Arnold Kling  

The Markets React, and so do I

Nomadism... Ken Rogoff on the Current Situ...

In the New York Daily News.

When it comes to estimating the probability of a default by the U.S. government, credit rating agencies have no special claim to expertise. The risk of sovereign debt cannot be determined through analysis of financial metrics. Instead, it necessarily involves the assessment of political conditions.

This sort of piece is at best not my comparative advantage and at worst a mistake to write. I think I do better when I am ignoring current headlines.

Comments and Sharing

COMMENTS (9 to date)
Arthur_500 writes:

Any lender looks at their risks for getting paid back. This included getting paid back on time and in full.

The lender looks at the finances of the individual but looks at many other variables also. For example if you are constantly checking your credit rating that is held against you because it might be indicative of you trying to game the system.

You may have lots of income but if your credit card debt is incredible then you might not be able to repay that auto loan. Your idea is that you have cash in the bank but that cash could be spent tomorrow or possibly returned to the person(s) who let you keep it in your bank temporarily.

It is correct to look at the US Government and see 27 Trillion in obligations and realize that the leaders of government can't find the political willpower to figure out how to decrease that debt load. There is a real risk that they just can't risk the political suicide necessary to start to fix the problem.

The US is bankrupt and S+P actually said they are less than perfect. The only reason our debt is considered so high is that compared to others we are still relatively safe.

That's like saying I would rather jump into a fire than into a pool of sharks.

Regretfully it is all too easy to shoot the messenger. After all, didn't S+P make mistakes five years ago? So now that they are trying to be responsible and not overlook the elephant in the room we condem them for their professional judgement.

I guess the best thing we should do is ignore it all and spend baby spend. that will breing us out of recession and improve the economy.

Will you lend me money so I can improve the economy?

Wayne writes:

I'm still a big fan, but you did make a mistake writing that article.

In their report, S&P specifically said that there was not an immediate financial risk to servicing US debt. Instead, they downgraded the US based on political analysis.

Various writes:

You are being too hard on yourself. I see nothing wrong with the piece you wrote. I think it is relatively accurate. Besides, in the heat of the moment (or in the middle of a developing crisis) I think it is perfectly acceptable to print a piece that is about 95% accurate, rather than waiting a week and publishing something that is 98% accurate. As a consumer of financial news, I often prefer the quicker, but slightly less accurate, story. I'm not expecting perfection.

Mike writes:

I agree with your assessment of the 10 year notes.

Methinks writes:

Arnold, cheer up.

If it was a mistake to write, it can't possibly compare with the weekly mistake that is Paul Krugman's NYT column.

N. writes:

Let me add my voice to the chorus. When I see the headlines, I look to you for a response (I was waiting for this post, in fact).

We're all fallible, but I value some people's opinions more than others.

Elvin writes:


I liked it. No anger, no pointing fingers, no lecturing. Just some sober observations. I don't like writing reaction pieces, either, but someone has to do them. Better you than Krugman (and even Tyler, at times). Don't be afraid to do it again.

Paly writes:

Gee...I thought it was one of the more insightful assessments that I've read since Friday.

The observation that financial market upheaval can't logically be traced to a concern over U.S. default risk given that Treasury prices rose is an obvious winner.

S&P downgraded U.S. debt on Friday. Panic ensues. The market responds by seeking safety in U.S debt. Funny actually.

Dallas Bob Smith writes:

In reading your postings over the last 8 or 9 years I must have learned something. I've been telling people all weekend that the ratings agencies had no advantage on sovereign debt analysis compared to the major bond traders and investors. I also pointed out that now that the government had been "officially" downgraded, a distraction at worst, that the players would turn their eyes back to the problems of the European zone, unemployment, the housing market - you know real issues - and realize that there has been no economic rationale for the market's indices rise. The "flight to safety" of Treasuries was easily predictable.
Like I said; I must have learned something. That leads me to a question: How does this make PIMCO's decision to exit Treasuries look, now.

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