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Thread: Portugal Suffering Greek Contagion Pressures EU Bonds

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by PeteEU View Post
    And that is based on what? That there is no reaction by Greece to put their house in order. How realistic is that?
    I don't believe the purpose of the IMF's Chapter IV consultation with Greece, from which that figure was released, intended to assume a static situation. Rather, the point was to illustrate that Greece faces some enormous fiscal challenges and that measures will be required to address them.


    I agree, however that is not how it sounded and that is not how many right wingers sound when talking about such entitlements. Cut cut cut, without thinking of the consequences of such cuts. Every dollar/Euro you take out of entitlements is less spending by said group (especially the elderly), which means less growth and in fact I would claim higher overall costs.

    Yes. But you cant really peg annual pension growth to inflation less anything. That would make the existing pension worth less while prices are going up...
    I only gave a small menu of possible options to illustrate that there are ways to address entitlement spending other than immediate cuts to all beneficiaries. Countries would have to choose the path (mix of tax hikes, benefit cuts, and implemenation approach) that best fits their fiscal challenges, economic realities, and social needs. Except for the portion of the population that is held harmless e.g., let's say current group of pension recipients, the rest would have to make sacrifices under any benefit cuts. Letting inflation do the work would spread the pain over a large number of years. Introducing means testing for which a segment would be held harmless would avoid imposing cuts on those who would be in the worst position to deal with cuts.

    Nothing worse that hearing about elderly that are dead because they could not afford with their pensions to heat their homes or eat.
    I don't believe any decent society should or would take measures that would result in that kind of hardship.

    And yet the markets and speculators forcing this to spread to nations who are in no way as bad as Greece. Some even have better debt ratios than most major economies around the world. Take Spain. 53% debt vs GDP, a budget deficit that is falling and lets not forget the last decade Spain had a budget surplus!.. yea they do exist. I dont deny Spain has its problems (20 unemployment) but so do most other nations out there. That is why I suspect speculation being a large part of the attacks against Portugal and Spain, especially with the lack of attacks against all countries that are in a similar boat.. UK, Ireland, Italy, and the US.
    Markets don't always act rationally and there can also be market failure. During the Russian default back in the 1990s, one saw debt costs rise substantially in other developing countries e.g., Brazil, where there was no meaningful increase in sovereign debt risk. Fear can lead to sweeping reactions e.g., co-movements in prices, that extend beyond what is justified. Markets can and do go to excess from time to time.

    And? Seriously, if you have this view then the UKs and US's credit rating should be slashed several points because they are far far worse off than Portugal and doing nothing to change course, something that Portugal is. The UK budget deficit is way into the double digits as is the US. The UK growth is barely above 0.. one could easily claim if it was not for Browns spending then the growth would be massively negative.
    IMO, the U.S. should be on negative outlook given its looming long-term imbalances and lack of commitment to date to begin to tackle those imbalances. I suspect that the ratings agencies will move in that direction in 2011 or 2012 if the U.S. fails to develop a credible fiscal consolidation program. The UK is on negative outlook. It is potentially troubling that none of the three major parties has offered much specificity on the fiscal reform front in the campaign for the May 2010 election.

    Last I looked Ireland had a debt vs GDP ratio of 65% and it had climbed from 25% to 65% in 2 year. The latest numbers from Ireland I can find say a 14.3% deficit on the state budget which is higher than the Greek and far far far higher than Portugal and Spain. Oh and that was a revised number by the Eurozone statistics office because the Irish did not .. lets say they pulled a Greece. On top of that the Irish are still having to bail out their banks.
    I believe the 14.3% percent budget deficit was not entirely structural. The IMF published a structural figure of 7.9% of GDP. I can't speak for the ratings agencies, or specifically S&P who downgraded Spain yesterday, but I do know that the current account deficit is one important figure that is looked at. I also know that there has been a bias toward continuity and some countries can benefit from a "legacy effect." I suspect that the U.S. and UK still enjoy some legacy benefits.

    On top of that Ireland has some of the highest external debt holdings on the planet.. something like 1300% of GDP I believe. Granted it is a stupid number since it includes private debt (a large portion).
    Total debt can sometimes be important. If crowding out occurs when it comes to financing, a sovereign debt crisis could erupt, especially if a private sector debt crisis spills into the financial sector and then spreads from there.

