The coalition Government has made a series of announcements today on housing. The NewBuy scheme offers mortgage subsidies and guarantees for those looking to buy new homes. At the same time the Government argues that it wants to rejuvenate the right to buy scheme by offering substantial discounts on prices - up to £75,000 after five years' residence in their social housing.
Both measures are dripping with ideology - Cameron has weighed in with sonorous declarations about home ownership being the key to a stable democracy. More prosaically, critics argue that the NewBuy scheme is in effect a way of providing to the ailing and traditionally Tory-leaning house building industry.
My main complaint is that, in both cases the measures will do precisely nothing to alleviate what even Conservative politicians agree is a national housing crisis. In macroeconomic terms, both appear overwhelmingly likely make things worse.
What are the roots of the housing crisis in Britain? It's quite obvious that there is a crisis when the price of the most fundamental good of all has accelerated way ahead of growth in pay in real terms. Housing has become more expensive than at any time in recent history. A person earning the median UK average income has little prospect of being able to buy a house - the idea that soaring house prices are an indication of prosperity is in my view absolutely grotesque. Yes, some people are sitting on paper assets which have expanded substantially - but soaring house prices represent a huge transfer of wealth from the poor and young to the old and rich, and represent a speculative bubble that, even amid house price falls in the last couple of years, has yet to burst properly (the falls in recent years have simply disgruntled the wealthy without making houses - especially at a time when real incomes are falling - more affordable). And it encourages the sort of property speculation that fuels lending booms - every economic crisis since 1973 has had its roots in property speculation. Moreover, and quite obviously, poor housing is at the root of many of the most acute social ills we face as a society.
In macroeconomic terms, the measures announced today will in the longer term bid up prices and make the situation worse. Subsidising mortgages, offering guarantees and above all effectively slashing the price of buying a social house will do little or nothing to boost supply while potentially increasing demand. It's really just accelerating the housing trends that have been so destructive in the last three decades. At the very best its a footling response to the crisis; most likely it will simply make things worse.
What is the answer? More and better social housing, of course, with the public sector driving forward a programme to construct hundreds of thousands of decent affordable homes for rent. It would both stimulate the economy and help get us out of the cycle of unstable house prices. It's simple, it's about as good an investment as any society would make, and it will never happen because, unlike our neighbours in Europe, our political and media classes simply cannot get past the ideology of home ownership
Monday, 12 March 2012
Wednesday, 29 February 2012
Workfare - bad for capitalism
The issue of unemployed people being made to do unpaid work for their benefits for a number of big companies - mostly retail - has become one of the Con Dem coalition's hottest potatoes. Public revulsion has led to a number of companies partially or wholly withdrawing from the scheme, and Ministers are plainly so rattled by the opposition that they have resorted to ludicrous rhetoric about "job snobbery" and even claims that the Socialist Workers' Party is behind the opposition to their scheme.
Leaving aside all the moral issues about people being made to do work for their benefits, and the questions around the extent to which these jobs replace paid work (one supermarket chain reportedly sending its paid staff home around Christmas while using its unpaid workforce to do their work), there's a fundamental economic issue here.
Put simply, workfare is just bad economics.
There are three reasons why a rational capitalist should reject workfare.
In other words - a good, serious capitalist who wants capitalism to flourish should be the first in the queue to campaign against the Government's workfare programmes. The arguments are, at heart, simple. Hence the stupidity of the rhetoric about the SWP - I cannot claim to be an expert on the SWP's programme but I'd be surprised if it included rescuing capitalism from the imbecility of the politicians who claim to promote it (which is, in essence, the Keynsian project) The only rational conclusion is that workfare has nothing to do with economics and everything to do with ideology.
Leaving aside all the moral issues about people being made to do work for their benefits, and the questions around the extent to which these jobs replace paid work (one supermarket chain reportedly sending its paid staff home around Christmas while using its unpaid workforce to do their work), there's a fundamental economic issue here.
Put simply, workfare is just bad economics.
There are three reasons why a rational capitalist should reject workfare.
- First, at a time of high and growing unemployment and deep recession, it takes demand out of the economy. While using unpaid labour increases profits, it reduces aggregate demand - especially when one considers that retail jobs are traditionally low paid, which means that retail workers are more likely to spend a higher proportion of their pay.
