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S&P's $2 Trillion Math Mistake
Last friday Moody's S&P announced that they had downgraded the U.S.'s credit rating (leading to a pretty huge discussion on Slashdot I might add). Since then more interesting news has come out, suraj.sun writes "In a document provided to Treasury on Friday afternoon, Standard and Poor's (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error — a basic math error of significant consequence — S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one. S&P incorrectly added that same $2.1 trillion in deficit reduction to an entirely different baseline where discretionary funding levels grow with nominal GDP over the next 10 years. Relative to this alternative baseline, the Budget Control Act will save more than $4 trillion over ten years — or over $2 trillion more than S&P calculated. S&P acknowledged this error — in private conversations with Treasury on Friday afternoon and then publicly early Saturday morning. In the interim, they chose to issue a downgrade of the U.S. credit rating."
More lies...the debt will INCREASE by almost 8 trillion over the next 10 years. And probably more than that I can guarantee you! The S&P should have downgraded us a loooonnnggggg time ago.
And sorry it is no ones fault but ours.
Somebody correct me if I'm wrong, but at current spending levels, cutting $4T over 10 years still has us running a deficit. Considering that this deal was politically the best we could do, it's easy to agree with S&P's pessimistic view of our political budget woes.
"Ask not what your country can do for you." --John F. Kennedy
There was a time when people worried about who had the largest nuclear arsenal.
This kinda reminds me of that "1000 vs 10,000" nuclear weapons discussion. Everybody is dead after 1000 bombs go off. It isn't like 10,000 bombs are going to kill you that much more.
The point being the economy is still going down the tubes...
It was S&Ps rating system that the banks gamed with repackaged mortgages in the first place. Fuck um.
How long before the media points that out? Think they will?
It isn't basic math, or any math at all, really. Despite massive quantities of data analysis and some of the most mind bending graphs ever devised, plain old emotion still rules most financial markets and most certainly rules things like applying "AAA" versus "AA+" to some piece of paper.
These people everyone is amped up about changing the US' rating are the same people who entirely failed to foresee the biggest economic collapse most of us have ever lived through. They were handing out AAA ratings, to mortgage backed securities that no one other the guy who invented them could even understand, just a few months before they became almost completely worthless. The fact that anyone still trusts S&P and their ilk is illustrative of the fact that emotion rules this game. They've proven with math that they know no more than anyone else.
"Sacrifice for the good of The State" - The State
You're right... it's just too bad that S&P didn't warn investors about the even greater risks involved in bundling questionable home loans and calling the result "investments".
No one ever had to evacuate a city because the solar panels broke!
http://krugman.blogs.nytimes.com/2011/08/07/i-heard-it-through-the-baseline/
The total debt US has is way too high anyway, if a person had same sort of debt load they would be insolvent.
That is a pretty astounding thing to say. Most people who have a mortgage have a far higher debt load than the US government, and sub-prime victims excepted, the vast majority of home-owners do not go insolvent in the process.
No, you see... the point here isn't to make a well-reasoned argument, rather they are trying to link the 'error in calculation' to somehow mean the S&P downgrade is faulty.
IIRC, the 'math mistake' they did was assuming that the Bush tax cuts wouldn't expire... Which seems like a rather obvious thing to happen considering there's certain elected people who'd rather let the US default than lose the next election.
I find it difficult to believe their reasoning is sound. The other two ratings agencies, Moodys and Fitch, have no plans to downgrade US debt. Standards and Poors also gave AIG and Lehman Brothers AAA credit ratings up til they crashed and burned. Then there were the mortgage backed derivatives issued the same AAA rating by S&P. The United States does have some serious long term budget problems but the credit downgrade is just political posturing.
"S&P still chose to proceed with their flawed judgment"
The judgement is not flawed ... AT ALL. With the revised GDP numbers from previous years, America does not deserve an "AAA" rating. However, neither do most other countries with a "AAA" rating.
But seriously, just GET OVER the fact that America is not fundamentally economically sound.
Every one complaining about S&P sounds like a 4-year whining about having their favorite toy taken away. S&Ps downgrade didn't place the America into the current position they're in. Lack of fiscal management from 1980 onward, did.
I dont get it.
One of the critical point is that S&P obviously believes that the deal made has unreasonable restrictions for future budget decisions, like the tax politics.
On the other hand i have never seen any political party so unwilling to accept (and clean up) the mess they made as the Republicans. Everybody knows the explosion of the deficit has nothing to do with Obama, it is the consequence of 2 wars at the same time started without specific goals, running over a decade, and insufficient results up to now.
So while the publically stated goals of the tea party may be understandable to me (everybody *sees* that things need to change), there is a significant difference between saying "we spend less" and "we just dont pay, even if we are obliged". The latter does not solve *any* problem (even if the right problem is stated), but destroys the trust of the insitution lending the money.