  2. #32
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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by donsutherland1 View Post
    I don't believe the purpose of the IMF's Chapter IV consultation with Greece, from which that figure was released, intended to assume a static situation. Rather, the point was to illustrate that Greece faces some enormous fiscal challenges and that measures will be required to address them.
    yea but my point is that it is a projection based on certain conditions that already have changed even before the study is published. You can make a similar projection with a similar result for any nation with a budget deficit. I remember a projection made 20 years ago or so, that the Danish state debt situation was out of control and bla bla. Today Denmark has zero external state debt.. go figure.

    I only gave a small menu of possible options to illustrate that there are ways to address entitlement spending other than immediate cuts to all beneficiaries. Countries would have to choose the path (mix of tax hikes, benefit cuts, and implemenation approach) that best fits their fiscal challenges, economic realities, and social needs. Except for the portion of the population that is held harmless e.g., let's say current group of pension recipients, the rest would have to make sacrifices under any benefit cuts. Letting inflation do the work would spread the pain over a large number of years. Introducing means testing for which a segment would be held harmless would avoid imposing cuts on those who would be in the worst position to deal with cuts.
    I know you did, but you and many others, always target pensions and other areas where the vulnerable of society get hit first. One has to ask why sometimes.

    Why not force companies and rich people to pay their fair share of the tax burden? We all know they avoid as much tax as they can where as the "normal" man and woman pay their full load every year. Was it not GE who paid no US tax last year? Plug those legalistic holes so that companies like GE pay their taxes fairly.

    Why not cut massive subsidy programs (tax breaks, direct subsidies and so on) for private companies before cutting those for the weakest in society? We all know what we are talking about. Airbus in Europe, Boeing in the US, banks world wide and of course the big multinational food companies that press the farmers on price world wide. All this is done by your and my tax euro/dollar.

    In the US case, why not cut massively in the military and security budget? Do you really need 4 branches of the military (not counting the Coast Guard)? Do you really need 1500+ nuclear bombs and the cost of upkeeping them? Do you really need 20+ intelligence agencies? Other countries do fine with far fewer..

    Why is it when we talk about spending cuts, we always go straight for healthcare (in Europe) and pensions?

    I don't believe any decent society should or would take measures that would result in that kind of hardship.
    That is how it was before the New Deal and the implementation of the so called welfare state. The poverty rate among the elderly was massively high.

    Markets don't always act rationally and there can also be market failure.
    Because the markets are being manipulated and are imperfect. Hence the idea that the free market is the best way is a stupid thing. It should be the job of regulators to minimize the manipulation as much as possible.. by for example demanding that if you want to speculate the you need to own the good/stock/stuff that you are speculating in and not "borrow" it from someone else. It would cut speculation dramatically. Just think if those who pushed up oil to 150 dollars were forced to actually take delivery of the oil they were buying?

    During the Russian default back in the 1990s, one saw debt costs rise substantially in other developing countries e.g., Brazil, where there was no meaningful increase in sovereign debt risk. Fear can lead to sweeping reactions e.g., co-movements in prices, that extend beyond what is justified. Markets can and do go to excess from time to time.
    Yes, because the markets along with the speculators were looking for the supposed weak nations. We see it all the time but so far we as a society just shrug it off despite we all having to pay for the consequences of these speculators actions.. and all the while these speculators are making trillions on the misery of others. We saw it when the markets went after Sweden a decade or so ago, they tried to do the same with Denmark.. and failed. They tried with stronger economies in Asia but had to settle with the weaker ones. They tried and succeeded in South America several times. They forced the pound out of the Europe currency thing (can never remember what it is called) 20 years ago almost, and tried to do it with other currencies also .. but failed.

    IMO, the U.S. should be on negative outlook given its looming long-term imbalances and lack of commitment to date to begin to tackle those imbalances. I suspect that the ratings agencies will move in that direction in 2011 or 2012 if the U.S. fails to develop a credible fiscal consolidation program. The UK is on negative outlook. It is potentially troubling that none of the three major parties has offered much specificity on the fiscal reform front in the campaign for the May 2010 election.
    On the US .. no way. The rating wont change. There might be a lot of threating, but it wont change. The US has been in the toilet budget wise for decades and nothing has happened on the credit rating. Its projected debt vs GDP in real dollars is massive, and nothing has happened. Its actual debt vs GDP is huge and nothing has happened. Nothing will happen as long as most if not all ratings agencies are American owned and run the way they are. These rating agencies wont bite the hand that feeds them.