- Second, if you believe in the power of the free market, it's a gross market distortion. Effectively it means that some of the largest and most profitable companies in Britain are being handed a massive corporate subsidy. At a time when the media are awash with cheap rhetoric about benefit scroungers - most of it, wilfully or otherwise, without any real foundation in fact - it's profoundly ironic that big and profitable companies, many of whom have already been named as employing sophisticated tactics to avoid paying tax, are receiving subsidy in the form of workers paid for by the state.
- Third, it does nothing to produce the flexible and skilled workforce that business leaders constantly argue is needed for the future. There is no evidence at all that mandatory workfare actually leads to long term employment (and the DWP's ambiguity about the extent to which the scheme is mandatory is one of the more curious aspects of the whole controversy); the evidence suggests that it does nothing to create long-term jobs. Moreover, the lack of opportunity for good non-graduate jobs remains a key problem that workfare simply avoids.
In other words - a good, serious capitalist who wants capitalism to flourish should be the first in the queue to campaign against the Government's workfare programmes. The arguments are, at heart, simple. Hence the stupidity of the rhetoric about the SWP - I cannot claim to be an expert on the SWP's programme but I'd be surprised if it included rescuing capitalism from the imbecility of the politicians who claim to promote it (which is, in essence, the Keynsian project) The only rational conclusion is that workfare has nothing to do with economics and everything to do with ideology.
Tuesday, 27 December 2011
Clegg and the shafting of Middle England
Listening to Liberal Democrats talking about economic policy, the challenge is to work out whether they're motivated by mendacity or stupidity. Both appear to be at work when they claim to be reducing the tax burden on low and middle-income families, as a report in today's Independent demonstrates.
Clegg has made much of how Liberal Democrats want to raise tax thresholds and have claimed that the increases in those thresholds announced so far by George Osborne demonstrate their influence in Government. But the Independent's research - based on a report by the Resolution Foundation - shows those modest changes will be more than offset by significant reductions in tax credits - some families will lose more than £6000 per year, or nearly a sixth of their income. In other words, those on low or middle incomes who receive tax credits will lose out significantly; those on higher incomes who do not receive tax credits will of course gain from the increase in the tax thresholds.
Quite obviously, then, the changes taken together will achieve precisely the opposite of what Clegg claims he has achieved. If he is being honest - and I suppose, even on the basis of his record in Government so far, one should not dismiss the claim immediately out of hand - it suggests a certain lack of intellectual grip.
The killer sentence in the Independent report comes towards the end of the piece - the fact that the families who are hit hardest are precisely those who spend all their income, so the cuts in income will drive down demand and depress the economy further. It's both a deeply regressive measure and one that will compound the economic disaster being visited on our society by Osborneomics.
Clegg has made much of how Liberal Democrats want to raise tax thresholds and have claimed that the increases in those thresholds announced so far by George Osborne demonstrate their influence in Government. But the Independent's research - based on a report by the Resolution Foundation - shows those modest changes will be more than offset by significant reductions in tax credits - some families will lose more than £6000 per year, or nearly a sixth of their income. In other words, those on low or middle incomes who receive tax credits will lose out significantly; those on higher incomes who do not receive tax credits will of course gain from the increase in the tax thresholds.
Quite obviously, then, the changes taken together will achieve precisely the opposite of what Clegg claims he has achieved. If he is being honest - and I suppose, even on the basis of his record in Government so far, one should not dismiss the claim immediately out of hand - it suggests a certain lack of intellectual grip.
The killer sentence in the Independent report comes towards the end of the piece - the fact that the families who are hit hardest are precisely those who spend all their income, so the cuts in income will drive down demand and depress the economy further. It's both a deeply regressive measure and one that will compound the economic disaster being visited on our society by Osborneomics.
Thursday, 17 November 2011
Running out of excuses
George Osborne's tenureship of the Exchequer has been notable for the parade of excuses for his economic failures. For the most part it was Labour's legacy; for a short while it was last winter's snowfalls; now it's the Eurozone. It can't be long before he's blaming it on the boogie.
New Statesman blogger and former Bank of England Monetary Policy Committee member David Blanchflower has published a piece that shows clearly that the the blame lies squarely with Osborne's economic policy.
Blanchflower writes:
It's also interesting to wonder what the effects of the Olympics might be on those numbers - I'd expect they would be worse without the large amounts of public spending and visitor revenues that the Olympics imply.
And one of the important implications of these numbers is that they are way worse than the Office of Budget Responsibility's growth projections, which underpin Osborne's deficit reduction strategy (such as it is). This implies that for all the pain of austerity, in Britain - like Greece - there is every prospect that austerity measures will make the deficit worse, at huge economic and personal cost (not that the Tories and their yellow chums appear to care much about the latter). It is looking like a failed strategy whose costs will overwhelmingly fall on the poorest and most vulnerable.