To say it in a analogy: If you have ordered something a restaurant, its not an option to say: "oh, i just dot pay this and dont eat it". Thats what they suggested. Obviouls there is significant difference to just not ordering something.
But then again, most mortgage owners have a reasonable plan to get out of debt in a certain time. For instance, my mortgage will be fully paid off in 15 years, and even assuming I default before that, the bank can sell the house and get their money back, so it won't disrupt anything else.
Can the US government claim the same ?
regardless of the math, S&P's reasoning is sound. let's not try to find scapegoats, please. the U.S. is hurtling at full speed towards a deficit meltdown, and quibbling over S&P's math doesn't change the fact that the country needs to come to terms with it ASAP.
I do not think that words means what you think it means.
Even if their conclusion is correct, their reasoning isn't anything close to sound. "Oh, the justification for our action was off by about 20%? That's okay, we'll just support the same conclusion and justify it with our gut feeling about politics," isn't reasoning at all. It seems to me that sound reasoning would be quantitatively comparing default likelihoods between the US government and other AAA-rated securities and then adjusting accordingly.
What they did is like killing a chicken, looking at its entrails, and then declaring that because of the intestines, they are confident that 2 + 2 = 4.
"I zero-index my hamsters" - Willtor (147206)
How can you in one sentence admit that "the US does have some serious long term budget problems" AND claim that getting anything less than the highest possible rating would be "political posturing" ?
I'm Rocco. I'm the +5 Funny man.
He says the government's performance is sure not AAA, but he'd rate the debt as AAA.
Remember: Ratings on bonds is supposed to be how likely they are to default. Nothing has changed that makes the US more likely to default.
http://www.cnbc.com/id/44056326
Our political situation is horrible, and shows no signs of becoming better. The Tea Party dominates the GOP, and the Democratic president folds faster than a house of cards whenever they do something stupid.
Let me break it down to the most basic of concepts:
Democrats want the government to spend more. The TEA Party wants the government to spend less.
Who do you think is right here?
There is no "I disagree" mod for a reason. Flamebait, Troll, and Overrated are not substitutes.
The total debt US has is way too high anyway, if a person had same sort of debt load they would be insolvent.
That is a pretty astounding thing to say. Most people who have a mortgage have a far higher debt load than the US government, and sub-prime victims excepted, the vast majority of home-owners do not go insolvent in the process.
When the government has already borrowed to over 10x it's annual income and continues to borrow yearly at almost double its income, I can assure you it acts NOTHING like a normal person. If I had a $500,000 mortgage and only earned $50,000 a year but had a car note that cost me $100,000 a year... you think creditors would get anywhere near me! AAA?? More like FFFFFFFFFFFFFFUUUUUUUU.
The common mistake with the "debt to gdp ratio" is that the federal government doesnt have a valid claim on every dollar in the GDP. They have a claim to what they have levied in taxes (it says so in our constitution). So saying "oh debt to gdp is better than anyone with a big mortgage" is like saying "oh the rest of the guys at my company all own a Porsche, i am just a janitor and my paycheck is 1/10th any of theirs but I can afford to get one too because WE all make TONS of money!"
The CBO assumed discretionary spending will grow at the rate of inflation. S&P assumed it grows with GDP. Both of these are perfectly valid assumptions (if any complaint is to be made, they're both too optimistic since historically the growth in discretionary spending has far exceeded both measures); a legitimate alternate choice of economic models is not an error. This is the Obama administrations typical "all reasonable experts agree" tactic of painting legitimate differences in opinion as disengenuous.
As for S&P's "acknowledgement", it was more along the lines of "we just reported your long term unfunded obligations are $211 trillion and you lack the political will or ability to do anything about it. And you want to have an argument over whether it's really $211 trillion or $209 trillion? If it's that improtant to you, we'll use your numbers, but you're completely missing the point here."
I happen to be on the side of "spend less", but it is a perfectly legitimate opinion to want to spend more AND collect more. The Democrats aren't advocating raising spending while lowering taxes. Frankly, that sounds like what the Repubs did under Bush II.
W..w..W - Willy Waterloo washes Warren Wiggins who is washing Waldo Woo.
Yes, because the position of the Democratic party (and all Democrats) is that basic. "SPEND MORE!"
It must be a simpler, more straightforward world in which you live.
Most every Democrat I've heard has talked about the desire to do some spending cuts in combination with some array of revenue increases. Sometimes they differ in what they think should be cut or protected (Medicare, Social Security, defense, whatever), which can then lead to internal disagreements among Democrats that might make it look like the entire party doesn't want to cut anything; the same holds for revenue increases, I'd say. I'd hope that over time they could come up with a plan that at least most Democrats could get behind that would be part spending cuts/reforms and part revenue increases.