    As for the UK, yes they are most likely waiting for the election, but again here, I doubt some how that the true factual credit rating of the UK economy will ever emerge. If there was an rationality the UK economy should have the same credit rating as the Spanish, but it does not last I looked.

    What we need is no American owned credit rating companies that are funded by governments in equal shares and are totally independent.

    I believe the 14.3% percent budget deficit was not entirely structural.
    And neither is the whole Greek budget deficit.

    The IMF published a structural figure of 7.9% of GDP.
    That is still high as hell.. over 50% of the overall budget deficit is structural then. The structural deficit is almost higher than Portugal s and Spain's over all deficit..

    I can't speak for the ratings agencies, or specifically S&P who downgraded Spain yesterday, but I do know that the current account deficit is one important figure that is looked at. I also know that there has been a bias toward continuity and some countries can benefit from a "legacy effect." I suspect that the U.S. and UK still enjoy some legacy benefits.
    Legacy effect? Spain has had a budget surplus.. yes a budget surplus for over a decade, cutting their debt vs GDP every year until the world wide crisis. That is a legacy. In the same time frame, the US had deficits increase year after year, with debt piling up for .. yes decades. The UK was a tad better though. If anything the legacy of the US economy is far far far worse than the Greek since the US has been in a budget deficit since before Carter pretty much. The whole legacy is most likely built up on the fact that the US consumer is a spending nut but that is solely based on the wishful thinking that the US consumer will go back to previous consumption levels and as it stands now that aint gonna happen any time soon.

    Total debt can sometimes be important. If crowding out occurs when it comes to financing, a sovereign debt crisis could erupt, especially if a private sector debt crisis spills into the financial sector and then spreads from there.
    it can I know, just pointing out that Ireland has the worst total debt on the planet, by far, followed by the UK. Another thing is how each country does its mortgage markets .. it is all different.
    PeteEU

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by PeteEU View Post
    yea but my point is that it is a projection based on certain conditions that already have changed even before the study is published. You can make a similar projection with a similar result for any nation with a budget deficit. I remember a projection made 20 years ago or so, that the Danish state debt situation was out of control and bla bla. Today Denmark has zero external state debt.. go figure.
    Denmark, among other states, has demonstrated that even challenging fiscal situations can be overcome. The IMF has made it a point to mention that countries have overcome larger imbalances than those facing much of the Developed world coming out of the recent financial crisis/severe recession.

    [quote]I know you did, but you and many others, always target pensions and other areas where the vulnerable of society get hit first. [/quote}

    I can't speak for others. But my references to pensions and health care (mainly in discussions concerning U.S. imbalances) is strictly on account of those programs accounting for almost all of the long-term imbalances. I've also noted that the U.S. cannot grow its way out of its imbalances. Tax hikes, discretionary spending cuts, and mandatory spending reform (which will require significant health care reform to address the excess cost issue) will be needed.

    One has to ask why sometimes.
    I usually try to skim through the ideological "noise" when it comes to economic/fiscal discussions. I suspect that perceptions about what the role of government should be, size of government, etc., are involved.

    Why not force companies and rich people to pay their fair share of the tax burden? We all know they avoid as much tax as they can where as the "normal" man and woman pay their full load every year. Was it not GE who paid no US tax last year? Plug those legalistic holes so that companies like GE pay their taxes fairly.

    Why not cut massive subsidy programs (tax breaks, direct subsidies and so on) for private companies before cutting those for the weakest in society? We all know what we are talking about. Airbus in Europe, Boeing in the US, banks world wide and of course the big multinational food companies that press the farmers on price world wide. All this is done by your and my tax euro/dollar.
    I believe the tax code as a whole should be examined in the U.S. All firms should be treated alike. Special industry subsidies should be eliminated. Closing those loopholes/ending special subsidies, etc., could allow tax rates to be lower than they might otherwise be.

    On the individual tax front, I believe a similar approach should be applied. The recent economic crisis raises the real question whether, for example, the mortgage interest deduction should be preserved. That deduction, among many other factors, skews investment flows. Moreover, the experience in Canada where that deduction was eliminated (no wrenching dislocation of the housing sector and now a higher home ownership rate than the U.S.) suggests that doing so is feasible. That is just one example of deductions. Rates should be set to meet revenue objectives and avoid, to the largest extent possible, economic distortions, deadweight from inefficiency, etc.

