Ratings Agency Launches Renewed Terror Attack, This Time On Spain - A Dossier

[JackRiddler]

A new phase in the bond markets' War on Europe opened Friday as Fitch dropped Spain from an AAA to an AA+ rating, prompting equity market declines and renewed pressure on Spanish bonds.


Aside from the sell-offs, the predictable result will be higher interest rates for loans to Spain and thus the move, taken by people who have no stake in that country and whose friends may be selling it short on the side for a windfall, effectively robs the Spanish people of more of their wealth than they might have otherwise lost.


Somewhere down the chain, this puts people out of work, out on the street, and into earlier graves.


A common definition of terrorism is "the use of violence and intimidation in the pursuit of political aims." It applies here, and I use it advisedly, aware of how promiscuously the word has been thrown around. Have bombers demanded more victims than banksters?


The terrorists delivered their demand note through the press as follows:

Fitch downgraded Spain's credit rating to AA-plus, and said it expects the country's adjustment to a lower debt level will materially reduce its rate of economic growth over the medium-term.

Fitch cited an inflexible labor market and a restructuring of regional and local savings banks as hindrances to the pace of adjustment.

Source: "Stocks slide, euro falls after Spain downgrade," Reuters, Friday May 28, 2010.
http://www.reuters.com/article/idUSTRE64K0JX20100528?type=ousivMolt

The wording is taken from Fitch's front page at www.fitchratings.com. The actual report, despite its impact on a whole nation, is subscriber-only.


Fitch is one of the instruments by which the global capitalist class finds a voice that can issue commands to the nations of the world. In this case, Spain is threatened that it had best ease restrictions on firing Spanish workers and cut their benefits, and is is being told how best to organize its banking sector.


Or else.


Adding insult to injury, Spain's adjustment to a lower debt level was itself a response to pressure from the bond markets, capitalist ideologists, and EU deficit hawks.



How the Racket Works

Calls go out to reduce Spanish debt, the market pressures Spain, Spain complies with budget cuts. The analysts call the budget cuts deflationary. Again the markets pressure Spain. Debt service rises, further austerity measures follow. Everyone whose country is not yet bankrupt complains about any accompanying 'bailouts.'

That includes the banksters, whose many years of regulatory capture, fraud and recklessness set off capitalism's greatest crisis back in 2007-2008. Their many 'bailouts' around the world required only brief periods of extortion, for they were 'too big to fail.'

The bankster bailouts and the bankster-caused economic depression in turn forced many nations into higher sovereign debt. Now the ingrates turn around and decry the sovereign debt that they helped cause.

This creates a rich target environment for the hedge-fund bond vigilantes. They look around the globe for which currency, which country to short next. Right now, they are working over Europe.

They do so for no better reason than that fortunes can be made by using Europe's genuine troubles as the excuse to short the hell out of it. Never mind that this only makes everything worse for Europe. In the end, it may turn out Spain is not 'too big to fail.'

In short, money talks, bullshit walks, and that's the greatest problem that we the peoples have yet to confront.

The fiscal hardliners in France and Germany keep driving the process, ironically forcing their own major export markets in southern Europe to deflate their economies.

Even if the Germans and French were to wise up and decide to fight back before the wave of recession and danger of default finally hits home, Europe lacks many of the necessary means of defending itself in this war, as euroland policy cannot be coordinated across the board.

For a primer on the initial phase of the attack, in Greece, see "Essay: Let us reject the anti-Greek mythology..." http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x8416528

Now let's take a closer look at the special role of the ratings agencies.



Fitch and the Financial Terror Racket

There are those who will reply that my views of the events are hyperbolic and unfair to the capitalist classes. One of their arguments will be that Fitch is merely exercising its free speech rights in announcing publicly what it believes about Spain.

Spain after all is heavily indebted and potentially insolvent. Should Fitch say otherwise?

Some have even argued a ratings agency downgrade is like the routinely negative economic trash talk here on DU, just more influential.

Such statements disregard several important facts about Fitch and the other two major ratings agencies, Standard & Poors and Moody's, and their role in the global financial rackets.

In the following list, the first few items may seem like unpleasant but legal facts of life that we cannot change. But please read on and take note of the three conflicts of interest inherent in Fitch's business model:

1) The word of the ratings agencies moves markets. Friday's market turmoil was the latest of literally thousands of confirmations.

2) This isn't even necessarily because the ratings agencies are so smart and the markets take them seriously. It is a predictable crowd effect. All players understand that a ratings agency downgrade acts as an impulse around which bets inevitably will be made. The creditors of a downgraded entity's debt may use it as a reason (or pretext) to go break some knuckles, raise rates, call in debts.

3) Thus a ratings agency is among the entities that serve as maestros for the market chorus. That is a hell of a conflict of interest for an entity that earns the bulk of its living directly from the major market makers.

4) To repeat an important point, Fitch very likely has raised for a time the interest rates Spain must pay, although Fitch is not a lender, it is not an official authority. Furthermore, Fitch may not and need not be involved in Spain at all.

(Except for an office in Madrid which might get to see a big crowd outside its doors on Monday at Calle General Castanos 11, 1st Floor, Madrid, Managing Director Rui Pereira, phone [phone], fax [phone].)