On the Republican side, there are certainly some I've heard talk about the need to reform the tax code and (at least) start cutting out tax expenditures. I'd say that those Republicans are in the minority, mainly because of the no increased taxes pledge and the Tea Party pressure from the right of the party.
I wouldn't mind the "cut spending" pressure coming from the Tea Party if the people pushing hardest for that didn't also seem to be entirely incapable of compromise. Compromising isn't something to be frowned upon, it's how both parties could leave with a deal they might like (or at least dislike equally). As I see it, the Tea Party's anti-spending stance is one that we need - it's the execution that is lacking.
> Democrats want less government spending as a percentage of GDP [1]. The TEA Party wants to destroy government [2], unions [3], and the US economy [4].
FTFY.
Sources: [1] http://en.wikipedia.org/wiki/File:US_Federal_Debt_as_Percent_of_GDP_by_President.jpg
[2] http://www.contractfromamerica.com/Idea.aspx
[3] http://en.wikipedia.org/wiki/2011_Wisconsin_protests
[4] http://www.standardandpoors.com/ratings/us-rating-action/en/us/
Join the window installer's union, where prosperity is a brick throw away!
He's from Washington?
Seriously, who believes anything coming from Wall Street OR DC? We are continuously lied to, by people treating us like children getting ready for Christmas. "Yes Virginia there is a Santa Claus"
We've known about the budget problem, we've known about Social Security going bust, We've known about Medicare, three wars, pork barrel spending all draining money from our economy for YEARS and yet, all they do is kick the can down the street.
Both DC and Wall Street have one thing in common, neither ever takes responsibility for the crap they get us into. And I'm afraid that short of a million people showing up in DC armed to the teeth, that nothing is going to change. After all, people like teat of Momma Government and Daddy Wall Street's allowance.
Agent K: A *person* is smart. People are dumb, stupid, panicky animals, and you know it.
Yeah, and God Forbid the people that can afford to give a little more to help the country that allowed them the opportunity to become wealthy in the first place actually do so. They didn't write those big bribe checks...oh, I'm sorry, campaign contributions... to have someone turn around and raise their taxes and cost them an extra percent a year. I mean, what is that, a few thousand dollars less a year? How will they ever survive?!
I'm all for spending cuts, but without taxes being raised on the wealthy, it's just more of the same BS. Tell the people living on 12 grand a year in the projects that it's time to tighten their belts so that the asshole speculators on Wall Street can get away with their ridiculously low effective tax rates. Oh, but I forgot, all that paper being traded back and forth "creates jobs". That's why these there's so many jobs out there now, right? That's why these companies are all sitting on record amounts of cash in the bank both here and abroad, meanwhile they're laying people off left and right...
This is just Part II of the extortion scheme that started with the bailouts as the rich try to snatch up an even bigger piece of the pie than they already have.
1) Plan on gaining 100 pounds.
2) Gain 75 pounds.
3) Congratulations. You have a weight loss of 25 pounds.
Except for ending slavery, the Nazis, communism, & securing American independence, war has never solved anything.
Any time I see a 10 year budget I get a good chuckle. We don't even have a budget for this year.
I love Jesus, except for his foreign policy.
The fact that anyone still trusts S&P and their ilk is illustrative of the fact that emotion rules this game. They've proven with math that they know no more than anyone else.
"All you need to know about rating agencies is that in May 2010 Moody’s still rated Greece triple-A." - Mark Steyn
Life is hard, and the world is cruel
Government: We planned to increase the budget deficit by $4 trillion next few years, but now we're only increasing it by $2 trillion! We cut spending by $2 trillion dollars!
S&P: You still increased spending. You didn't cut anything. You still spend almost twice as much as you make. You are no longer credible.
Government: Traitors! Terrorists! Hostage takers! Can't you idiots in private industry do math?
Pathetic. Even the slashdot title of this article is complete rubbish.
6th Street Radio @ddombrowsky
You have to be a complete piece of shit...
...to continue being a Party loyalist at this point, and thinking one Party could possible be at fault. Seriously, to be a partisan at this point is beyond metal retardation and into comatose.
Congratulations! You are a complete piece of shit, and the heart and soul of the problem.
there appears to be a massive number of epically stupid people
And you're one of them, you unthinking, ideological self-brainfucked sack of scum. Please fucking die. Honestly, people like you dropping dead can only be a net plus to society.
Considering how petty Congress is being about the entire issue, I would downgrade the damn rating as well. From their ( S&P ) standpoint, the leaders of the USA are willing to put the entire economy at risk while they squabble about their own little pet issues.