    In the US case, why not cut massively in the military and security budget? Do you really need 4 branches of the military (not counting the Coast Guard)? Do you really need 1500+ nuclear bombs and the cost of upkeeping them? Do you really need 20+ intelligence agencies? Other countries do fine with far fewer.
    IMO, there should be no "sacred cows" so to speak. While I favor a strong defense, that is very different from expecting that Defense should be immune. I believe it is both reasonable and appropriate to expect that the Pentagon increases its returns (ability to meet objectives, resource deployment, etc.) per dollar of funding, just as is expected of any other agency.

    As I never bought into Krauthammer's "unipolar" argument that the U.S. had achieved military preeminence--it had the greatest military power but that power did not begin to approach preeminence--understand that economic concepts pertaining to resource scarcity/limits are relevant in the dimension of power, and recognize that the U.S. has numerous highly dependable partners overseas (including countries that were foolishly mocked as comprising "Old Europe"), I am comfortable with a framework that recognizes the reality of a multipolar world, the continuing importance of balance of power considerations, and partnership with allies. I don't believe ad hoc coalitions are a very effective security mechanism, as they are functions of expediency, not enduring interests and shared values.

    Why is it when we talk about spending cuts, we always go straight for healthcare (in Europe) and pensions?
    I can't speak for others. My view is that the focus should start where the greatest imbalances exist and then the policy framework needs to consider how to achieve the necessary objectives while minimizing economic harm, considering social needs, etc.

    That is how it was before the New Deal and the implementation of the so called welfare state. The poverty rate among the elderly was massively high.
    I'm well aware of that. I don't think it would be reasonable, politically feasible, or ethical to go back to a situation akin to those times. Social Security in the U.S. (and I apologize for resorting to a U.S. example, but I am far more familiar with the data concerning those examples), even as the program has some serious problems, has done enormous good in virtually eliminating the incidence of poverty among senior citizens. Just cutting expenditures is not a viable reform. Gradually slowing expenditure growth over an extended timeframe, raising the retirement age to better reflect changes in life expectancy, adjusting payroll taxes, perhaps separating the pension component from supplemental programs, will likely be needed. On an actuarial basis, the challenges facing that program are far more manageable than the health-related imbalances in the U.S.

    With respect to those latter imbalances, the introduction of budgeting (financial rationing) or cutting expenditures/raising taxes, won't achieve the desired ends. A large part of the problem rests in the structure of the U.S. health industry itself. Far-reaching changes will be required there. Those changes will need to address technology procurement, the supply of personnel (touching on licensing issues, determining what is/is not empirically supported as useful), among numerous other factors. The degree of structural reform will likely be magnitudes of order greater than what was pursued in the recently-enacted health care law.

    Because the markets are being manipulated and are imperfect. Hence the idea that the free market is the best way is a stupid thing. It should be the job of regulators to minimize the manipulation as much as possible.. by for example demanding that if you want to speculate the you need to own the good/stock/stuff that you are speculating in and not "borrow" it from someone else. It would cut speculation dramatically. Just think if those who pushed up oil to 150 dollars were forced to actually take delivery of the oil they were buying?

    Yes, because the markets along with the speculators were looking for the supposed weak nations. We see it all the time but so far we as a society just shrug it off despite we all having to pay for the consequences of these speculators actions.. and all the while these speculators are making trillions on the misery of others. We saw it when the markets went after Sweden a decade or so ago, they tried to do the same with Denmark.. and failed. They tried with stronger economies in Asia but had to settle with the weaker ones. They tried and succeeded in South America several times. They forced the pound out of the Europe currency thing (can never remember what it is called) 20 years ago almost, and tried to do it with other currencies also .. but failed.
    As numerous factors (market structure, information asymmetries, human psychology/behavior, interests of market participants, etc.) assure that markets are not perfect, not always rational, produce externalities, can go to excess (and speculative attacks on currencies is one dimension of excess), a level of regulation is necessary. The regulation needs to be sufficiently robust and its enforcements sufficiently effective to assure that the objectives of such regulation are achieved. Markets are a wonderful mechanism. But one should not lose sight of the reality that markets, like any other human institution, have imperfections and can produce failure, as well as success.

