Doublethink on triple-A

Which politician, holding a senior frontbench economic position, made the following sensible observation

I remind you that Lehman Brothers, the collapse of Lehman Brothers, which started this global financial crisis, on that very day, they still had a AAA credit rating. What does a AAA credit rating really amount to? What I’m saying is you can’t place enormous store in the rating agencies. They do get things very badly wrong, and they totally missed those major firms and economies that were driving and the reason for the GFC.

Unfortunately, the same one who said only a few months ago that our

commitment to returning the Budget to a real surplus in a timely fashion and retaining Australia’s AAA rating is paramount.

Answer over the fold

Andrew Robb, Shadow Minister for Finance, Deregulation and Debt Reduction–Coalition-commitment-on-surplus-and-AAA-rating-clear.aspx

It’s sensible to aim for a budget surplus, properly defined, in good economic times, and a high credit rating has some benefits, but the idea that these should be paramount targets is the kind of nonsense, dominant on both sides of Australian politics, that we could do without. Measures of budget balance and debt should be policy instruments, used in the management of the economy, not targets, let alone “paramount commitments”. Unfortunately, Robb’s silly statement putting the AAA rating as a top priority passed without notice, while has entirely valid observation about the uselessness of such ratings has been the target of vigorous criticism.

27 thoughts on “Doublethink on triple-A

  1. I would like to hope all politicians read your post and digest it.

    Perhaps the mood of Australians and people elsewhere would switch to confidence about the future if politicians and other managers would talk and act sensibly.

  2. I’m actually surprised you even pay attention to Andrew Robb. Smart, he certainly is not.

  3. @Troy Prideaux

    Out of the mouths of babes, I guess. The first statement I quote is the most sensible thing I’ve ever heard about AAA ratings from any (major party) Australian politician.

  4. What a diabolical mess this two-party political system is when people have to deny reality and tow the line no matter how wrong they know it is. How many politicians genuinely believe what they are saying? Probably only the nutbags.

  5. While relying on the rating of an asset may be foolish, that doesn’t have to mean that wanting your assets to have a good rating is pointless, does it?

  6. And here is Hockey playing both sides for the middle

    Well the rating agencies aren’t perfect but it was the Coalition that won back the AAA sovereign credit rating from Moody’s and Standard & Poor’s after the Labor Party lost it…

  7. I know some smart people in Michigan and maybe Troy Prideaux is one of them. But not I think such a Renaissance man as to be given credit for judging the smartness of a serious professional politician like Andrew Robb. I doubt if Jeffrey Kennett had an IQ (at the ages when IQ most mattered) over 130 or, maybe even 120, but all those many people who described him as a f**kwit and worse were thoroughly confounded and not to the surprise of those who were both smart and objective about him. He had his blank areas, as no doubt Robb does, but see if you can find someone to give you a description of how he had the people with PhDs jumping in his conferences and office chats. So, do yourself a favour TP and try to learn what it takes to be an effective professional politician. (Another contrast is the very smart Malcolm Turnbull making foolish errors that the canny plodders with time served in the milieu – Malcolm Fraser being another that comes to mind – would never have made).

    As to the ratings it is a pity that Robb used the word “paramount” but the more accurate alternatives were probably periphrastic and therefore not good for his immediate purposes – another aspect of being a political professional. Obviously ratings matter if you can borrow a lot of money significantly cheaper because you have a high rating. I don’t know what a credible current quantification of the benefits of the extra A would be, do you?

    And another thing easily overlooked. Like hard and fast rules to uphold the rule of law against tyrannical or bureaucratic or corrupt decision makers, and the hard rule of the market to maintain its own tough fairness and honesty, some simple rules for naturally profligate politicians, and, by no means least, for the voters who put spending demands on them without any responsibility to assess priorities, are necessary discipline. Seeking to keep AAA rating fits that need and slippery slope arguments are not all empty clichés.

    Robb’s own point about Lehmann isn’t a particularly good one because the “structured finance” area of the rating agencies which seem to have been staffed by third raters who couldn’t get jobs with the banks were separate from the government and corporate areas where the analysis was of higher quality and the staff smarter and more sophisticated. I would suggest that the very well informed opinions of at least some of the ratings agencies senior people who have good access at high levels of government around the world are well worth knowing about. Most people only get a glimpse through the ratings of government bonds.

