Friday, July 29, 2011

Don't Throw that Bread Out Because of a Little Spot of Mold

7/29 I have been saying that perhaps a large wake up call would be better for us than more negotiating and crap legislation that can get through our completely non-functional legislative bodies. Check out this chart on "sovereign" (a nation's) debt that has been downgraded from "AAA" by the rating services. Instead of yield (cost of borrowing so to speak) going higher, after a period of adjustment (9 days on this chart, for heck sakes), it heads on down. The idea, I think, is that a nation who has just been downgraded will... try harder, and investors jump in. Or the uncertainty is gone. Or to put it another way, as we have seen in the past from the ratings just before the current Bank Deregulation Depression, those damned ratings services far from prophesying future problems are merely lagging indicators. Probably this falls in the category of "lies, damned lies, and statistics" but anyway here's the rather humorous chart:

7/29  This is some writing that didnt' make the cut over at Aimless. :)  That should really put the attenna up. :)

I looked up the policies of the 1930’s because I usually believe we have not completely rid ourselves of those policies in the aftermath of the Crash of 1929. Certainly our policies leading up to our current problems look eerily similar to the pre-depression days, and currently it looks like we are making a U-turn on the progress we have made post catastrophe.
While we do not appear to be making the sharp policy mistakes of the 1930s, we do appear to have some longer-term drags—the potential for debt downgrades and the need to ‘write the rules’ still on financial regulation and the Healthcare bill,” said Don Rissmiller, chief economist for Strategas research and one time economist at the Federal Reserve Bank of New York.  – CNBC Online  “Debt Fallout: Even Market Pros Don't Know What to Do”\
Below find the general agreement among monetarists about what the bad policies after 1929 amounted to:

“Monetarists, including Milton Friedman and current Federal Reserve System chairman Ben Bernanke, argue that the Great Depression was mainly caused by monetary contraction, the consequence of poor policymaking by the American Federal Reserve System and continued crisis in the banking system.” – Wikipedia   “Great Depression” 
Is this the moment when the Market Pros finally realize that they are in uncharted waters? Is the debt downgrade contemplated by the rating agencies more realistic in its reasoning than we give it credit?  It’s not just an event to avoid but a series of factors that are to be considered when a ratings agaency takes such an unprecedented step.
If I were rating the debt, the big question to me would be whether our current system of government (3 clashing parties in the House of Reps, and a 60 percent majority necessary to pass a bill in the Senate) is viable.  We are in the midst of a historic period of corporations lobbying in profound numbers, pouring record amounts of money into campaigns, having company employees assigned to key government offices like Secretary of Treasury and myriad agencies designed to regulate the very companies they are from, and companies handing out jobs as rewards to ex-government officials. In the midst of this the Supreme Court takes off the caps on the amounts of money that companies can be used to influence the government.  Is that viable?
Do “market pros” think that the debt reduction being discussed in the form of less government outlays, or even in raising taxes should that actually occur, is  not a “contraction of the money supply?” Do they think there isn’t a continued crisis in the banking system with very little money to lend?

The reason that Market Pros don’t know what to do is very broad indeed. If we could actually look at the similarities between what happened in the Great Depression and the current day depression without the moderation of unemployment benefits, fiscal stimulus, government bailouts of banks, and the many other things we have done right UP UNTIL NOW, we would see a more direct correlation. To believe that we are out of this depression because we have moderated it to death is pretty wishful thinking.

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