Krugman: Credibility, Chutzpah And Debt
Will the extremists win?:
Credibility, Chutzpah And Debt, by Paul Krugman, Commentary, NY Times: To understand the furor over the decision by Standard & Poor’s ... to downgrade U.S. government debt, you have to hold in your mind two seemingly (but not actually) contradictory ideas. The first is that America is indeed no longer the stable, reliable country it once was. The second is that S&P itself has even lower credibility; it’s the last place anyone should turn for judgments about our nation’s prospects.
Let’s start with S&P’s lack of credibility. If there’s a single word that best describes the rating agency’s decision to downgrade America, it’s chutzpah...
America’s large budget deficit is, after all, primarily the result of the economic slump that followed the 2008 financial crisis. And S&P, along with its sister rating agencies, played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste.
Nor did the bad judgment stop there. Notoriously, S&P gave Lehman Brothers ... an A rating right up to the month of its demise. ...
Wait, it gets better. ...U.S. Treasury ... spotted a $2 trillion error in S&P’s calculations. And the error was the kind of thing any budget expert should have gotten right. After discussion, S&P conceded that it was wrong — and downgraded America anyway...
More broadly,... in those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong. ...
So there is no reason to take Friday’s downgrade of America seriously. These are the last people whose judgment we should trust.
And yet America does have big problems.
These problems have very little to do with short-term or even medium-term budget arithmetic..., if you actually do the math, instead of intoning big numbers in your best Dr. Evil voice, you discover that even very large deficits over the next few years will have remarkably little impact on U.S. fiscal sustainability.
No, what makes America look unreliable isn’t budget math, it’s politics. And please, let’s not have the usual declarations that both sides are at fault. Our problems are almost entirely ... caused by the rise of an extremist right that is prepared to create repeated crises rather than give an inch on its demands. ...
The real question facing America, even in purely fiscal terms, isn’t whether we’ll trim a trillion here or a trillion there from deficits. It is whether the extremists now blocking any kind of responsible policy can be defeated and marginalized.
http://economistsview.typepad.com/economistsview/2011/08/paul-krugman-credibility-chutzpah-and-debt.html
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