  8. I think S&P stuck a fork in the credit rating agencies credibility in court earlier this month.
    In particular:

    2013/07/08: Slate: S&P Legal Defense — No Reasonable Investor Would Take Us Seriously
    Standard & Poor’s, facing up to $5 billion in civil damages on charges of knowingly understating
    the credit risks of mortgage backed securities, is offering a novel defense — no reasonable investor
    would have taken S&P’s claims about its own objectivity seriously.

    2013/07/08: BBerg: S&P Raises Puffery Defense Against U.S. Ratings Case
    Standard & Poor’s, at the first court hearing over the U.S. government’s claims that the rating service
    defrauded investors, argued reasonable investors wouldn’t have relied on its “puffery” about credit ratings.
    S&P said in its request to dismiss the case that the government can’t base its fraud claims
    on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest
    because U.S. courts have found that such vague and generalized statements are
    the kind of “puffery” that a reasonable investor wouldn’t rely on.

    That just about says it all.

  9. Elsewhere the puffery defense has been successful.

    One argument is that S&P claims are ‘promotional rhetoric’ and are not to be taken seriously.

  10. We also see double-think on the triple-U; unemployment, under-employment and unseen (hidden) unemployment.

    I really don’t know why more people are not up in arms about unemployment. Add the triple-U’s together in Australia and you have over 11% unemployment. That is worse than one in ten unemployed.

    “Total labour underutilisation has risen to 11.41 per cent in the February 2013 quarter. Over the
    last 12 months, total labour underutilisation has risen from 11.10 per cent to 11.41 per cent (seasonally adjusted).” – Centre of Full Employment and Equity.

    Youth unemployment in Australia is bouncing around between 20% and 25%; from 1 in 5 to 1 in 4 youth unemployed.

    These dreadful results no longer seem to be on the radar of the politicians, the media or conventional economists. Like the proverbial frog in a pot of slowing warming water we have become used to this new situation and accept mass unemployment. Official unemployment in Australia is now very close to 700,000 persons. Measure all the Triple-U’s and it is as follows;

    700,000 / 5.7 x 11.4 = 1,400,000 persons.

    That is greater than the population of Adelaide which has about 1.26 million people. Imagine the entirety of Adelaide and its surrounds unemployed. This is the scale of the problem. This represents an enormous loss of productive capacity and an enormous and unfair burden on these 1.4 million persons. It is this unutilised capacity which constrains economic performance and which will further exacerbate near future economic problems.

  11. het @ 8

    Yes indeed, and remember that the Federal Court in November 2012 found that S&P had engaged in deceptive conduct when rating certain CDOs.

    Really, with the documented failings of the rating agencies any politician with half a brain would just politely show them the door when they come knocking to discuss ratings of government debt. Or, even better, aggressively point out their failings and change the debate.

  12. Well, it is pretty clear that Rating Agency ratings are a protection racket.

    “A protection racket is an extortion scheme whereby a criminal group or individual coerces a victim (usually a business) to pay money, supposedly for protection services against violence or property damage. Racketeers coerce reticent potential victims into buying “protection” by demonstrating what will happen if they don’t—they damage the victims’ property.” – Wikipedia

    Thus, “pay us fees for a rating, manage your national economy or business the way we, or our super rich friends want to manage it i.e. for their benefit, or else we will give you a low rating and increase you interest rates / borrowing costs.”

    The whole thing is clearly extortion, especially but not only, when used against nation states. It essentially says, “the poorer your country is and the more problems you have, the more we will charge you for help (loans)”. Yeah, like that will work. Help the poor by slugging them with more costs.

    There is clealy also a conspiracy or cabal (explicit or implicit) to accord Rating Agencies a respectability and influence they do not deserve given their abysmal and morally (if not legally) criminal performance, not to mention the clear lack of necessity for it. Any person or corporation can and should do due diligence on lending in other ways.

  13. I don’t agree with Robb about the paramountcy of getting an AAA rating, but if we want to be charitable we can draw a coherent argument out of these two statements. Thus:

    1) Ratings are crap
    2) But all our interest costs and credibility insulation against an irrational debt panic reside in that crap
    3) So we need to make sure the agencies issue favourable crap (ie an AAA rating), if necessary by running an economically harmful surplus.