5) Now the fun really begins. What is the business model? Fitch and the other two make money by serving private financial-sector clients who pay ratings agencies to rate the instruments they issue. Thus when Fitch announces a rating for one of its' clients instruments, it engages in commercial speech, at the request of the client who hired it. The second inherent conflict of interest is self-evident.

6) Spain and other countries are not paying Fitch to rate them and announce the results under its "free speech" rights. This makes for a third inherent conflict of interest, in that Fitch has no incentive to please Latvia, Botswana or Uruguay. It merely has a completely unnacountable form of power over these countries. At the same time, its business comes from private entities that may have interests antagonistic to these countries.

7) This is a great set up for insider trading. Anyone who could get Fitch to tweak its ratings, or who merely knows when a ratings downgrade will be announced and is in a good position to trade accordingly -- for example, all of Fitch's major clients, the banks that have their own desks for Fitch and deal with it every day -- could make amazing fortunes.

Of course, I make no accusations. I merely note the possibilities. In the absence of evidence of such trades, this is baseless speculation! Chastise me with whips and scorpions!

I mean, maybe it would be all right to speculate if Fitch and Co. had a past record as participants in fraud. But it's not like they should be viewed as criminal organizations per se. Moody's is not the Mafia!

Oh. Wait a minute.

8) Fitch and to an even greater extent Moody's and S&P took part as players in the greatest financial fraud in history by dollar amount: Wall Street's securitization, derivitization and relentless cloning of subprime debt instruments in 2002-2007.

Perpetrated mainly by a class of traders and executives at major New York-based and London investment banks, this fraud generated the financial meltdown that
- first manifested in August 2007,
- saw its preliminary climax in September 2008,
- was interrupted by the banking "bailouts" and the suckers' market of 2009-10,
- and now appears to have resumed with a vengeance.

And the ratings agencies were at the heart of the fraud.

There was one main reason why Wall Street banks were able to
- buy a seemingly endless stream of high-interest junk-mortgage loans from predatory lenders in the United States, at a time when housing prices would go up forever because this time is different,
- package these into impenetrably dense securities containing fragments from thousands of loans,
- and sell them as though they were good investments to pension funds, other banks, municipalities, insurance companies, and the suckers of the world.

The reason is that Moody's, S&P and Fitch, the respected ratings agencies hired by Wall Street banks to examine and rate these junk instruments, obediently gave AAA ratings to thousands of these, often mere months before they failed.

The AAA Equations: No Quants Required

No AAA rating on junk securities = far fewer suckers to buy junk = lower demand = less incentive for Wall Street to produce junk = lower demand from Wall Street for subprime mortgages from predatory lenders = less incentive to make predatory loans to house-buying suckers from the lower classes = fewer defaults when the housing market contracts = less economic misery on the ground in the US today.

No AAA rating on the junk = fewer sales of the junk = less market heat around subprime securities = fewer derivatives and clones = a much smaller financial house of cards = less severe crash when the housing market contracts = less severe misery for investors around the world = less economic misery in the world.

Moody's, S&P and Fitch get rich by helping to generate more economic misery in the world.

Backlash?

As we have been learning, slowly, from Congressional hearings, occasional exposes, whistleblowers and, of late, prosecutorial briefs, it was common knowledge at these institutions that they were engaging in fraud.

Ratings analysts were not examining the instruments they were rating. In fact those who did were discouraged, because there were more bonds than ever to rate, and business had never been so good, and giving an actual junk rating to junk might make Goldman and Bear and the Brothers go away.

When Wall Street brought the junk around to Moody's and Fitch, a higher rating than it deserved was a foregone conclusion.

If they were willing to take part in fraud on that scale, there is reason to investigate them for everything else they do. Such an organization is unlikely to be committing only one crime at a time.

So why are these fuckers all so likely to get away with it?

That's the beauty of dispersed responsibility and compartmentalization. The greatest crime in capitalist history (in dollar value) was perpetrated not by individuals, but by a class of individuals who each fulfilled merely one part in a chain of fraud production that arose semi-organically. All knew to take the money and cover their asses.

This is also how the mafia works, and was able to work to such great advantage for so many years: Thanks to the dispersal of responsibility among different fronts, limited liability entities and role players, most of whom didn't even want to know more than they needed to know. It was nearly impossible for prosecutors and the FBI to pin the crimes on the family chiefs and capos.

This is why the federal government finally devised the RICO acts, which allow proven members of criminal organizations to be convicted for crimes committed by other members. It would be a pleasure to see these applied to the banksters.

Unlike the mafia, however, the banksters are protected by a powerful legitimating ideology that until now had widespread acceptance:

The unregulated free market is best, only traitors to America think otherwise, God prefers it. Greed serves higher interests, it's good to be rich, rich is sexy, everyone wants to work for Goldman, your value is your income, you only hate it if you're a loser. Wall Street funds America, it is indpendent of the government, it generates wealth for everyone else, it allocates capital more efficiently than the public sector or a bunch of hippies on the town council, and it is bringing development and wealth and jobs and lots of goodies to every poor country on earth. Taxation robs wealth from those who create it, government spending maintains the lower class as freeloaders. Europe is full of communists.

