The most interesting part of Habib's post (to me):

 

In essence, S&P doesn’t believe the parties can agree on anything worth being agreed upon and the eagerness of Republicans to nearly force a default in what would have been a completely unforced error is a new low. In short, while the US didn’t default and isn’t expected to there’s no reason for anything but pessimism based on those living in DC.

 

Another piece of the puzzle.. http://news.yahoo.com/obama-cant-word-china-210114302.html

1. Is there a difference between new jobs vs not losing existing jobs in today's economy? Can we agree that had we lost automotive jobs and ancillary jobs that it would be worse than it is now?

 

2. Taking a cut is silly, meaningless idea.

 

If you saw a quarter on the ground would you pick it up and why?

Allow me to-rephrase then.

 

Is there a difference between new jobs and spending to prevent the loss of jobs?

 

Assuming this means a difference a government/taxpayer funded job and job created by a need in the marketplace the answer has to be yes.

 

There is significant difference.

These are the things we know: 1.) The US did not default or fail to pay anyone otherwise. 2.) Standard and Poor’s has reduced the US’s debt rating to AA+ while Moody’s and Fitch have kept it at AAA. 3.) Thus, this is is purely an judgement call by Standard and Poor’s. 4.)Standard and Poor’s has released their reasoning for the downgrade.

 

To start with the first three points, since the US didn’t fail to pay anyone, particularly creditors, it’s difficult to assess how the market will react to S&P’s pessimism, especially as the other ratings agencies have continued the AAA rating. There’s plenty of speculation, but I’m not sure anyone has a good read on how it will turn out, afterall, this is unprecedented. I think the main issue is whether Britain, France, or Lichenstein, for instance, will become more desirable for investments than the US based solely on S&P’s dictates and not on a failure of the US. In essence, how much does the market trust S&P and to what extent are there viable alternatives to the US? Those would be questions not worth asking had the US actually defaulted.

 

As to the fourth point, S&P has said that one of its main reasons (the main reason?) for downgrading the debt rating was because of the complete inability for either side in Washington to work with the other side in any meaningful or reasonable manner to manage the debt over the long-term. While they’ve said that the US is able to service its debt currently, the political war in DC has both threatened this and has given few reasons that anything significant could be done to draw down the debt. As recently as within the last year S&P re-evaluated the US’s debt, keeping the AAA rating, but warning that it is unsustainable long-term. The only thing to have changed in that short of time has been the political climate, most notably the debt ceiling debacle.

 

To be specific, S&P reasoned “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge” and “political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.” In essence, S&P doesn’t believe the parties can agree on anything worth being agreed upon and the eagerness of Republicans to nearly force a default in what would have been a completely unforced error is a new low. In short, while the US didn’t default and isn’t expected to there’s no reason for anything but pessimism based on those living in DC.

 

As to my own assessment, I’m a bit hesitant to accept S&P’s decision, even if their rationale is seemingly accurate. For one, S&P was among the biggest public image losers when it came to the financial crisis of 2007 for having rated sub-prime mortgage backed securities with their AAA rating and failing to oversee newly created investment vehicles based on bad debt. However, they’ve been considerably more vocal as of late. While they are expected to be when dealing with issues of sovereign debt - it's what they do - I’m curious if their newfound volume is an attempt to re-establish their credibility or their importance in the market. Fitch, for instance, has been nearly silent. Moody's has been in between. They also seemed far more involved in the debt ceiling debate than one should expect. As they were warning of the perils of default, they were also grading the potential “deals” being floated and indicating that they would be downgrading the US’s debt if certain deals were made. That seems overly involved. Even still, they decided to downgrade the debt after the eventual deal was passed. On top of this, after they had made their decision Treasury found a $2T miscalculation on the part of S&P, who fixed the error and continued with the downgrade. It seems like they should have either been more accurate in their measurements or taken a bit more time to re-evaluate after the correction. This is all to say I’m a bit weary of S&P’s motives without much in the way of concrete evidence to back it up. At any rate, it's hard to disagree with much of their reasoning and it's tough to predict how it will all play out.

 

I generally agree with your post. I found S&P's reasoning to be very, very weak and frankly rather unusual. There is nothing to suggest that the US would not pay its debt even with the political differences present in DC. I'll disagree with your contention that the Republicans were eager to cause a default or for that matter there would have been a default by the US on its debt even if the debt ceiling had not been raised. Programs would have been cut; a lot of people with govt jobs or working under govt contracts would have lost their jobs and a lot of bad things would have happened, but I seriously doubt the US would have defaulted on its debt (there are a fair number of legal scholars that believe that under the 14th Amendment, it would be unconstitutional for the debt not be be re-paid and the courts would have forced the debt to be paid even if the politicians had decided differently).

