Now We Can We Rest Easy: Brussels Bureaucrats Are Protecting Us From Financial Risk

The Soviet leadership did not publish deliberately falsified statistics. They just dropped statistical reporting when things went bad. Outside observers could get a sense for how well the economy was doing by the number of pages in the annual statistical handbook.

It seems as if Brussels bureaucrats have learned from Soviet practice.

The European Union Commission, in its latest proposed regulations of financial markets, wants to prevent rating agencies from releasing their reports on European Union member countries. According to the Commission spokesperson: “When the Commission comes to the conclusion that a rating is not correct, it can set it aside for a specified period of time.” The temporary ban should prevent rating agencies from pushing debtor countries deeper into crisis, the spokesperson declared.

This provision makes Brussels bureaucrats arbiters of whether ratings agencies know what they are doing. Politician/bureaucrats, not Fitch, Moody’s or S&P, decide the level of risk of a country’s sovereign debt. Rating agencies about to lower the rating of a crisis country can be muzzled by the EU regulators. (And I guess no one will know about this!)

Speak about shooting the messenger bringing bad news! Such brilliant measures will surely make the financial world a safer place.

Spoof Turns into Reality

I was thinking of writing a tongue in cheek post about granting S&P whistle blower protection after its downgrade.

Imagine my surprise when I saw the following on Drudge just now:

US Inquiry Eyes S&P Ratings of Mortgages

 

It’s Not the Tea Party Stupid: Why the Bond Market Does Not Like What It Sees

Those who blame the kamikaze, hostage-taking tea party for ruining the U.S. credit rating do not see what the bond market sees. The last-second budget deal, which was really about nickels and dimes, underscored two things:

 First, it again revealed a political system unable to address the big issues. And if it tries to address them, it is likely to make things worse.

Second, it shows a nation that is no longer able to grow itself out of fiscal difficulties.

Experts know that the deficit and debt figures tossed around in public discussion are only the tip of the iceberg. The real iceberg is the unfunded liabilities of Social Security and Medicare. Their unfunded liability is how much money we would have to set aside to meet the future obligations of these two programs.  Our national debt, which may soon reach the size of GDP (say $17 trillion), is dwarfed by the unfunded Social Security and Medicare liabilities that may have already reached $100 trillion!

The bond market is looking at our deficits and our unfunded liabilities, and it does not like what it sees.  Moreover, it sees that any and all serious attempts to deal with these fiscal problems impose huge costs on potential reformers.

As examples, I would cite:

The savaging of George Bush’s attempt at the start of his second term to reform Social Security via partial privatization.

The demogoging of Paul Ryan’s plan to salvage Medicare and Medicaid by turning it into an insurance grant program.

The passage of Obama Care under the fig leaf of a deficit reduction plan, with all parties understanding it raises unfunded liabilities.

In the past, we have been able to ameliorate deficits and unfunded liabilities by economic growth. There is now doubt as to when or whether we will return to healthy growth. We have an economy that does not lend, does not take risks, does not buy, and is strangled by regulations. We have an administration that is perceived as anti-business and more interested in redistribution than growth and efficiency. If we are doomed to European-style growth, our fiscal woes will grow worse and worse and worse.

The S&P downgrade speaks to all these concerns. It surely did not help that the Obama administration ordered the free coverage of a wide variety of women’s health costs in its latest administrative guidelines for Obama Care. As more of these administrative rulings come out, the colossal unfunded mandates of Medicare will be better understood.

If things are so bad, you might ask, why is our federal government not already paying higher interest rates? The answer is that although things are bad here, they are worse elsewhere. It is like a marathon with some of the world’s slowest runners. We are running very slow but others are slower.

That’s not the way to win a race – by relying on the ineptitude of others.