The banksters also are a lot more powerful than the mafia.

At the end of the 20th century, they used their influence to repeal the laws against the crimes they committed in the 21st.

Thus their collusions and corruptions could be committed in the open, or at least be visible to anyone who can afford a Bloomberg machine -- or a Fitch subscription plan!

Goldman's traders can claim they believed their own bullshit analysis, or merely did what their clients wanted. The executives of these large institutions, as we have seen in their Congressional testimonies, can claim they were too high up to know shit from shinola. They're very sorry, by the way.

Hedge fund managers who created the derivatives bomb can say they were only able to place their bets because suckers were willing to take the other side.

And so almost all of them keep their plunder and their positions and can continue their class war on the world.

If there is a weak link that can begin to unroll the bankster complex and start getting some of these furries into Supermax, it is at the ratings agencies.

The excuses end with the raters who announce themselves as independent, neutral, third-party auditors. The same entities that today are playing a spearhead role in the bond markets' offensive in Europe, and who not so long ago knocked down California and are no doubt planning a return visit to the Golden State.


Shut them Down

Every day you hear about how the government seizes properties from persons and companies suspected of crimes. Beyond the ACLU, there isn't much outcry in these cases of due process for drug dealers. The drug dealers are not 'too big to fail.' Apparently, they are more of a disaster than the Gulf oil spill, which isn't going to result in the seizure of BP. They are more of a national emergency than the banksters, who engaged in these frauds and continue to wage an international class war.







Iceland Jails Top Bankers, Why Can't New York AG Do the Same?
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x8328133

Prosecutors Ask if 8 Banks Duped Rating Agencies
By LOUISE STORY
Published: May 12, 2010
The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.
http://www.nytimes.com/2010/05/13/business/13street.html?hp

...BLUMENTHAL SUED THE RATERS -
CHECK OUT THE PUNCH-LINE AT THE END OF HIS PRESS RELEASE

(This is a public domain document, quoting is not limited.)

Attorney General Sues Credit Agencies For Tainted Ratings That Enabled Financial Meltdown
http://www.ct.gov/ag/cwp/view.asp?A=2341&Q=456804

Attorney General Richard Blumenthal today sued two of the nation’s largest credit rating agencies -- Moody’s and Standard & Poor’s -- for knowingly assigning tainted credit ratings to risky investments backed by sub-prime loans. Blumenthal said Moody’s and S&P’s alleged misconduct enabled the worst economic downturn in the nation since The Great Depression. The lawsuits, unique and unlike others filed on behalf of specific investors or pension funds, are sovereign enforcement actions brought under the Connecticut Unfair Trade Practices Act.

Despite repeated statements emphasizing their independence and objectivity when rating structured finance securities, Moody’s and S&P knowingly failed to live up to their representations. In particular, their ratings on structured finance securities were tainted by their desire to earn lucrative fees. Moody’s and S&P knowingly catered to the demands of investment banks and other large issuers of structured finance securities in order to increase their own revenues. As a result, many structured finance securities that contained a great deal of credit risk undeservedly received Moody’s and S&P’s highest ratings, Blumenthal alleges.

SNIP

“Moody’s and S&P violated public trust -- resulting in many investors purchasing securities that contained far more risk than anticipated and that have ultimately proven to be nearly worthless. The results have been catastrophic -- crippling the entire economy. Today’s lawsuit seeks an order stopping Moody’s and S&P from deceiving consumers, as well as civil penalties and disgorgement of ill-gotten profits.”

Structured finance securities have been the centerpiece of the national financial crisis. They are financial products whose value is derived from a stream of revenue flowing from a pool of underlying assets -- assets most commonly backed by residential mortgages, including subprime mortgages. They can also be backed by other assets such as student loans and credit card balances. Moody’s and S&P dominate the ratings market for structured finance securities -- and are responsible for rating virtually all structured finance securities issued into the global capital markets. Investors and other market participants rely on Moody’s and S&P to fulfill their stated promise of independence and objectivity.

SNIP

Blumenthal said Moody’s and S&P’s lack of independence and objectivity, violating the Connecticut Unfair Trade Practices Act, has manifested itself in several ways, including:

Moody’s and S&P modified rating methodologies to make more money: In short, in direct contrast to their public representations, and unbeknownst to investors and other market participants, Moody’s and S&P’s rating methodologies were directly influenced by a desire to please their clients and enhance their own revenue. Assessing actual credit risk was of secondary importance to revenue goals and winning new business.

Ratings shopping: Issuers unhappy with a credit rating agency’s initial analysis can attempt to influence the process by informing the rating agency of a more desirable rating that one of its competitors is willing to assign. As a result, the rating agency knows that it must meet its competitor’s rating or forgo the revenue altogether. Both Moody’s and S&P knuckled under to this pressure and allowed it to influence the ratings they assigned to structured finance securities.

SNIP

Today’s action is distinct from Blumenthal’s ongoing litigation against all three credit rating agencies -- Moody’s, S&P and Fitch -- that was filed in July 2008. The earlier lawsuits allege that the agencies knowingly gave state, municipal and other public entities lower credit ratings as compared to other forms of debt with similar or even worse rates of default. Those cases remain pending.