:|
We ( the US ) obviously can't get its act together by ourselves. Congress proved that. It took the threat of a downgrade before we finally decided to get semi-serious about the issue. Personally, I would consider the S&P downgrade as a warning shot across the bow. In effect "Get your sh*t together or suffer the consequences".
We shouldn't REQUIRE a GD debt increase to begin with. If our idiot 'leaders' would learn to spend less than they take in, we wouldn't NEED a debt ceiling at all. S&P sees this, as does the rest of the world. The leadership isn't interested in reducing their spending and, as a result, S&P made the right decision. This isn't a sustainable path. At some point it WILL come falling down around you. Why the retards in charge can't figure this out is beyond my ability to explain.
Personally, I hope the other rating companies follow suit. It will take that level of threat before my elected morons finally quit bickering and note the cliff edge they're dancing on. Maybe ( and it's a longshot ) they'll be able to get this train back on the right track. Maybe.
Given their track record, I'm definitely not counting on it. . .
Intended or not, corporations saw Social Security as a excuse to drop employee pensions (and take the difference as profits). At one time, even "menial" workers got decent pensions as part of their employment package. After 30 years of downsizing, rightsizing, off-shoring and union-busting, most people's only options for retirement are to gamble what little savings they have on the stock market (we all know how that worked out) and fall back on Social Security for the rest. The problem is not the "entitled" poor and retired, it's the entitled corporations who have sucked this country dry and given nothing back.
Support Right To Repair Legislation.
Well, first a positive note : America's not nearly as bad as most other nations that grace this planet. China, while currently better than America, isn't without debt problems. But America's better off than Europe when it comes to debt. Yet Europe is better behaved than Turkey & middle east, who are in worse shape despite massive influxes of money.
But still that would mean that on the average, Americans ... did never even intend to repay their debts. Welfare states were created, knowing full well they were doomed. People trading their income now, in the form of taxes, for health care, study help for their kids and pensions that won't come, except for the first ones who enjoyed these benefits.
And yet lots of generations had the option of turning the tide, and didn't. Not just in America, but in Europe, the middle east, and Asia, lots of people had the option of stabilizing the system by choosing to take responsibility instead of shoving the bill to their kids, and all chose wrong.
The real question is, now that the cat's out of the bag, how long do we pretend we can put it back in ? The system has failed, and while this obvious truth can still be denied, it will reassert itself soon enough. Though I do hope we can pretend a while longer, I have a family to take care of, and despite the rosy pictures implied in leftist and progressive propaganda if we simply take the money from the bankers, we all know that their promises of wealth, brotherhood and justice for all will turn into the wars, concentration and slaughter camps they turned into last time.
I would simply suggest to take the lessons of history to heart : when public opinion does not just jabber about evil bankers, but actually attacks them in numbers, do what millions of people forgot to do before world war 2 : run ! Run to a place with sufficient food, home produced food, without multiculturalism (which will soon be nothing but a fancy word for ethnic wars), and preferably a nation without military alliances. Stay far away from any large American city, get the fuck out of Europe (the EU, not Switzerland), get the fuck out of the middle east, get the fuck out of Africa, or if you must, at least stay out of Northern Africa and the Saharan countries.
I don't know who will rise, it depends on many factors. I guess it will be whichever decent nation manages to not get destroyed, and I frankly seriously doubt it will be China.
Political posturing and the political circus has contaminated sound judgement in the US.
If deciding how to spend tax revenue isn't a central, complex political issue, what IS? You think there's some obvious "sound judgment" that everybody intuitively knows but it's been covered up by master politicians?
You are sitting on a multi-billion dollar fleet...
The fact that the only spending problems you pointed out are related to the military makes you sound really biased. A credible solution is going to involve cuts everywhere.
It being a bubble did not automatically mean that mortgage-backed securities were iffy. All the rating agencies cared was: 'Were people going to continue to pay their mortgage?' They couldn't care less if the house value was going to collapse, except to the extent that it was going to affect the likelihood of paying the mortgage.
However, the fact it was a bubble did affect that, and hence the rating agencies should have taken a closer look at them...
Something like half those damn things never had the mortgages properly transferred inside. Some mortgage backed securities appear to, legally, have no mortgages at all in them.
This isn't some sort of fraud in the loan making, where the rating agencies arguably weren't supposed to care about. It wasn't fraud in the foreclosures, which is also happening. This is fraud in the actual securities. Some of the investors who went bust have started looking at the actual securities, and discovered they were utter nonsense, without actual loans inside.
Forget the damn housing bubble, or the economic collapse. Those can be argued the rating agencies weren't able to foresee. However, the fact they stamped A+ or whatever on an security with bogus pieces of paper stating that some unknown mortgage will be transferred in at some future date, some mortgage that didn't even exist and can't be transferred now...well...seriously, I don't understand how they're still in business.
If corporations are people, aren't stockholders guilty of slavery?