Standard and Poor Showing

So Standard and Poor's has downgraded US long term debt.

That plainly represents a political judgment rather than an economic one. S&P explains it this way:
“In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand.”

Pardon me if I don't genuflect toward the rating agency that gave a triple A rating to bundled sub prime mortgages. That mistake helped bring our entire economy to its knees. And, as Robert Reich points out here, if S&P had done its job and accurately assessed the risk, the bubble wouldn't have been so large and so destructive.

The downgrade could be very bad news for every American with any debt. It is a direct consequence of S&P's previous failure, coupled with irresponsible Republican intransigence.

We won't know until Monday how this news will affect the market for US Treasury bills, notes and bonds, all of which have been trading at very low interest rates. We also won't know until the Asian markets open Sunday evening (our time) how equity markets will react.

The Wrong Trousers

Last Tuesday, America put on The Wrong Trousers, programmed by a larcenous penguin (played by Eric Cantor) to steal prospects for middle class prosperity. The larceny is nearly completed when Wallace (in the role of America) is awakened by an alarm (stock market decline), starts removing the trousers and begins an effort to bring the larcenous penguin to justice, aided by Gromit (played by Paul Krugman, Brad DeLong, Mark Thoma and others).

Watch the movie. It's more entertaining than actual events. Let's hope America wakes up in time, finds the correct trousers and celebrates with a bit of cheese..

Prediction and Governing

Last May I posted the observation that governing is prediction.

Various studies have concluded that, in general, liberals are better prognosticators than conservatives, especially if they have no law degree.

Now David Frum of the Wall Street Journal has joined the chorus.

"Imagine, if you will," Frum asks, "someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?"

The main problem I see with Frum's observation is the assumption that someone whose research and analysis of facts and trends differs from one's own is thereby an "enemy." We should all be seekers of truth, not seekers of vindication. The proof of the pudding is in the accuracy of resulting predictions.

Krugman's predictions are accurate. Wall Street Journal's are not.

Curmudgeon Status

I've been warned.

A couple of days ago during the morning status report at The Bean, one of my colleagues spoke up:

"Unless your blog posts become more emotional," he warned, "we're not gonna let you renew your curmudgeon's license."

I tried to think of a response. Finally I mumbled: "I yam what I yam."

It was a weak riposte.

August Oriental Town Board Meeting

There were some positive developments in the way last night's town board meeting was conducted.

Mayor Bill Sage reported that he has been reading Robert's Rules of Order and learning a lot from it. That is good.

Town Manager Bob Maxbauer reported on the status of planning for a new town dock at the end of South Avenue. He will submit a proposal for a grant under the federal Boating Infrastructure Grant (BIG) program, thus leveraging the money the town has set aside for the project. The area will be dredged to a depth of eight feet before installing a pier planned to be six feet wide and 120 to 130 feet long. It will be designed to BIG standards, expected to last for at least twenty years. The BIG program targets non-trailerable transient vessels at least 26 feet long and requires a depth of at least six feet alongside.

Maxbauer also explained the recent purchase, using funds from last year's budget, of a John Deer Alligator vehicle, which will provide new capabilities to public works with more economy than the existing pickup trucks.

The meetings still take too long. I will have some suggestions about that.

Gandalf

Gandalf frees the GOP from Grover Wormquist.

http://youtu.be/w65menUWLIY

Where Is The Stock Market Rally?

Today is the eighth straight day the market is down. No rally yesterday after the vote in the House. No rally today after the vote in the Senate.

Does the Market know something Washington doesn't?

Maybe they see this as a victory for the Tea Party but a loss for America. I do.

This deal, with its reduction in government spending, will be a drag on the economy. The consequences:

1. More jobs lost;
2. Reduction in the Gross Domestic Product (GDP);
3. More deterioration in the nation's roads, highways, bridges, railroads, harbors and other infrastructure (the quality of our infrastructure now ranks 23rd in the world);
4. Reduction in basic research;
5. Reduction in education;
6. Reduced ability to compete with the rest of the world;
7. More wealth diverted to the wealthy and powerful;
8. More blame to the blameless,
9. Reductions in Medicare and Social Security.

The Tea Party has now killed their half of the dog.

Cutting government expenditures in an economic downturn really worked out for Herbert Hoover in 1929, didn't it? Just remember - it was the Tea party this time.

Debt Limit Explanation

I have tried to explain what is going on, but today economist Jared Bernstein has a more clear explanation:

"While waiting to go on Larry Kudlow’s show last night, I heard Sen Mitch McConnell say:

“What we have done, Larry, also is set a new template. In the future, any president, this one or another one, when they request us to raise the debt ceiling it will not be clean anymore. This is just the first step. This, we anticipate, will take us into 2013. Whoever the new president is, is probably going to be asking us to raise the debt ceiling again. Then we will go through the process again and see what we can continue to achieve in connection with these debt ceiling requests of presidents to get our financial house in order.”

This morning, on Squawk on the Street (CNBC) I debated former Sen Judd Gregg who wholeheartedly endorsed this process, calling it the best way to impose budget discipline.

Predictable, I guess, but let’s think about this for a sec. These politicians are essentially saying the following:

“We in Congress cannot be counted upon to come up with budgets that pay for the spending we authorize. Therefore, we will have to borrow to make up the difference. But if that borrowing hits the cap, we will not raise the cap to cover the appropriations on which we already signed off, unless we get the spending cuts we want.”

To understand how nonsensical Sens McConnell’s and Gregg’s position is, you have to appreciate that Congress knows when they pass their budget whether it will breach the debt ceiling or not, just like you know when you order your lunch whether you’ll be able to pay for it. They’re saying, I’m going to keep ordering lunches I can’t pay for and when the cashier hands me the check, I’ll hand it right back and tell her it’s her problem.

The budget process is when you square the ledger. Or not—there will be budgets, especially in recession, that add to the deficit and breach the ceiling. In such cases, Congress must borrow to make up the difference, and sometimes that will mean raising the ceiling, as we’ve done without incident since 1917.

But Sens McConnell and Gregg would rather pass budgets they knowingly refuse to pay for, and then threaten default. You can call that budget discipline if you want. But I’m telling you, this is not the way of great nations.

On the plus side, while I was waiting to go on Lawrence O’Donnell’s show, I heard Barney Frank, who, while even more disheveled than usual, made a whole ton of sense on the debt ceiling debate (he was a ‘no’ vote in the House)."