(And then Blumenthal went and blew himself up, not quite as fatally yet as Spitzer. But one wonders. Andrew Cuomo had best stay out of high-end bordellos and not talk about Vietnam.)






A Gem From The Eve of the Meltdown:

Fitch says confident in "AAA" subprime ratings

NEW YORK
Wed Jul 18, 2007 11:31am EDT

July 18 (Reuters) - Subprime mortgage bonds carrying the highest, "AAA," rating have not eroded in quality despite price declines in the securities in recent days, Fitch Ratings said on Wednesday.

Bonds

"We continue to be confident that "AAA" ratings reflect the high credit quality of those bonds," Glenn Costello, co-head of Fitch's residential mortgage group, said on a conference call. The top-rated bonds are designed to withstand a very high percentage of defaults, he said.

Fitch, Standard & Poor's and Moody's Investors Service last week roiled debt markets by announcing downgrades or potential cuts to bonds and collateralized debt obligations backed by subprime loans. Using new rating criteria that boosts default expectations, Fitch said it may take rating actions on at least $7.1 billion in low-investment grade debt, and about $803 million in CDOs.

A benchmark index of "AAA" rated subprime bonds dropped last week as investors speculated losses would not be isolated to the riskier, "BBB" rated bonds.

http://www.reuters.com/article/idUSN1831999120070718







Prior Threads:

Moody's Prepares Financial Terror Attacks on US and World - Time to Shut Them Down
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x7922092#7923431

Now the Wall Street mob come to rob the very same nations and states who rescued them of a few interest points more, and to destroy and discredit any and all entities or people who may have the power and inclination to resist them.

It is only the latest price we pay for that cowardly act of appeasement by the leaders in Washington, Republican and Democrat, in September 2008.

Turn on your TV, and you can see propaganda spots for Bank of America and Citi, paid by your taxes and the cheapening of your currency that allowed the Fed to flood them with cash. Read the gossip pages, and you can find out how the leading criminals are enjoying their latest round of bonuses. Paid by you. Watch the news, and you will see evidence of their lobby’s latest successes in Washington, and again the lobbyists are paid - millions - by you, to screw you. Banking regulation? That has to go through legislative bodies filled with the paid servants of the banks, and even if some minor restraint does come out of the process, it will take years.

Meanwhile, Moody’s can downgrade a country in less time than it takes for Madam Speaker to read the title of a bill. Soon as it is spoken, their decree has the force of a natural disaster.

California, the United States, Greece and the EU should not be living in terror of Moody's.

Moody's should be living in terror that the law enforcement is going to knock down their doors and seize their files - tomorrow morning could not be soon enough.

Nations have been whores to capital long enough. They've given everything, and capital demands more, and more, unto their death. Real change will never happen except by socialism. Start by expropriating the banks.
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x7777568

[JackRiddler]

1. News From Next Week

The weather report says next week will have a high probability of news stories about lazy Spanish civil servants claiming sick days caught drinking margaritas on the Costa del Sol and paying for it with bribe money as they cavort with socialist single-mother hookers who are drawing multiple welfare payments (For the American edition of this story let's offhandedly throw in Obama and ACORN-ED.) causing the bankruptcy of their country and a series of other economic crashes around the world. Add a bit of ethnic humor - Ay, caramba! - and amen.

[JackRiddler]

2. Nobody loves me!

[leftstreet]

3. Wow. Thanks for all this

That was a bit of work!

Nice resource

K&R

[JackRiddler]

4. Thank you.

[JackRiddler]

5. Memo to me: Don't post long articles on the Saturday of a holiday weekend.

The numbers under the "View" column are of course unusually low. Duh.

[Uncle Joe]

6. Kicked and recommended. This was most enlightening and well worth the read.

Thanks for the thread, Jack.:thumbsup:

[femrap]

7. Spain overbuilt

just like we did. They're in debt just like our nation is. Hell, our AAA should probably be downgraded as well.

But we can print more dollars....Spain can't print more Euros.

It's a Sovereign Debt Crisis most everywhere. The nations took on the toxic assets of the Banks and now there is no where else to pass them to....just let the hungry starve, the ill die, and the jobless sit.

The banks who were too big to fail should have failed and Glass-Steagall should have been part of the Financial Reform Bill, but it wasn't because we live in a Fascist f*cking country now. The politicians are bought and paid for.

I thought it was most amusing when China said it wouldn't sell its Euros and the markets in Europe rallied. So who is the most powerful nation of the world???

This is going to end very badly. Very badly. This summer is going to be hell.

Ever read Martin Armstrong....the dude in prison who wouldn't give the US gov't his market models?

[JackRiddler]

10. Oh, they did, but that's the substrate to which crisis attaches itself...

as I'm sure you're aware.

What the hell do I mean?

They overbuilt yes - due to a bubble strategy driven by the banksters in which the ratings agencies played a key role. Otherwise they might have just built a little bit more than they could afford, instead of lots more.