The political implications of this are important. It is imperative that the Tories are not allowed to get away with their blame game, or with claims that tax cuts for the rich or (as Blanchflower points out) the frivolities of deregulation will make any difference. Osborne never looks like a man whom nature has fashioned to stand up and take responsibility - he must be called to account.
New Statesman blogger and former Bank of England Monetary Policy Committee member David Blanchflower has published a piece that shows clearly that the the blame lies squarely with Osborne's economic policy.
Blanchflower writes:
The recession can be split into four parts. First, the "down" part which started in the second quarter of 2008 and went on for a total of five consecutive quarters of negative growth, during which output fell by an enormous 7.4 per cent. Second, the "up" part, which also lasted five quarters (from Q3 2009 to Q3 2010) when under Alistar Darling and Gordon Brown, growth increased by 2.8 per cent. Then, the "flatline" phase under George Osborne, which is also fifteen months long (from Q4 2010 to Q4 2011) with growth of 0.2 per cent, assuming we use the EU's estimates. Osborne destroyed Darling's recovery. Then, finally, the "stagnation" phase, lasting 24 months (from Q1 2012 to Q4 2013) with growth of 2.1 per cent over two years, or an average of just over 1 per cent.
So by the end of 2013, only 5.6 per cent of the 7.4 per cent drop in output will have been restored. This is worse than the 1930-1934 double-dip recession, which had only a slightly bigger output drop but was over in 48 months. By the end of 2013, this will number 69 months and counting.He concludes that there's no point blaming the Eurozone - the profile of Britain's recession closely fits domestic political decisions. Blaming the Eurozone becomes even more asinine when one reflects that France and Germany are performing rather better than the UK. One reason for this might be that the French and German economies are much more solidly founded on manufacturing, rather than financial services; Osborne, like so much of his party, is a creature of the City and the financial sector in a way that blinds him to the workings of the real economy - assuming that he has the will and the intellectual courage to look. If Britain is at greater risk than France or Germany, it's partly because we have allowed our economy to be far too dependent on the financial sector.
It's also interesting to wonder what the effects of the Olympics might be on those numbers - I'd expect they would be worse without the large amounts of public spending and visitor revenues that the Olympics imply.
And one of the important implications of these numbers is that they are way worse than the Office of Budget Responsibility's growth projections, which underpin Osborne's deficit reduction strategy (such as it is). This implies that for all the pain of austerity, in Britain - like Greece - there is every prospect that austerity measures will make the deficit worse, at huge economic and personal cost (not that the Tories and their yellow chums appear to care much about the latter). It is looking like a failed strategy whose costs will overwhelmingly fall on the poorest and most vulnerable.
The political implications of this are important. It is imperative that the Tories are not allowed to get away with their blame game, or with claims that tax cuts for the rich or (as Blanchflower points out) the frivolities of deregulation will make any difference. Osborne never looks like a man whom nature has fashioned to stand up and take responsibility - he must be called to account.
Tuesday, 25 October 2011
An economics lesson from Argentina
The landslide victory for President Christina Fernandez de Kirchner in Argentina's general election on 23 October provides lessons in both economics and politics for Western governments in the grip of continued economic criss.
Her victory comes off the back of a successful economic and social policy based on fiscal expansion, one which has flown in the face of every neo-liberal nostrum. This paper from the Center for Economic and Policy Research shows how, following its default on its debt and the sharp painful contraction that followed, Argentina has not only seen growth that would be the envy of the Eurozone, Britain and the United States but has made huge progress in reducing poverty and inequality, with expanded social programmes producing major gains in public health and welfare.
In other words, Argentina has thrown off the burden of debt and turned Osborneomics on its head. It's not surprising that its government has been rewarded with a landslide victory at the polls.
There are two important lessons here as the Eurozone crisis develops and politicians call for more austerity.
First, it puts the lie to austerity economics imposed by financial institutions and their spokesmen in government. Osborne and Cameron lie about job creation in order to rationalise their economics - in Argentina they've implemented the policies that neoliberals tell us are reckless and they've achieved real economic benefits, widely shared.
Second, there is an important message about democracy. In Greece especially, indebtedness is being used to promote the interests of bankers above democracy, in an attempt by lenders to ensure they carry none of the risks of their lending. The risk is instead borne by ordinary people. The Argentinian default threw off that risk, and, importantly, deprived bankers and financial institutions of their powers to subvert democracy.
