06 Aug 2011

Interesting Reactions to S&P Downgrade

Financial Economics 10 Comments

I’ve already mentioned Tyler Cowen’s surprising reaction

But here is Brad DeLong making a refreshingly honest admission. (The same is true for me, Prof. DeLong.)

And here is Bob Wenzel making the most sense out of this that I have yet seen.

10 Responses to “Interesting Reactions to S&P Downgrade”

  1. Raja K says:

    Is this the beginning of a negative rate era? Banks now penalizing cash holdings. Granted this is only for very large funds but that’s how it begins doesn’t it?

    A penalty on saving. Wow!


    • Scott says:

      That’s an interesting way to leverage your ‘too big to fail’ status.

      Need protection? Over the FDIC limit? Park your money with us — we’re not allowed to fail!

      Protection will cost you x% per month. Thank you taxpayer!

  2. JSR08 says:

    Bob, he’s a little clarity for you and for Mr. Wenzel:


    S&P didn’t just “suddenly discover the debt crisis.” What they and others have suddenly realized through this debt ceiling hoopla is that one of the two political sides of this country is unwilling or unable to deal with the biggest generator of our deficit and debt: entitlements. Cuts in discretionary spending is becoming more and more moot as time goes on due to the fact that entitlement obligations will and are skyrocketing. It is not possible to “raise revenue” enough to cover these obligations the fact that both sides can’t come to a mutual understanding on this is what downgraded us.

    The Tea Party is getting torn to shreds right now by the Left yet they are the only ones actually trying to deal with the actual problem we face. As Janet Daley puts it, “the idea that a capitalist economy can support a socialist welfare state is collapsing before our eyes.”


    • Dan says:

      One of the two parties? Did I miss something or didn’t entitlements expand when the republicans had control of the house, senate, and Bush president.

      • JSR08 says:

        They did. And certainly I would be naive to try and sell the idea that the Republicans didn’t play their part over the years to get us in this fiscal situation. But it is apparent that collectively they are trying to do the right thing now, even if that means the old Republican guard is being dragged kicking and screaming by the “Tea Party Republicans.”

        I constantly hear that same reasoning from my liberal friends regarding Bush and Republicans. Don’t they get credit for slowly learning their lesson and trying to change their ways? Should parents berate their children for their past mistakes even while they are trying to do better?

        • bobmurphy says:

          JSR08, sorry but I don’t think the Republicans are trying to do the right thing on this. If they did nothing, they automatically had a balanced budget, i.e. no further borrowing by Treasury. So they basically said, “OK we’ll let you borrow $2 trillion more, but only if you agree to a balanced budget amendment process that will never be ratified. And promise us you will cut spending before a crisis hits!!”

          • JSR08 says:

            Bob, what don’t you understand about the word “try”? Your last couples sentences (however sarcastic) seem to indicate that you know what it means.

            Take the Republican’s recent policy positions as a whole versus the Democrat’s. Can you honestly say that they are still acting as two sides of the same coin?

    • Silas Barta says:

      I was waaaaaaaay ahead of S&P … and I still am, because they don’t seem to take into account how it will only get harder to democratically reduce entitlement spending.

      BTW, people buying long-term Tresurys at current rates are complete idiots. That is all.

  3. George Smith says:

    Someone has dared to suggest the emperor is less than fully clothed, and regardless of the political motives involved it is the correct thing to say. It took some guts to make this rating, especially since they’ve been rubber-stampers for so long. I love it.

  4. EB says:

    It’s quite ironic, indeed, that we would see LT Tsy futures surge on the news of a downgrade, but it makes sense from a margin call perspective. Had another major ratings agency joined S&P, we might see forced liquidation of Tsys and a spike in yields. However, with only the S&P downgrading, Tsys are still good margin, though with a slightly greater haircut. All the concurrent downgrades in corporates (and soon to be munis) are creating demand for good margin instruments, including the very debt that was downgraded and triggered all this. Welcome to the bankstas’ paradise.