meaning TARP) worked." - J] First, the interest payments would skyrocket so right off the bat we would increase our own interest payments. Not smart at all. We need to be honest and like any household facing tighter times, we need to find more revenues and cut spending."

A brave new banking system – while public is told banking system is healthy FDIC quietly grows troubled bank list by 180 and adds over 1,600 employees in the last two years to deal with bank failures.

Posted by mybudget360 | July 13, 2011

URL: http://www.mybudget360.com/a-brave-new-banking-system-fdic-banking-problem-institutions-grow-fdic-more-employees/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+mybudget360%2FQePx+%28My+Budget+360%29

Reagan adviser: 5 myths about debt ceiling

Here's my favorite part: "[Republicans] made the same argument in 1982, when Ronald Reagan requested the largest peacetime tax increase in American history, and again in 1993, when Bill Clinton also asked for a large tax boost for deficit reduction. In both cases, conservative economists' predictions of economic disaster were completely wrong, and strong economic growth followed."

And for those of you who think Obama would have to slash spending automatically were the ceiling not raised, understand that it's not his prerogative to make those choices; Republicans would put him in a position where he could not avoid violating the law: either by defaulting on Treasury payments; or by slashing spending already authorized by Congress.

Five myths about the debt ceiling

By Bruce Bartlett

July 7, 2011 | Washington Post

In recent months, the federal debt ceiling — last increased in February 2010 and now standing at $14.3 trillion — has become a matter of national debate and political hysteria. The ceiling must be raised by Aug. 2, Treasury says, or the government will run out of cash. Congressional Republicans counter that they won't raise the debt limit unless Democrats agree to large budget cuts with no tax increases. President Obama insists that closing tax loopholes must be part of the package. Whom and what to believe in the great debt-limit debate? Here are some misconceptions that get to the heart of the battle.

1. The debt limit is an effective way to control spending and deficits.

Not at all. In 2003, Brian Roseboro, assistant secretary of the Treasury for financial markets, explained it best: "The plain truth is that the debt limit does not affect the deficits or surpluses. The critical revenue and spending decisions are made during the congressional budget process."

The debt ceiling is a cap on the amount of securities the Treasury can issue, something it does to raise money to pay for government expenses. These expenses, and the deficit they've wrought, are a result of past actions by Congress to create entitlement programs, make appropriations and cut taxes. In that sense, raising the debt limit is about paying for past expenses, not controlling future ones. For Congress to refuse to let Treasury raise the cash to pay the bills that Congress itself has run up simply makes no sense.

Some supporters of the debt limit respond that there is virtue in forcing Congress to debate the national debt from time to time. This may have been true in the past, but the Budget Act of 1974 created a process that requires Congress to vote on aggregate levels of spending, revenue and deficits every year, thus making the debt limit redundant.

2. Opposition to raising the debt limit is a partisan issue.

Republicans are doing the squawking now because there is a Democrat in the White House. But back when there was a Republican president, Democrats did the squawking. On March 16, 2006, one Democratic senator in particular denounced George W. Bush's request to raise the debt limit. "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure," the senator thundered. "Increasing America's debt weakens us domestically and internationally. . . . Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren."

That senator was Barack Obama, and he, along with most Democrats, voted against a higher limit that day. It passed only because almost every Republican voted for it, including many who are now among the strongest opponents of a debt-limit increase.

3. Financial markets won't care much if interest payments are just a few days late — a "technical default."

Some Republicans believe that bondholders know they will get their money eventually and will understand that a brief default — just a few days — might be necessary to reduce future deficits. "If a bondholder misses a payment for a day or two or three or four," Rep. Paul Ryan (R-Wis.) told CNBC in May, "what is more important [is] that you're putting the government in a materially better position to be able to pay their bonds later on."

This is nothing but wishful thinking. The bond-rating agencies have repeatedly warned that any failure to pay interest or principal on a Treasury security exactly when due could cause the U.S. credit rating to be downgraded, which would push interest rates up as investors demand higher rates to compensate for the increased risk.

J.P. Morgan recently surveyed its clients and asked how much rates would rise if there was a delay in payments, even a very brief one. Domestic investors thought they would go up by 0.37 percentage points, but foreign buyers — who own close to half the publicly held debt — predicted an increase of more than half a percentage point. Any increase in this range would raise Treasury's borrowing costs by tens of billions of dollars per year.

Some may think that a rise in rates would be temporary. But there was a case back in 1979 when a combination of a failure to increase the debt limit in time and a breakdown of Treasury's machines for printing checks caused a two-week default. A 1989 academic study found that it raised interest rates by six-tenths of a percentage point for years afterward.

4. It's worth risking default on the debt to prevent a tax increase, given the weak economy.

While Republicans' concerns about higher taxes are not unreasonable, most economists believe that any fiscal contraction at this time would be dangerous. They note that a large cut in spending back in 1937 brought on a sharp recession, which undermined the recovery the country was making after the Great Depression.

Republicans respond that tax increases are especially harmful to growth. However, they made the same argument in 1982, when Ronald Reagan requested the largest peacetime tax increase in American history, and again in 1993, when Bill Clinton also asked for a large tax boost for deficit reduction. In both cases, conservative economists' predictions of economic disaster were completely wrong, and strong economic growth followed.

5. Obama must accept GOP budget demands because he needs Republican support to raise the debt limit.

Republicans believe they have the president over a barrel. But their hand may be weaker than they think. A number of legal scholars point to Section 4of the 14th Amendment, which says, "The validity of the public debt of the United States . . . shall not be questioned."

Some scholars, including Michael Abramowicz of George Washington University Law Schooland Garrett Epps of the University of Baltimore Law School, think this passage may make the debt limit unconstitutional because by definition, the limit calls into question the validity of the public debt. Thus Treasury may be able to just ignore the debt limit.

Other scholars, such as Michael McConnell of Stanford Law School, say the 14th Amendment will force Obama to prioritize debt payments and unilaterally slash spending to pay bondholders. But this would involve the violation of laws requiring government spending.

Either way, a failure to raise the debt limit would force the president to break the law. The only question is which one.

Krugman: If Obama caves, it's 'the end of his presidency'

Debt Limit Stakes

By Paul Krugman

June 28, 2011 | New York Times blogs

So, here's where we are on the debt limit discussions: Democrats have agreed to large spending cuts, but are holding out for doing something about

a rule that lets businesses value their inventory at less than they bought it for in order to lower their tax burden, a loophole that lets hedge-fund managers count their income as capital gains and pay a 15 percent marginal tax rate, the tax treatment of private jets, oil and gas subsidies, and a limit on itemized deductions for the wealthy.

And Republicans walked out.

Think about it. There's a significant chance that failing to raise the debt limit could provoke a renewed financial crisis — and Republicans would rather take that chance than allow a reduction in tax breaks on corporate jets.

[Don't forget tax breaks for yachts and thoroughbred horses, and taxpayer-funded subsidies for mega-profitable oil and gas companies! - J]

What this says to me is that Obama cannot, must not, concede here. If he does, he's signaling that the GOP can extract even the most outrageous demands; he's setting himself up for endless blackmail. A line has to be drawn somewhere; it should have been drawn last fall; but to concede now would effectively mean the end of the presidency.