Krugman Blog- I Heard It Through The Baseline

[n2doc]

Oh, my. Treasury has a fact sheet explaining that $2 trillion error by S&P; it may sound technical, but to anyone who follows budget issues, it’s a doozy.

When the Congressional Budget Office “scores” policies, it does so relative to a “baseline” — a set of assumptions about what would happen in the absence of that policy. The normal CBO baseline — mandated by Congress — assumes that discretionary spending will rise with inflation, but no more. This isn’t realistic most of the time, since the demands for government services rise both with growing population and in many cases with rising economic activity; that’s one reason CBO always provides an “alternative fiscal scenario” that’s supposed to be more realistic. Under current conditions, however, with Obama already committed, even before the debt deal, to fairly harsh austerity, the zero-real-growth baseline is more realistic — and it’s how the debt deal was scored.

But S&P initially assumed that the debt deal was subtracting off a quite different baseline.

The point here is not so much the $2 trillion, which makes very little difference to real US fiscal prospects; it’s the fact that S&P stands revealed as not understanding basic analysis of budget estimates. I mean, I don’t think I would have made that mistake; real budget experts, like the people at the Center on Budget and Policy Priorities, certainly wouldn’t have.

So what we just saw was amateur hour. And these people are pronouncing on US credit-worthiness?

http://krugman.blogs.nytimes.com/2011/08/07/i-heard-it-through-the-baseline/

I think it was deliberate, not a mistake.

[XanaDUer]

1. These credit agencies rule our lives

just ask some poor person with a crappy FICO score when they get denied for a job over it.

I saw something about the SEC suing them. I hope they do.

[Tennessee Gal]

2. So, Krugman, what you suggest be done about this?

[chill_wind]

4. It's up to Congress to not let Dodd-Frank

get watered down even more, but that appears to already be happening - it's already being screwed with by "special interests" (see the Slate piece in my other post.)

Here's one thought he had in past commentary when it was a big topic last year:

(..)

The bill now before the Senate tries to do something about the rating agencies, but all in all it’s pretty weak on the subject. The only provision that might have teeth is one that would make it easier to sue rating agencies if they engaged in “knowing or reckless failure” to do the right thing. But that surely isn’t enough, given the money at stake — and the fact that Wall Street can afford to hire very, very good lawyers.

What we really need is a fundamental change in the raters’ incentives. We can’t go back to the days when rating agencies made their money by selling big books of statistics; information flows too freely in the Internet age, so nobody would buy the books. Yet something must be done to end the fundamentally corrupt nature of the the issuer-pays system.

An example of what might work is a proposal by Matthew Richardson and Lawrence White of New York University. They suggest a system in which firms issuing bonds continue paying rating agencies to assess those bonds — but in which the Securities and Exchange Commission, not the issuing firm, determines which rating agency gets the business.

I’m not wedded to that particular proposal. But doing nothing isn’t an option. It’s comforting to pretend that the financial crisis was caused by nothing more than honest errors. But it wasn’t; it was, in large part, the result of a corrupt system. And the rating agencies were a big part of that corruption.

Berating the Raters
By PAUL KRUGMAN
Published: April 25, 2010
http://www.nytimes.com/2010/04/26/opinion/26krugman.html

[chill_wind]

3. Krugman and Dean Baker's commentary last year

around the time of some Senate’s Permanent Subcommittee on Investigations.

(both links here}

Krugman and Baker's commentary last year

Berating the Raters
By PAUL KRUGMAN
Published: April 25, 2010

Krugman Nails the Issue on Credit Rating Agencies
Dean Baker
Monday, 26 April 2010 03:02

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x532066

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Slate has this interesting article from a few days ago:

Moody's Junkies
If everyone hates the credit rating agencies, why won't anyone enforce the Dodd-Frank provision to dethrone them?

By Bethany McLeanPosted Tuesday, Aug. 2, 2011

http://www.slate.com/id/2300572/

see whole article, but here's the last two graphs:

In fairness, the regulators, or at least the SEC, do still seem to be plodding gamely ahead. In March, the SEC proposed to remove credit ratings from the rules that govern which securities a money market fund may purchase. Gellert says that his business is doing very well, because although investors may still be using ratings from the big three, they're also eager for another opinion. That can only help. And he says that at the hearing he saw bipartisan support for removing ratings from regulations.

Then again, on July 21, in a little-noticed vote, the House financial services committee approved (over the objections of Massachusetts Rep. Barney Frank, ranking Democrat on the committee and one of the named authors of Dodd-Frank) a repeal of the part of Dodd-Frank that (quite reasonably) subjects the credit rating agencies to "expert liability," meaning that if the ratings agencies screw up they'll face the same legal risk as accountants and other third party advisers in bond sales. The July 29 Wall Street Journal reported that various business groups, including the Chamber of Commerce, are suing the government to overturn various parts of Dodd Frank that they don't like. The Journal piece didn't mention section 939A, but it would seem a likely target. According to the OCC's testimony, some in the industry are already recommending a "legislative change" to the section. Loathe them though everyone does, reliance on the credit rating agencies turns out to be a terrible habit that almost no one is willing to break.

http://www.slate.com/id/2300572

July 21 of this year. Interesting timing, no?