Standard & Poor's downgraded Greece debt to junk bond status and also downgraded Portugal, roiling the financial markets, including over 200 points on the Dow Jones Industrial; we have a mini-tsunami of fear, uncertainty and doubt as the market frets who owns what debt. What we are seeing is a natural consequence of bureaucratic-intensive social welfare states facing deficit crises under a weak economy, being forced to take politically unpopular actions, including higher retirement ages, public service pay and budget freezes/cuts, and fuel tax increases. (Italy is another country where the national debt exceeds GDP, but its budget deficit is roughly half the size of Greece's rate.) The concern about countries like Greece, Spain and Portugal is that the left-wing governments there are less likely to push through the fiscally responsible steps necessary; what Greece has done to date has been vigorously opposed by unions.
To compare, the US national debt for 2010 is estimated to run just under 95% of the GDP; to contrast, we've run above 100% for the 3-year period starting with 1945. One interesting statistic in terms of the frequent Dem talking point about the "fiscally responsibility" Clinton record is that the federal debt ratio rated above 64% five times during the Clinton Presidential years and only one time (the economic tsunami year 2008) under G.W. Bush.
Today Obama paid lip service with his "all options are on the table" deficit reduction commission charged to find some way to trim the deficit to about $550B a year by 2015. This is similar to saying if you are overeating 1430 calories a day, by 2015 you should cut your excess calories to 550 calories. The point is, you are still going to put on weight eating 550 excess calories. We need more than a gimmick. We need leadership. What evidence is there that Obama is willing to take any kind of the measures Greece is now doing--like raising retirement age for social security, cutting federal spending and wages by 10%, etc.?
GOP Foils Second Financial Overhaul Cloture Vote; Alternative GOP Plan Outline
There has been a contrasting GOP plan for financial overhaul reform introduced last July 23 which has gotten little publicity. I will not discuss it in detail in this post, but in essence the GOP looks at a more flexible approach to identifying private companies with systemic risk ("too big to fail") for purposes of extended regulation, but rules out bailouts and provides a more expedited form of bankruptcy with stakeholders (creditors and shareholders) bearing the costs (hopefully a transparent form of bankruptcy, not the Obama Administration version of crony-bankruptcy (i.e., favoring lower-standard union interests over higher-priority bondholders)); it is more flexible in terms of derivatives (e.g., more discretion for innovative derivative products, including customized derivative trading), reform of the GSE's (Fannie Mae and Freddie Mac); it wants to reform the Federal Reserve back to the basics of monetary policy (versus Federal Reserve empire building, including for "too-big-to-fail"/Tier-1.
The Democrats today once again forced a cloture vote, resulting in the same result as yesterday's cloture failure. The progressives, as usual, are blind to the concept of moral hazard and the law of unintended consequences. For example, taxing Tier-1 companies or even the industry increases costs to consumers socializes expenses of specific firms, which should be assumed by stakeholders. If you codify Tier-1 criteria, you introduce perverse incentives. For example, depending on codification, firms could consolidate to qualify for Tier-1 status and potential resolution, or if they didn't want Tier-1 (e.g., to avoid increased regulation or taxes), they might make decisions resulting in exemption. There is also serious question of whether, say, undue reliance on credit raters or reserve requirements in essence attenuates proactive corporate responsibility and self-reliance in risk management.
Political Cartoon
Eric Allie is making reference to a recent HHS economics report suggesting that Medicare cuts may be unrealistic (say it ain't so, Joe!), and the new law will increase premiums and drive up to 15% of hospitals into debt.
Quote of the Day
A government that robs Peter to pay Paul can always depend on the support of Paul.
George Bernard Shaw
Musical Interlude: "Me and You" Songs
Alice Cooper, "You and Me"
Glenn Frey, "Part of Me, Part of You"
Helen Reddy, "You and Me Against the World"
The Kinks, "You Really Got Me"
Josh Groban, "You Bring Me Up"
