Belmont Club

The Turn of the Card

Despite Barney Frank’s advice to ignore the rating agencies, not everyone will. Standard & Poor’s lowered credit ratings for Fannie Mae, Freddie Mac, and other lenders backed by the federal government. It will be recalled that Fannie Mae and Freddie Mac used their association with the Federal Government to back mortgages beyond their own intrinsic ability. Now that very same connection has turned into guilt by association.

The U.S.-sponsored mortgage finance companies were lowered one step from AAA to AA+, and S&P said the downgrade reflects the companies’ “direct reliance of the U.S. government.” S&P lowered the U.S. credit rating on Aug. 5.

There was something supremely ironic about an agency whose boast was Federal Government backing declining in credibility along with its patron.

Meanwhile the markets continued to fall as investors fled to gold and ironically — Treasury Bonds. The Los Angeles Times notes that the Dow Jones average fell 600 points by midday on a Monday opening. “The appetite for Treasury bonds suggests that the Standard & Poor’s downgrade of the U.S. has not shaken the faith of investors in U.S. bonds.” It also suggested that the market’s skittishness was related to the general weakness of the economy rather than just being an outcome of the downgrade.

Money was looking for a haven, and not finding it, kept looking.  There was nowhere to hide.

Europe, for example, may also face the possibility of a credit downgrade, according to an investor formerly connected with George Soros. But it isn’t the just the short-sellers who are raising the alarm. Czech Finance Minister Miroslav Kalousek said the debt crisis shows the Eurozone’s social model is unaffordable.

“What the euro zone leaders are doing (in response to the latest bout of the crisis) is merely a fight for time. It is not a solution,” Kalousek told public broadcaster CT24.

“A solution is to admit that the present so-called social model is not affordable,” he said, citing the need for Europe to compete with Asia and other markets in the global economy.

“We have to try to adjust our consumption to our real income.”

But that would be poison for politicians, who are capable of nothing else but bribing voters with their own money. It was not as if they knew how to do anything else. So they would fight to keep the music playing.

Rogers, who co-founded the Quantum Fund with George Soros in the 1970s, “predicted Western governments will embark on a new round of quantitative easing to help spur their moribund economies, as politicians and other policymakers were not prepared to go through the pains of bankruptcy”. In other words, he believed the politicians were going to throw every Euro and Dollar they had at the debt beast to try and keep their social model.

“They’ll try to disguise it. They’ll call it cupcakes or who knows what. It’ll cause a big rally in raw materials and commodities because more and more people will realize they are printing money, they are debasing the currency.”

“The idea of printing more money and buying up worthless bonds instead of forcing people to go bankrupt is ludicrous.”

“In America, we had states and cities go bankrupt, many times. It didn’t end the United States, it didn’t end the U.S. dollar. It caused some pain, some terrible pain. But that’s how you solve problems.”

“You start over from a stronger base, after you acknowledge your mistakes… That’s what capitalism is all about.”

But bankruptcy would usher in a painful era of reckoning. It would change membership in the winners and losers column big-time. In bankruptcies the problem is always who gets what in the remainder of entities that have gone belly up.

Unsurprisingly, President Barack Obama urged the public to pay no attention to the ratings agencies, and even if they did to always remember the downgrades were the result, as his supporters put it, of the Tea Party ‘smoking tea’.

“No matter what some agency may say,” Obama said, “we’ve always been and always will be a triple-A country.” … The president attributed the market upheaval to a “string of economic disruptions” around the world, and the debt ceiling debate brinksmanship that raised the specter of a U.S. default. …

“The fact of the matter is that this is essentially a Tea Party downgrade,” Obama adviser David Axelrod said Sunday on CBS’ “Face the Nation.”

“They are totally unreasonable and doctrinaire and not founded in reality,” former Vermont Democratic Gov. Howard Dean, also appearing on CBS, added of House Republicans.

“I think they’ve been smoking some of that tea and not just drinking it,” he said.

But Obama, Dean, Frank, Herman von Rompuy and all the titans of the political world seemed to have shrunk to puny garden gnomes in the face of the vast financial upheaval racing around the world. People who once believed they could calm the financial waters with a mere word now find their authority carries less weight. A new Rasmussen poll suggests that only 17% of likely voters believe that the Federal Government has the “consent of the governed”

This constitutes a different kind of “credit downgrade” distinct, but not unrelated to the decline in investor confidence in Washington. The current political elite is running out of credibility, not just with the rating agencies, but across the board. The problem is that fewer and fewer people believe them any more. The only way they can turn this decline around is to improve their performance. To govern rather than to campaign. The power of spin and media memes has reached the limit of its effectiveness. It no longer suffices to demonize the Tea Party or whoever the chosen enemy of the day may be. Humbug can only go so far.

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