So then the crisis begins - and everyone has to pick up debt to bail out the banks (because the banks are in control, not because it's right) and everyone picks up debt because of countercyclical measures to deal with recession.

And then - then - the bust-out starts. The timing is determined by banksters, not by some kind of internal crisis clock. They decide when to start shorting Spain, for their profit.

Again the point is not how debts should be graded objectively (if there is such a thing) but who is doing it with, what timing, to what end. Fitch is a proven dishonest actor, so even if they're telling the truth in this case, it's within a constellation of distorted pronouncements.

[socialist_n_TN]

8. It's simple really, "The Shock Doctrine"

comes to Europe. The IMF and international capitalists want to dismantle the most successful social democracies on the planet. THIS is the war we're in.

[JackRiddler]

11. Absolutely.

In Europe, the dreamed-of bankster endgame is to destroy the "German Model" of labor relations.

In the United States, to destroy Social Security.

[Hannah Bell]

9. k&r

[Imajika]

12. Perhaps Spain should live within its means?

Rather than take on debt, what about if nations like Spain acted responsibly and lived within their budget?

Why do so many people run around blaming "banksters" for everything instead of pointing the finger at the people of these nations who elect politicians that promise more than the nation can afford? The US has done the same thing. Yes, we would all agree to increase the tax rates on the rich here at DU, but enough of our fellow citizens simply disagree in that they elect politicians who won't do it. If a majority of people make foolish decisions, the minority will suffer too. Hopefully, over time, nations collectively learn from their mistakes.

It may suck that a countries people are idiots, greedy, ignorant, etc (we got Bush twice afterall), but aren't things like austerity and deep budget cuts a good wake up call once in awhile to remind people to live within their means. Perhaps they will vote for politicians that don't deficit spend, no matter how much people want programs. Perhaps they will vote for politicians that actually tax the top rate at a much higher percentage.

Spain is paying the piper for taking on too much debt. They opened themselves up to this by taxing & spending irresponsibly. They wouldn't have to give a fig what the ratings agencies said if they didn't run up massive, unsustainable deficits/debt.

There is simply no avoiding austerity measures throughout Europe. Debt has gotten so bad in some places that defaulting completely wouldn't even prevent massive cuts in public sector and safety net programs.

[leftstreet]

13. You forgot your sarcasm thingy n/t

[Imajika]

14. No, not at all..

I mean it. Live within your means. I have to do it, my neighbors have to do it, my company has to do it, why do we give a pass to whole populations of people that don't?

I don't want to owe credit card companies 25% interest so I don't borrow from them. My company uses credit as convenience, and it is always paid back the day the bills arrive so no interest is ever owed.

The only reasons to go into debt would be national survival and perhaps a stimulus during down times that gets paid back immediately (probably through temporarily higher taxes) once the economy turns around. If people believe in programs to help others, we should pay for it. If people want to pay teachers a decent wage to get the very best, we should pay for that. If the nation claims it wants to offer good benefit packages to public employees, then we should be willing to pony up and pay the price.

Our taxes are far too low for the top earners. Once people are making millions and billions they should be taxed at at least 75%. Steep progressive taxation on personal take home income, regardless of how it is derived would be a good first step. If the public refuses to elect politicians that will enact such changes, then we should live within our means and see the results. If people decide they don't want substandard teachers, a crappy safety net, etc, then they will vote more progressively and we will get the changes we need. I mean personal take home income here. None of this tax corporations/businesses more who in turn just raise their price on us to make up for it. The correct idea is to get at the actual money the wealthy keep for themselves, not pass feel good tax measures that only result in backdoor regressive taxation.

All we are doing now by taking on these massive debt loads is pushing the difficult decisions off to the future. It is no different than if I used my credit cards to live at a higher standard of living than I can actually afford because my family can't decide what to cut.

[BelgianMadCow]

15. have a look at these graphs and tone it way down

And before you start - yes I'm from Belgium - and we are even more on the sucky side.

I'm not the one saying Spain should live by its means.

The effing "banks" plunge us into this hole, the rating agenceis giver junk triple 1, and now that governments have taken on too much debt bailing 'em out these rating agencies rate down the countries. It's unbelievable - and then putting austerity measures on the largely innocent average citizen - really!

on edit: finally the debt + deficit graph

[Imajika]

17. How did the banks or ratings agencies...

..make your country borrow all that money?

Isn't that a good reason to live within your means? Don't spend on programs and benefits you can't afford, and you won't have to deal with the "banksters" at all right?

"and now that governments have taken on too much debt bailing 'em out these rating agencies rate down the countries."

Err, do you have any idea what a ratings agency does? How it works at all?

Ratings are dropped when the agency believes the entity (country) runs a risk of not paying back it's debts. Many European countries are on pace to do exactly that - default. So why shouldn't the ratings agency warn investors? In fact, it would seem the ratings agencies were far too generous before and issued ratings that were entirely too high. One could argue that a more cautious approach, and lower bond ratings is precisely what they should be doing.

This is no different than taking on a ton of credit card debt, finding yourself with a dangerously out of balance debt to income ratio, and being surprised when the creditors lower your credit limits and raise your interest rates. They are preparing for a default. This is why people, companies and nations should never take on massive debt. As I said, live within your means.