    Now (2) is empirically untrue, but there’s nothing wrong with the logic.

  14. And how many Liberals were standing up during the boom years and opposing the coalition tax cuts? That is clearly the time when we should be squirreling money away for the bad times to come, but nobody wants to be a boom-time party-pooper, do they?

  15. IMH, anybody who advocates a market or market orientated economy and doesn’t object to rating agencies is seriously confused.

    Rating agencies belong to, for the lack of a better category name, a financial polit bureau with rules that do not tolerate a benevolent dictator as member on the grounds of such an agent being an extreme lefty.

  16. I enjoyed this, John, and laughed aloud. Well-done (again).

    This man determines the truth myopically – on the basis of what suits his interests at the time an issue arises. No principles or integrity at all. I suppose I should cry but you nailed him nicely.

  17. @hc

    Almost all politicians are like that. Gillard was. Abbott is. Rudd is reminding me he is too. To them neither objective nor moral truth matter, only winning. We have to ask what it is about our entire sociey and system that rewards dishonesty and hypocrisy at the top because it clearly does. I don’t think this is true further down the totem pole of society. There are clear majorities of reasonably honest and decent people (nobody is perfect) in the middle and poorer classes. Just very few, if any, honest and decent people right at the top.

  18. To whoom is he talking to? To his colleagues, i would guess.
    His American colleagues had lowered US rating by blackmailing President demanding surpluses.
    I would take his message as: Lets not play blackmailing so we do not loose AAA like our American friends.

    What is the only sustainable way to keep AAA long term?
    Having full employment.
    Having full employment is the strongest message that repayment of debt is not a problem because that government knows what is doing.
    AAA does not affect interest rates of a country.

  19. 1. “I would take his message as: Lets not play blackmailing so we do not loose AAA like our American friends.”

    2. “AAA does not affect interest rates of a country.”

    But I know among our American friends there are many – possiby the great majority – who are not fooled by the nonsense advice of wanting to keep something (1), which is useless (2) but they can’t do anything to prevent their innate intelligence from being offended by people who peddle contradictions in a public forum.

  20. I’m sure something is missing from this sentence PrQ:

    Unfortunately, Robb’s silly statement putting the AAA rating as a top priority passed without notice, while {Robb?} has entirely {forgotten that his?} valid observation about the uselessness of such ratings has been the target of vigorous criticism.

    Re the substantive matter:

    I’d agree that as a matter of general principle, one wants the state to maintain a close relationship between revenues and outlays over any significant time period and certainly avoid allowing debt service costs to exceed the value of the assets or outlays of which the the debts are the result. Attaching a significance to a dficit or surpus budget outside of such considerations is at best vacuous posturing. More usually, it’s the iteration of a populist meme seeking to draw a parallel between household expenditure patterns so as to render ‘authentic’ and ‘wise’ the politicians advocating it.

    The reality is that the state’s warrant is to create a context in which the needs of the citizenry (housing, health, education, safety, social justice etc) can be consistently optimised over time. Whether in any given year the budget is in deficit or surplus is an entirely secondary consideration in circumstances where one can believe that these broader ends are being efficiently approached. Jeopardsing any of these out of a pressing desire to achieve a AAA rating or a surplus budget is simply dangerous finance sector-friendly dogma at work.

  21. @het
    Remember the Bluto (John Belushi) quotation from Animal House, “You f@#ked-up, you trusted us!”

  22. John

    You may think it’s sensible but I find it disturbing our pollies in economics and finance positions are so clueless.

    Lehman didn’t have a AAA rating prior to its collapse. Some of its products had AAA ratings because of correlations and stuff.

  23. @sdfc
    You’re always going to get pollies of varying intellectual capacities and capabilities in any broad society. I tend to listen to the upper 90 percentile of such and mostly ignore the others (of which Robb falls well and truly into).

  24. hc #18,

    What you are recognising is that it is not just Abbott who is sociopathic, Robb probably is as well. We can’t have this level of detachment from truth an process in government. This is the Harvard business ethic leaching into politics, let it go long enough and you wind up with this kind of shocker……

    Profit at any cost rather than a fair society. The US GOP is determined to push their people to the level of desperation where this is the only means for survival.

    The whole Abbott front bench is compromised and not worthy for public office.

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