At the heart of the neoliberal programme is the axiom that financial "responsibility" - which means concentrating power in the hands of a privileged minority - trumps democracy. The real lesson of Argentina is that growth, employment, welfare and democracy can go hand in hand. It's unsurprising, then, that neoliberal hegemonists should try to demonise Argentina as a rogue economic state.
Her victory comes off the back of a successful economic and social policy based on fiscal expansion, one which has flown in the face of every neo-liberal nostrum. This paper from the Center for Economic and Policy Research shows how, following its default on its debt and the sharp painful contraction that followed, Argentina has not only seen growth that would be the envy of the Eurozone, Britain and the United States but has made huge progress in reducing poverty and inequality, with expanded social programmes producing major gains in public health and welfare.
In other words, Argentina has thrown off the burden of debt and turned Osborneomics on its head. It's not surprising that its government has been rewarded with a landslide victory at the polls.
There are two important lessons here as the Eurozone crisis develops and politicians call for more austerity.
First, it puts the lie to austerity economics imposed by financial institutions and their spokesmen in government. Osborne and Cameron lie about job creation in order to rationalise their economics - in Argentina they've implemented the policies that neoliberals tell us are reckless and they've achieved real economic benefits, widely shared.
Second, there is an important message about democracy. In Greece especially, indebtedness is being used to promote the interests of bankers above democracy, in an attempt by lenders to ensure they carry none of the risks of their lending. The risk is instead borne by ordinary people. The Argentinian default threw off that risk, and, importantly, deprived bankers and financial institutions of their powers to subvert democracy.
At the heart of the neoliberal programme is the axiom that financial "responsibility" - which means concentrating power in the hands of a privileged minority - trumps democracy. The real lesson of Argentina is that growth, employment, welfare and democracy can go hand in hand. It's unsurprising, then, that neoliberal hegemonists should try to demonise Argentina as a rogue economic state.
Wednesday, 5 October 2011
Cameron plummets new depths of economic illiteracy
The Conservative Party conference has, in many respects, been characterised by a flight from the real world of evidence and empiricism - a retreat into a fantasty tabloid world of economic benefits from higher speed limits, weekly bin collections and feline threats to human rights. But there is perhaps no finer example of this that the comments that David Cameron is about to make about debt.
Cameron will, it is reported, argue that it is time for individuals to pay back debt. The bad economics of this has been admirably dissected by the ever-excellent Richard Murphy:
Moreover, the Government's own economic forecasts are predicated on the assumption that personal debt will increase over the lifetime of this Government.
But it's worse than that. Much of the famous record deficit is made up of the debts owed by bankers to the Government that bailed them out - but Cameron and Osborne are far from urging bankers to pay up. It's not surprising when one reads that the Tory Party is largely bankrolled by the financial sector.
I think this has nothing to do with economics, and everything to do with politics. It's the same as the idiot rhetoric we hear again and again from coalition Ministers about the nation's credit card - a desire to reduce economic problems which go way beyond their intellectual grasp and their framework of analysis to homely analogy. It's the politics of obfuscation, designed to hide the fact that the Coalition has nothing to offer and nothing to say.
Cameron will, it is reported, argue that it is time for individuals to pay back debt. The bad economics of this has been admirably dissected by the ever-excellent Richard Murphy:
But all that being said to have everyone throughout the economy at the same time seeking to reduce ther debt is an economic prescription straight from the mad house (or maybe Oxford; you choose).No need to add to any of that, as far as analysis goes (incidentally, Murphy wonders how Cameron could have got a first in a degree that includes economics - PPE at Oxford. As I can testify from personal experience, you can get a first in PPE by doing very little economics indeed - and none beyond the first year course which is barely of A-level standard. Cameron could quite easily have got a first while knowing no more economics than a middling A-level student). But of course it's far worse than that - Cameron, a man who was born into extreme wealth, appears to have no understanding that in the long term real wages have fallen and that in many areas the cost of living is rising sharply - look at domestic energy costs or public transport fares.
Why is this so crazy? There are three main reasons. First, and most importantly, if everyone saves at the same time we very obviously get a recession. If people don’t spend what they earn, which is necessary if they are to save, then demand crashes. If demand crashes then very clearly employment crashes with it, businesses fail and recession follows. So that is what Cameron is calling for.
