Listening to the television talk show pundits this past Sunday, including Austan Goolsbee (one of Obama’s failed economists), and George Will (one of the right’s senior statesman), I find myself in a difficult position.
My predicament is agreeing with the current actions of Standard & Poor’s, and also defending their actions during the credit crisis of 2008. (Has it ever really ended?)
Beginning in 2006, I wrote, lectured, and blitzed the radio airwaves with the ultimate impact of the financial engineered mortgage market.
I discussed CDOs, CDSs, and even SIVs (most people thought these were used to drain pasta.)
I took public information, thought wildly out of the box, made assumptions based on what-if premises, and viewed government, Wall Street, and even the media as all participating in the biggest bank heist of all time. (Should you like to read or hear any of these past radio shows or writings, they’re all available at billtatro.com.)
In addition, at the risk of my own personal financial advisory career, I directed clients to get liquid, invest in assets non-correlated to the stock market, and short housing and financials.
For a while, it didn’t look good. Housing spin machines, government press conferences, and all sorts of market machinations worked to keep the markets up. However, economics ultimately won as it always does, and my thesis was proven correct.
Standard & Poor’s is currently being vilified because they were wrong in 2008, so they must be wrong now.
In fact, the White House and their cronies would have you believe the S&P made a $2 trillion math error, and thus the downgrade should be dismissed.
Let’s first examine the triple A rating for subprime mortgage paper in 2008.
Let me make myself perfectly clear. Some will contend S&P was bought off, and gave triple A to the highest bidder. (I’ll let history judge that accusation.)
I tend to believe the data provided by Fannie and Freddie, the administration, the bankers, and even the Treasury and Federal Reserve was so slanted to a positive outcome that a triple A rating was inevitable.
There was no reason to believe differently. The pressure from politicians like Barney Frank and Chris Dodd must have been enormous, as were the so-called brilliant minds of Goldman Sachs that built models to prove that success was not only a given, but was designed to go on as long as the eye could see. (Or, as they say on Star Trek “Going where no man has gone before.”)
All of this gave a whole new meaning to garbage in, garbage out. The models were not only garbage, but also self-serving to all of the participants from Washington to Wall Street.
We all know what happened, and know the S&P ratings based on the information provided was wrong.
Once again, S&P is currently making decisions based upon outside information provided by the Congressional Budget Office. The CBO made an initial assumption about spending, and then found the most recent Congressional deal lowered the debt level assumption.
S&P simply went back to the original debt level assumption to come up with $22.1 trillion (93% of 2021 GDP vs. $20.1 trillion which is 85% of 2021 GDP.)
It was a decision based upon the willingness of Congress to be really serious about debt, and also based upon growth assumptions of 3% to 5%. I’ll put my money on Pimco’s new norm of GDP at 2% or less for the foreseeable future, as opposed to the ludicrous assumption of 5% growth.
Make no mistake, like it or not there was no math error except for the error Obama and Geithner have made .
It is possible, however, that there was an error in S&P rating the United States much too high.