    On the US .. no way. The rating wont change. There might be a lot of threating, but it wont change. The US has been in the toilet budget wise for decades and nothing has happened on the credit rating. Its projected debt vs GDP in real dollars is massive, and nothing has happened. Its actual debt vs GDP is huge and nothing has happened. Nothing will happen as long as most if not all ratings agencies are American owned and run the way they are. These rating agencies wont bite the hand that feeds them.
    I'd like to see more empirical work done on the effectiveness and utility of ratings agencies relative to measuring risk. They are a deeply embedded component in the world of finance, but are they really effective at what they do? The recent financial crisis exposed major problems, but such problems have been exposed time and again each time there has been a major crisis be it the Scandanavian banking crisis of the early 1990s or the Asian financial crisis in the late 1990s, or the most recent U.S.-led financial crisis.

    In the broader context, risk management needs to be improved markedly. It is not clear that risk management is qualitatively better than it was in the past. Early findings concerning such models as the Value at Risk (very widely used) suggest that such models may actually have amplified the risk as the financial crisis was beginning to develop. Judgment, reliance on historic cases, understanding/research in market structure, among other approaches need to be given much greater weight in an improved risk management environment.

    And neither is the whole Greek budget deficit.
    That's correct.

    Legacy effect? Spain has had a budget surplus.. yes a budget surplus for over a decade, cutting their debt vs GDP every year until the world wide crisis. That is a legacy. In the same time frame, the US had deficits increase year after year, with debt piling up for .. yes decades. The UK was a tad better though. If anything the legacy of the US economy is far far far worse than the Greek since the US has been in a budget deficit since before Carter pretty much. The whole legacy is most likely built up on the fact that the US consumer is a spending nut but that is solely based on the wishful thinking that the US consumer will go back to previous consumption levels and as it stands now that aint gonna happen any time soon.
    Looking at your point, I think "legacy" was the wrong word to describe the situation. To rephrase it, there is a prevailing conventional wisdom under which it is taken as an article of faith that the U.S. won't default, the UK won't default, etc. IMO, such assumptions are not helpful when one is actually trying to get a better understanding of sovereign debt risk.

    it can I know, just pointing out that Ireland has the worst total debt on the planet, by far, followed by the UK. Another thing is how each country does its mortgage markets .. it is all different.
    I looked a little further into the matter on Ireland. Reasons for ratings agency confidence--which may or may not be justified--included:

    It is "too early to conclude that most of the factors that contributed to (Ireland's) economic vitality have been structurally eroded." "Ireland has some room to manoeuvre." The government's financial strength heading into the financial crisis/recession was "very high."
    Last edited by donsutherland1; 04-29-10 at 11:11 AM.

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Yesterday, I noted that an agreement on the terms of financing, size of financing, and Greek commitments will likely be reached soon and that given the growing gravity of the situation and rising risk of contagion, there is even a chance that an agreement might be reached before the markets reopen on Monday.

    This morning, CNBC reported:

    Sources familiar with the talks said officials were expected to announce the details of a three-year deal by Monday.

    That was enough to spark a relief rally in markets fearful of contagion across the euro zone.


    It will remain an open question as to whether Greece will carry through with the measures that are needed to address its fiscal challenge, which entails liquidity and solvency issues.

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by donsutherland1 View Post
    I can't speak for others. But my references to pensions and health care (mainly in discussions concerning U.S. imbalances) is strictly on account of those programs accounting for almost all of the long-term imbalances. I've also noted that the U.S. cannot grow its way out of its imbalances. Tax hikes, discretionary spending cuts, and mandatory spending reform (which will require significant health care reform to address the excess cost issue) will be needed.
    The so called long term imbalances are due to governments "lending" from the money pool to pay for their deficits or so I understand the over all problem. So fixing the short term problems will help a long way in fixing the long term problems.

    I usually try to skim through the ideological "noise" when it comes to economic/fiscal discussions. I suspect that perceptions about what the role of government should be, size of government, etc., are involved.
    I agree. A much more pragmatic than ideology based economic and political discord is needed. Sadly that is seriously lacking at the moment in the US.

    I believe the tax code as a whole should be examined in the U.S. All firms should be treated alike. Special industry subsidies should be eliminated. Closing those loopholes/ending special subsidies, etc., could allow tax rates to be lower than they might otherwise be.
    Long term maybe, short term no. A lot of taxes are needed to plug the holes.