Secondly, if we have everyone repaying debt then the money supply also crashes – because debt is the basis for all money creation in the UK. Now we could get round that with QE, for example, but the government has given away responsibility for such issues and as such Cameron is calling for a cut in the money supply and a consequent liquidity crisis at the same time as he’s calling for recession. Smart move Dave.
Third, Dave really has not got his head around the fact some debt is really, really useful. Government debt is the most useful of all. We need vast amounts of it because the annuities that underpin almost all old age pensioners private pension income are based on the ownership of gilts – that is, government debt. Perhaps he doesn’t realise this, but if the government were to repay all it’s debt, which seems to be his fantasy, he’d destroy the entire logic of the private pension sector. It’s an interesting idea that this seems to be what he is setting out to do.
So universal debt reduction is a massively bad idea.
Cameron also ignores the fact that it is also basically not possible: it’s pretty much an accounting impossibility that we can all reduce debt together. Debt is owed to people. Unless those to whom money is owed agree to sit on massive piles of cash they will not spend or even save with a view to earning interest when debt is repaid to them then everyone repaying debt simply can’t occur. I agree the issue is a little more complex than this, but that’s the essence of it.
Moreover, the Government's own economic forecasts are predicated on the assumption that personal debt will increase over the lifetime of this Government.
But it's worse than that. Much of the famous record deficit is made up of the debts owed by bankers to the Government that bailed them out - but Cameron and Osborne are far from urging bankers to pay up. It's not surprising when one reads that the Tory Party is largely bankrolled by the financial sector.
I think this has nothing to do with economics, and everything to do with politics. It's the same as the idiot rhetoric we hear again and again from coalition Ministers about the nation's credit card - a desire to reduce economic problems which go way beyond their intellectual grasp and their framework of analysis to homely analogy. It's the politics of obfuscation, designed to hide the fact that the Coalition has nothing to offer and nothing to say.
Saturday, 6 August 2011
Daddy, what's a credit ratings agency?
The short answer to that question is of course an organisation that gave Lehmann Brothers a triple-A rating minutes before it collapsed. But as Standard and Poor announce that they have downgraded the United States' rating from AAA to AA+ - potentially increasing borrowing costs for the productive economy and hitting ordinary citizens, it's worth pausing to consider the role of these organisations.
Essentially, credit ratings agencies do precisely that - the compile and publish assessments of the creditworthiness of businesses and governments, to provide information that allows investors to assess the risk associated with their investments. In traditional market theory, where market information is crucial, they perform what is theoretically a hugely important service.
But there are real questions about the way in which the big agencies carry out their work. There's the quite obvious question of why, before the collapse of 2008, the agencies continued to give banks whose capitalisation was essentially founded on junk bonds AAA ratings right up to the moment of the crash.
After 2008 serious questions were asked about the performance and accountability of the agencies - most famously in the film Inside Job, but also by US legislators. A piece in the New Republic by Alex Klein describes how legislators sought to bring some accountability into the world of the reference agencies, but were brushed aside by the administration:
The implications are horrendous. If I wanted a loan from my bank, and I went to my bank manager claiming that I'd slipped my mate Fred down the pub a couple of tenners and he's offering an assurance that I'm creditworthy, I'd get a fairly dusty response. Yet that caricature appears not to be so very far from what credit ratings agencies are doing. They're clients of the people they're assessing and they bear no accountability for their conclusions, and on this basis decisions are taken and things happen that fundamentally affect the economic well-being of people and states. It's a form of ideological strong-arming that is an absolute antithesis of democracy.
BBC Newsnight blogger Paul Mason's description of the thinking behind the agencies' response to the debt ceiling crisis seems to give an all-too-plausible insight into the blend of ideology and economic irrationality behind the agencies' reaction. It shows how these decisions are political as well as economic.
In the specific case of S and P, there appears to be a certain amount of posturing. They said they would downgrade if the deal on the deficit ceiling contained a commitment to cut of less than $4 trillion the next decade - in the event the deal required cuts of $2.1 trillion. That's bad enough for the average American on medicare, but evidently in the macho irresponsible world of the credit rating agency, face has to be saved at the expense of increasing the economic misery. The US treasury is already challenging the numbers, a source suggesting that S and P's analysis contained errors amounting to a mere $2 trillion. The fact that Sarah Palin is claiming the downgrading as a Republican victory says much for the bizarre non-logic surrounding the whole affair.
It seems clear that the real function of the credit ratings agency is ideological - the secret police of the shock doctrine, wielding vast power without accountability. They got it disastrously wrong in 2008, and may do again now. Sensible economics seems to require that their power is broken.