By the way, I am not saying the US is any better. We are broke too. Other factors are in play though. The US can just print money, EU countries can not. The wisdom of adopting the Euro is highly questionable in my opinion.

[JackRiddler]

21. Please recall, much of the public debt wasn't actually borrowed!

The banks needed bailouts. This is true in every OECD country. Governments took on toxic assets which they did not make themselves. You can say they shouldn't have, and I agree. But then many of the same banks - and above all the ratings agencies - who are responsible for the crash (due to the AAA fraud) turn around and raise interest rates on the countries that bailed them out (who have to roll over debt no matter what). Again, I think you'll agree that the first step has got to be to dethrone the financial sector, which makes the problems and then takes advantage of the problems to make more money.

[JackRiddler]

23. ...which is also due to the roll-over effect...

meaning, debt comes due and has to be replaced (obviously deficit cutting might be possible but eliminating debt instantly is not). A ratings agency attack makes the costs of the roll-over higher.

So you have often the same banks
- engaging in fraud, creating their own bad debt, going insolvent
- extorting bailouts by being 'too big to fail' instead of defaulting and being liquidated,
- passing their bad debt to the public sector,
- then charging higher interest on public sector debt roll-overs (because the public sector is now "over-indebted" and downgraded)
- then turning around and betting against the debt on the derivatives market, further damaging the public sector.

There's also the factor that their crash caused the economic decline, forcing governments to spend on deficit or exacerbate the decline.

If the public sector spends more, they short it (inflationary!). If the public sector cuts back, they short it (deflationary!). Imagine what happens if the public sector raises taxes on their precious loot - socialism! Withdraw all capital immediately!!!

Even if no one single actor participates in every step, as it unfolds everyone understands what the next step is. The market will work this way, so it happens. Complete irrationality out of "rational" actions. Unregulated capital markets whose purpose is profit will always cause these dynamics.

[JackRiddler]

16. There are certain assumptions in there that I don't think are true.

You are approaching this sincerely and without snark, so I will take it seriously and give it a long response.

How is it possible that every country is individually responsible for what is obviously a world crisis happening in many countries at the same time?

And why do you think it should be the financial markets who judge the responsible from the irresponsible? Who voted for them?

The most obvious and I think provably false assumption in what you write is that "austerity and deep budget cuts" are "a good wake up call once in a while to remind people to live within their means."

This is remote from empirical reality.

The people who get hit by austerity generally are the ones who already were scraping to get by and doing their best to live within their means. Suddenly they lose pensions they worked for all their lives, or get thrown out of work at the same time the government scales back benefits for the jobless. Their whole lives they had the "wake up call," now they get battered even worse than before.

Furthermore, a great many of those who are hit by austerity are children. This never seems to factor into all the talk about this. Even if you want to blame their parents, it's the children who suffer - including some who haven't even been born yet. I hope you don't think they were the ones being irresponsible and living beyond their means. They certainly didn't get to vote.

Meanwhile, the most irresponsible (and powerful) actors are the ones who are rewarded, in good times and bad. They don't get a "wake up call."

They were rewarded when times were good, they are responsible more than others for making times bad, and then they are rewarded even more because times are bad.

This is not democracy, it is financial feudalism.

Thus the incentives are totally skewed. The "wake up call" isn't reaching the parties most responsible for the troubles, so it solves nothing. It makes things worse.

And that is what I describe at length above, if you read it fairly.

Fitch and the Wall Street banks and the big hedge funds are "banksters" because they drove a bubble, ruined the economy, forced the world to bail them out, and now get to dictate budget cuts and austerity measures. You can say they needed a lot of suckers, so it's the suckers' fault, but there is no excuse for fraud. Fraud is still crime. Transactions must be based on truthful accountings, or civilization is itself a fraud.

They are prospering for their irresponsibility and their crimes. Read again how the financial fraud was conducted, and then come back here and say these institutions and their principles should be left in charge of the economy. But that's what happened. They're in charge -- not the elected governments.

The economy is not only government. The economic failure does not come from government alone. You cannot ignore the private economy. That's what failed. And "we" did not all participate equally in the private economy, as you seem to think we participate equally in government because we all have one vote. The economy is very much directed by the rich, the banks and the big corporations.

Governments must spend when the private sector fails. That's the only way that recovery comes. You seem not to see what the Great Depression taught.

Spain and the US and many other countries have taken on a great deal of debt that their governments (and the people who elected these governments) did not actually create. Please read that again. The government owes a great deal of money that it did not actually borrow.

After "financial innovations" banks and financial actors expand their balance sheets, creating enormous credit and debt in a bubble environment. After the most recent failure of this in the US, governments here and elsewhere, including Spain, took on many "toxic assets" - the failed debt created by the financial sector - so as to rescue the financial sector.

People obviously didn't vote for that. In the US, they rose up against the bailout, but Congress succumbed instead to the carrot and stick of the Treasury Department and the financial sector.

A great deal of US debt is due to wars. You may say people voted for that, but this ignores the reality that they don't get a choice. They get railroaded into wars by bogus threats, which they believe in honestly, then get stuck there. Democrat and Republican have a monopoly due to the "one winner only" system and neither offered a way to end the occupations.