 

One can wonder if S&P isn't firing back at the DC politicians that rather verociously criticized the rating agencies for their role in the CMBS problem that itself played a role in the economic downturn. The politicians criticized the rating agencies for too easily issuing high ratings on those investments. Guess S&P decided to get tough in its ratings. Which brings to mind that old adage: Be careful what you ask for, you just might get it.

How much does a Senator and Congressman make?

I generally agree with your post. I found S&P's reasoning to be very, very weak and frankly rather unusual. There is nothing to suggest that the US would not pay its debt even with the political differences present in DC. I'll disagree with your contention that the Republicans were eager to cause a default or for that matter there would have been a default by the US on its debt even if the debt ceiling had not been raised. Programs would have been cut; a lot of people with govt jobs or working under govt contracts would have lost their jobs and a lot of bad things would have happened, but I seriously doubt the US would have defaulted on its debt (there are a fair number of legal scholars that believe that under the 14th Amendment, it would be unconstitutional for the debt not be be re-paid and the courts would have forced the debt to be paid even if the politicians had decided differently).

 

One can wonder if S&P isn't firing back at the DC politicians that rather verociously criticized the rating agencies for their role in the CMBS problem that itself played a role in the economic downturn. The politicians criticized the rating agencies for too easily issuing high ratings on those investments. Guess S&P decided to get tough in its ratings. Which brings to mind that old adage: Be careful what you ask for, you just might get it.

 

This is a big factor in S&P's action, not necessarily out of any spite but because of being defensive and erring on the conservative side this time.

 

However, S&P made it clear all along that they wanted to see $4 trillion in cuts and a clear consensus in DC about being committed to fixing the budget deficit and debt issue. DC failed miserably on both of those. They agreed to $2 trillion in cuts and it is clear to all that there is no consensus in DC on this issue. The hard line stance by both sides showed S&P we have a fractured process in DC with no optimism that it will get better. If anything, this next election may make things worse.

How much does a Senator and Congressman make?

Here you go

 

http://tinyurl.com/3wq8kaz

Assuming this means a difference a government/taxpayer funded job and job created by a need in the marketplace the answer has to be yes.

 

There is significant difference.

 

I am speaking specifically about automotive jobs and ancillary jobs that didn't go away as a result of the stimulus package.

Here you go

 

http://tinyurl.com/3wq8kaz

 

$174k

And if each took a 24,000 dollar paycut do you mean to tell me that wouldnt save us money.

 

12,840,000 a year to be exact. That might help create a job or two, but heaven forbid the politician help the US

And if each took a 24,000 dollar paycut do you mean to tell me that wouldnt save us money.

 

12,840,000 a year to be exact. That might help create a job or two, but heaven forbid the politician help the US

 

It would have zero impact. Picking up pennies while stepping over dollars.

I am speaking specifically about automotive jobs and ancillary jobs that didn't go away as a result of the stimulus package.

 

I assume that was cash for clunkers.

 

It really did not impact jobs. It created an artificial spike at taxpayer expense. Edmunds estimated that program only resulted in an additional 125,000 sales. And that is on a base of around 10 to 12 million sales per month.

 

http://money.cnn.com/2009/10/28/autos/clunkers_analysis/index.htm

 

The impact can be seen in this chart.

 

http://casafoodshed.org/wp-content/uploads/2010/11/Oct-auto-sales.jpg

 

There was a huge spike in sales during the program. But then there was a trough of sales after wards. Did the program cause automakers to alter or stop planned manufacturing plant shut downs? I can not recall that being the case. Unfortunately the program was expensive, very short manipulation of a market. The home mortgage program much the same. Are there lots more jobs in construction today due to the home mortgage rebate? It does not appear so.

 

So the government found reasons to destroy good used cars (causing a spike in used car prices that really hurt poor people or those that lost a job who could have benefited from cheap used cars!) and tried to 'stimulate' the market. Since decisions on factories and production targets are set to the long term conditions this program likely saved no jobs. And in the long term the market has slowly recovered. The car company executives probably liked short term spike - I bet they made their bonus target for that quarter - but they did change much of what they were doing.

 

Government interference in a marketplace rarely works. Cash for clunkers and the home mortgage rebates were attempts to trick the natural market and a lot of wasted money.

And if each took a 24,000 dollar paycut do you mean to tell me that wouldnt save us money.

 

12,840,000 a year to be exact. That might help create a job or two, but heaven forbid the politician help the US

 

Every federal employee should take 5 - 10% cut. Numerically it would not be a big deal but it would send a message that the problem is recognized and serious steps are being taken. Of course the guys at the top should take the first cut!