Essentially, credit ratings agencies do precisely that - the compile and publish assessments of the creditworthiness of businesses and governments, to provide information that allows investors to assess the risk associated with their investments. In traditional market theory, where market information is crucial, they perform what is theoretically a hugely important service.
But there are real questions about the way in which the big agencies carry out their work. There's the quite obvious question of why, before the collapse of 2008, the agencies continued to give banks whose capitalisation was essentially founded on junk bonds AAA ratings right up to the moment of the crash.
After 2008 serious questions were asked about the performance and accountability of the agencies - most famously in the film Inside Job, but also by US legislators. A piece in the New Republic by Alex Klein describes how legislators sought to bring some accountability into the world of the reference agencies, but were brushed aside by the administration:
Last May and June, during the debate and mark-up process for the Dodd-Frank financial reform act, Congress saw many proposals that would have curtailed the overweening power of the rating agencies. Almost all of them were lost or ignored.
The most prominent proposal to curtail the power of the rating agencies, championed by Senator Al Franken, would have ended the longstanding practice of banks choosing and paying their own bond rating agencies, a clear conflict of interest. The freshmen senator brought an amendment to the floor that would have rotated the agencies among firms, reducing their power. On a wave of disgust for the agencies’ financial crisis failures (like giving Lehman Brothers a triple-A rating minutes before its collapse), the Franken amendment passed.
But then the Democrats turned and ran. Barney Frank and Chris Dodd said the issue needed “more study.” And the administration, for its part, stayed silent. Franken told Newsweek, “I could never quite figure it out … It was weird. Dodd gave a speech and said, ‘What Al’s done is great … But I think it could have unintended consequences.’ I said, ‘Maybe you could tell me what one of them is?’” Franken’s amendment was neutered, ultimately becoming a research study in the final bill.
And Franken’s popular proposal wasn’t the only bullet dodged by the rating agencies. There was another important provision in the final Dodd-Frank bill, originally proposed by Representative Paul Kanjorski, that would have labeled the agencies “experts” and therefore capable of being held legally liable for their ratings. But the agencies lined up against it, refusing their expert status even after the bill’s passage. As Sue Allon, CEO of the credit risk management firm AllonHill told me, “They came together and said they wouldn’t do it. Because all of them refused, there was very little choice.” And so the SEC, reporting to Treasury and the president, nullified the liability clause. Just a week ago, the House Financial Services committee approved a bill that would reverse it altogether.
Finally, Congress and the president never orchestrated serious and extended oversight hearings into the specific role played by the rating agencies in the 2009 crisis. The Federal Crisis Inquiry commission, the ten-member body tasked with investigating the financial crisis, asked too few questions of the rating agencies, adds Ornstein, and unintentionally served to shield them from Congress. “There should have been a much deeper investigation.”
The implications are horrendous. If I wanted a loan from my bank, and I went to my bank manager claiming that I'd slipped my mate Fred down the pub a couple of tenners and he's offering an assurance that I'm creditworthy, I'd get a fairly dusty response. Yet that caricature appears not to be so very far from what credit ratings agencies are doing. They're clients of the people they're assessing and they bear no accountability for their conclusions, and on this basis decisions are taken and things happen that fundamentally affect the economic well-being of people and states. It's a form of ideological strong-arming that is an absolute antithesis of democracy.
BBC Newsnight blogger Paul Mason's description of the thinking behind the agencies' response to the debt ceiling crisis seems to give an all-too-plausible insight into the blend of ideology and economic irrationality behind the agencies' reaction. It shows how these decisions are political as well as economic.
In the specific case of S and P, there appears to be a certain amount of posturing. They said they would downgrade if the deal on the deficit ceiling contained a commitment to cut of less than $4 trillion the next decade - in the event the deal required cuts of $2.1 trillion. That's bad enough for the average American on medicare, but evidently in the macho irresponsible world of the credit rating agency, face has to be saved at the expense of increasing the economic misery. The US treasury is already challenging the numbers, a source suggesting that S and P's analysis contained errors amounting to a mere $2 trillion. The fact that Sarah Palin is claiming the downgrading as a Republican victory says much for the bizarre non-logic surrounding the whole affair.
It seems clear that the real function of the credit ratings agency is ideological - the secret police of the shock doctrine, wielding vast power without accountability. They got it disastrously wrong in 2008, and may do again now. Sensible economics seems to require that their power is broken.
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