Finally, you're entirely ignoring the role of interest and risk premiums. Spain didn't borrow what it actually has to pay back. It's forced into a competition with other countries that subsidize their economies by spending. If you cut back spending, you fall further behind. If you spend, you take on debt. That leaves you at the mercy of a market and its interest rates. If they raise interest rates on you you're screwed (because you have to roll over the existing debt, debt service will rise without your getting more credit). And if entities like Fitch come along and rate you lower than they did the subprime scam bonds that their clients issued, the responsible thing to do is not to say, "OH, sorry Fitch, how can we serve the banks and bondholders whose interests you represent." Sovereign nations need to fight back, not to accommodate.

The situation in Spain today will be the situation in the United States this winter. You can bank on that. Perhaps before, but definitely after the election, you will see overwhelming calls for austerity and pressure from the markets to enact it.

[Imajika]

18. You know, I agree with much of what you say here...

...and I certainly appreciate your taking the time to respond.

Still, you keep excusing the people for their votes or lack of votes. You make it sound as if this recession is the only reason Europe and the US have massive deficits and debt. For the most part, we have been overspending for years and years and years. Rather than make the tough decisions such as cuts or increased taxes, we just let most everyone have their spending priorities and don't balance the budget. That really is exactly what I said previously - it would be like if me and my family could not decide how to balance our budget so we just kept maxing out credit cards to buy everything everyone wants. We'll only be able to move money around so long till it catches up to us, and then we are going to have to deal with all sorts of crap like higher interest rates, lower credit limits, collection calls, etc.

There is simply no excusing people from consistently voting for politicians who spend far more than we take in. Unfortunately, this layer of politicians appears to make people feel as if they are not to blame because they are not making the budgetary decisions themselves. It is very much like the people that rail at Supreme Court decisions, yet have no idea how those justices got in there and fail to realize their votes for President and Senate directly impacts who is making those decisions. You and I may blame an insufficiently progressive system of taxation for some/much of the debt problem, but a majority of people in the US and throughout Europe are voting in a way that causes budgets to be way out of balance. I also agree with the general thrust of your post about international financiers (banksters) gaming the system and creating a win/win for themselves. I certainly agree that there is this sort of bloodsucking elite that is feeding off the system to the tune of billions upon billions of dollars without creating or really doing anything much of value.

On a side note, this is something I think people finally sense but can not quite put their finger on. It is one reason people are generally angry. They know there is this class of "not what you know, rather who you know" people that are nothing more than fat parasites eating away at the system.

But I must go back to my main point. The lesson here is do NOT go into debt. Democracies generally have the mechanisms to allow the people to put responsible people into office, the problem is the people simply haven't been doing so. As just an example, most Americans don't even know what a primary election is let alone vote in one.

"How is it possible that every country is individually responsible for what is obviously a world crisis happening in many countries at the same time?"

The same way so many Americans got into so much debt? People got used to the idea they could just keep borrowing and borrowing for so long, they forgot what it even means to live within their means. No different than many (not all) of the people buying real estate just assumed the market would go up forever. It didn't matter that they couldn't really afford it, just use credit cards to get by and in 6 months my new home will be worth 10% more and they can turn it over or get equity loans and roll it all up.

"And why do you think it should be the financial markets who judge the responsible from the irresponsible? Who voted for them?"

I didn't vote for convenience stores either. They are a byproduct of our free market system. You don't need to participate in high finance. You can put your money in the most basic bank account and do just fine. No one needs to borrow a crap load of money. In fact, getting back to saving up for the things we want is probably far better (and safer) anyway.

"The people who get hit by austerity generally are the ones who already were scraping to get by and doing their best to live within their means."

Okay, so they were barely scraping by receiving money from the government right? If austerity affects them this drastically, they are probably receiving benefit cuts. How is this any different from the employees in the private sector (the vast majority) getting pay cuts or laid off and curtailing their donations to charitable causes. The recipients of those charities are hurt right? Sorry to say, but this kind of "trickle down" is simply unavoidable - at least to some extent. You and I would argue there is still plenty of money to keep these programs going by taxing the wealthy more, but if the majority of our fellow citizens won't vote for politicians that will collect the appropriate level of taxes then we are right back to square one. Caring people make their arguments to assist the vulnerable, right wingers argue for more defense spending and whatever else they think are priorities, no tough decisions are made, and we end up recklessly spending on everything. This has been the pattern for a long time.

"You can say they needed a lot of suckers, so it's the suckers' fault, but there is no excuse for fraud. Fraud is still crime. Transactions must be based on truthful accountings, or civilization is itself a fraud."

I have no problem with this point. Fraud should be prosecuted where it can be proven laws were violated. I just have this sense that the term "bankster" has come to basically mean "anyone who works for a financial institution that we don't like".

"They're in charge -- not the elected governments."

They end up with the upper hand when elected governments take on a lot of debt - no different than the local banks credit department can start dictating terms to you if you run up your credit cards. Also, through regulation government should never allow "too big too fail". Again though, this is the responsibility of voters in a democracy. Also, I wouldn't have bailed them out at all anyway.

