International Finance

Evaluation BS

The economic news is riveting this week especially to an economist, but it amazes me all the BS I hear and read about as people are asked to assess the situation. Harry Frankfurt, a Princeton philosophy Professor, wrote a brief treatise titled “On Bullshit” a few years ago in which he tried to answer an obvious question, “Why is there so much BS out there?” One answer he gave was that too many people are expected to have an opinion about matters in which they do not know very much. Another reason must be the 24 hours news and commentary shows that some people are addicted to. It is curious how having more time to report the news does not result in much teaching about how things like the economy work.

So let me mention just a few things that have irritated me in the last few days.

1) I just watched a FOX report on the decline of the market today and they were showing how the market went down even faster while President Obama was making his speech in the afternoon. I’m a novice about stock trading but wouldn’t it make sense that trades that took place at 1:45pm or so are probably based on orders received sometime earlier and that it is unlikely that traders are evaluating the President’s speech, feeling bad about its implications, and then in real time placing more sell orders? Someone please correct me if I’m wrong.

2) I can’t believe how nasty people have been in their comments about S&P. Again I am not an expert on S&P but I do know that they are an independent company that makes risk evaluations on different types of assets. They have been in business for a very long time and they are staffed by a group of professionals that are trained in risk analysis. If they do their job right they should not be swayed by outside opinions of what the ratings should or should not be. Their business is based on their reputation and so they have an incentive to do the best independent evaluation they can provide to maintain that reputation. Their opinion on US debt is just that … their opinion. Yes, they did rate mortgage backed securities as too safe in the past but the risk involved in those was mostly systemic risk that was, and continues to be, very hard to evaluate.

Still it would be professional to treat them like the professionals they are rather than criticizing them as incompetent. Yes, you can disagree and argue that US treasuries are still safe and even S&P would agree that that’s true. Afterall, it is only one opinion.

Two side points. First, I’ve read several stories that some government regulations require that some companies invest in only AAA bonds as evaluated by S&P. Such regulations seem very bad form. I would suspect that rules like that were written to favor important special interests (i.e. S&P) to give them a favorable position in the risk analysis market. This downgrade could act as a wake-up call to eliminate such rules. (not to punish them but as an excuse to eliminate a bad rule) Second, I did think it was very bad form for S&P to announce that any debt deal would need to cut $4 trillion from the deficit to prevent a downgrade. That does suggest an independent agency with too much power to influence policy outcomes. S&P is an evaluator … not a policy recommendation agency, … at least not this branch of S&P. Again I think we can criticize S&P and the whole ratings system but can’t people do it in a more professional way?

3) Isn’t there an inconsistency in the statements by the administration? Wasn’t President Obama, Secretary Geithner and Ben Bernanke all claiming a few weeks ago that brinksmanship on the debt ceiling was threatening a US default? Before the agreement was reached I heard news organizations nonchalantly reporting that a deal needed to be made before the US “defaults” on August 3. I wrote in February why regardless of what the “experts” were saying there was really no chance we would default even if the debt ceiling were not raised on time.

OK, so now we get past the debt deal and to the S&P downgrade and we hear the administration saying that there is absolutely no way the US will ever default on its debt! But wait a minute … aren’t we going to get to another debt ceiling vote again at some point … and can’t the same brinksmanship occur, … and if last time you said default was possible … well, then how can you say the US will never default? This kind of wavering cannot inspire confidence in the administration. [BTW, my opinion is that the US is not in danger of default anytime soon, regardless of brinksmanship in the future and the S&P rating at AA+ doesn’t indicate that anyway]

My first two points can be explained by Frankfurt’s hypothesis, the third point cannot. The third point can only be attributed to politics … politics that is very bad for building confidence in our economy.


Steve Suranovic received his B.S. in mathematics from the University of Illinois at Urbana/Champaign and his M.S. and Ph.D. in economics from Cornell University. He has been a faculty member at the George Washington University since 1988. He has served several terms as the current Director of the International Trade and Investment Policy M.A. program at the Elliott School of International Affairs.

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