"And 'we' did not all participate equally in the private economy, as you seem to think we participate equally in government because we all have one vote. The economy is very much directed by the rich, the banks and the big corporations."

This is an extremely thoughtful point. I will have to really think on that because it has very big ramifications.

"Governments must spend when the private sector fails. That's the only way that recovery comes. You seem not to see what the Great Depression taught."

That is a very strong statement. I do not think this is true. There is no doubt that stimulus spending can kickstart an economy, but your dismissing the business cycle and the private sector's ability to recover on its own. You may not want to wait for a recovery, but I do not think history shows the government always has to spend in order to pull out of a downturn. The Great Depression is not a singular lesson for all recessions/depressions. Further, there is quite a lot of debate about this. WW2 is what many really believe got us out of the Depression, and that involves a lot more than spending. Your talking about a national mobilization that allows the government to pull young men and women off the streets which effectively wipes out unemployment, pay them dirt cheap and send them off to fight. Additionally, the government is giving extraordinary powers during war time that I seriously don't think we'd want to grant each time we suffered a severe downturn.

"The government owes a great deal of money that it did not actually borrow."

I will read this more closely, but I'd assume this is debt servicing. No insanely high national debt, no problems with debt servicing.

"After the most recent failure of this in the US, governments here and elsewhere, including Spain, took on many 'toxic assets' - the failed debt created by the financial sector - so as to rescue the financial sector."

This is thorny. We purchased the "toxic assets" from the very same financial network we borrow money from. My feeling was - let them fail. I do not really believe the whole Western world as we know it would have collapsed. A simple "we don't have the money to bail out the likes of JP Morgan" would have sufficed. Other companies would have bought up the pieces and a lesson would have been learned. What we did has not deterred "too big to fail". Instead, we institutionalized it.

"People obviously didn't vote for that. In the US, they rose up against the bailout, but Congress succumbed instead to the carrot and stick of the Treasury Department and the financial sector."

No, see, that is where your off the mark in my opinion. The people didn't rise up at all. Not even a little. What the people did was expressed their displeasure to pollsters. There is no evidence they will vote any different. It is the responsibly of a democratic society to actually make their votes count. The fact that half the people don't bother to get involved is essentially a nod of consent to the current governance.

"A great deal of US debt is due to wars. You may say people voted for that, but this ignores the reality that they don't get a choice."

If people really don't want a war, they will not vote for politicians that support it. The issues here is that a majority of the people in this country have no problem with wars - and are willing to vote for politicians that march off to battle for dubious causes and don't pay for it. There is simply no excuse here in my opinion. We may wish it to be otherwise, but a majority of our fellow citizens are okay with the status quo where that is concerned.

"The situation in Spain today will be the situation in the United States this winter. You can bank on that. Perhaps before, but definitely after the election, you will see overwhelming calls for austerity and pressure from the markets to enact it."

I do agree here. My answer is some relatively simple social security fixes (tax all income, not just that under 100k), dramatically raise top bracket rates (and make sure we are hitting personal take home pay), etc, etc. Still, it is the responsibility of society to spend only what we take in. We should fight for the things we believe in, but we can not continue burying ourselves in debt because one side or the other can't get their way. Our movement should be for reform, balanced budgets, elimination of debt, increased taxes on the wealthy, etc. There is simply no excuse for taking on so much debt and becoming beholden to creditors - especially not in a nation as rich as we are.

[JackRiddler]

20. Somewhere in between...

bailout

"People obviously didn't vote for that. In the US, they rose up against the bailout, but Congress succumbed instead to the carrot and stick of the Treasury Department and the financial sector."

No, see, that is where your off the mark in my opinion. The people didn't rise up at all. Not even a little. What the people did was expressed their displeasure to pollsters. There is no evidence they will vote any different. It is the responsibly of a democratic society to actually make their votes count. The fact that half the people don't bother to get involved is essentially a nod of consent to the current governance.

There was less than a week to act. Congress got a record number of phone calls - supposedly 10 million, more than 90 percent against. I wish we had a people who would have mobilized, and done so quickly enough to shut down Washington and Manhattan that week. But without a doubt, the vote went through against their will. Obviously we had no input on the Federal Reserve bailouts -- much higher.

And what are you saying about Obama? He voted for TARP, continued and extended the bailouts as president, met the banksters' demands. So how is it that you say we have a vote in this? On many questions, we have no vote. I believe third parties would have replaced the two-party cartel long ago, except for the winner-takes-all system. No third party can grow, when all that voting for it does is decide the election in favor of the greater evil.

We agree about a lot. Sure sounds like you'd like to dethrone the bankers and tax the rich first. (I don't know why you compare banking to competition among convenience stores who don't get bailouts).


Thanks.

[Odin2005]

19. I have had the exact same thoughts about the "ratings agencies" for a while.

[JackRiddler]

22. Glad to see it.

It's an example of how collusive arrangements are often executed in the open, disguised as mere business.

[JackRiddler]

24. one more kick for readers

[voteearlyvoteoften]

25. good read rec

[JackRiddler]

26. thank you!

You are Why I Fight!