    On the individual tax front, I believe a similar approach should be applied. The recent economic crisis raises the real question whether, for example, the mortgage interest deduction should be preserved. That deduction, among many other factors, skews investment flows. Moreover, the experience in Canada where that deduction was eliminated (no wrenching dislocation of the housing sector and now a higher home ownership rate than the U.S.) suggests that doing so is feasible. That is just one example of deductions. Rates should be set to meet revenue objectives and avoid, to the largest extent possible, economic distortions, deadweight from inefficiency, etc.
    I have no problems with deductions, as long as the are targeted the vulnerable in society and not the well off. No reason for a multi millionaire getting tons of deductions just because he was blessed with 5 houses.

    IMO, there should be no "sacred cows" so to speak. While I favor a strong defense, that is very different from expecting that Defense should be immune. I believe it is both reasonable and appropriate to expect that the Pentagon increases its returns (ability to meet objectives, resource deployment, etc.) per dollar of funding, just as is expected of any other agency.
    Kudos, rare we hear this coming from an American.

    I can't speak for others. My view is that the focus should start where the greatest imbalances exist and then the policy framework needs to consider how to achieve the necessary objectives while minimizing economic harm, considering social needs, etc.
    I disagree. The focus should be on be on an over all solution. The "greatest imbalances" are not always the root of the problem. Take the US. As I understand it various US governments have used social security as a deficit hole plugging instrument and gotten away with it. You cant just then say.. hey your pensions got to be cut in the future and all you young people have to work till you are 90 and STILL continue to use social security to plug your massive deficits. Take Greece. The reason that they are in the hole they are in, is not that they spent insanely (yes they did spend more than they should), but that their whole tax system is so poor that they have not gotten enough revenue relative to what they should have gotten. In both cases, your approach would not cure the cancer in the system.

    I'm well aware of that. I don't think it would be reasonable, politically feasible, or ethical to go back to a situation akin to those times. Social Security in the U.S. (and I apologize for resorting to a U.S. example, but I am far more familiar with the data concerning those examples), even as the program has some serious problems, has done enormous good in virtually eliminating the incidence of poverty among senior citizens. Just cutting expenditures is not a viable reform. Gradually slowing expenditure growth over an extended timeframe, raising the retirement age to better reflect changes in life expectancy, adjusting payroll taxes, perhaps separating the pension component from supplemental programs, will likely be needed. On an actuarial basis, the challenges facing that program are far more manageable than the health-related imbalances in the U.S.
    As I stated, I believe that the problem is not social security but the fact various US administrations have skimmed the funds for deficit covering and spending. So unless you deal with this problem (as it is allowed and not fixed), then nothing will change and social security will continue to degenerate into nothing.

    With respect to those latter imbalances, the introduction of budgeting (financial rationing) or cutting expenditures/raising taxes, won't achieve the desired ends. A large part of the problem rests in the structure of the U.S. health industry itself. Far-reaching changes will be required there. Those changes will need to address technology procurement, the supply of personnel (touching on licensing issues, determining what is/is not empirically supported as useful), among numerous other factors. The degree of structural reform will likely be magnitudes of order greater than what was pursued in the recently-enacted health care law.
    I agree. The US needs to go away from a employer based healthcare to a non employer based healthcare. On top of that the US needs to live up to its reputation of the free markets.. something that most certainly does not exist in the healthcare industry. And if that fails.. massive regulation and forcing private companies to compete.

    As numerous factors (market structure, information asymmetries, human psychology/behavior, interests of market participants, etc.) assure that markets are not perfect, not always rational, produce externalities, can go to excess (and speculative attacks on currencies is one dimension of excess), a level of regulation is necessary. The regulation needs to be sufficiently robust and its enforcements sufficiently effective to assure that the objectives of such regulation are achieved. Markets are a wonderful mechanism. But one should not lose sight of the reality that markets, like any other human institution, have imperfections and can produce failure, as well as success.
    Agree fully.

    I'd like to see more empirical work done on the effectiveness and utility of ratings agencies relative to measuring risk. They are a deeply embedded component in the world of finance, but are they really effective at what they do?
    Good question. We can both agree on I bet that they are very influential, and one could easily say too influential considering the conflict of interest they are in.

    The recent financial crisis exposed major problems, but such problems have been exposed time and again each time there has been a major crisis be it the Scandanavian banking crisis of the early 1990s or the Asian financial crisis in the late 1990s, or the most recent U.S.-led financial crisis.
    Swedish banking crisis not Scandinavian. But none of these crisis were picked up by the ratings agencies but were clear as the living day long before they happened. And that is my point.. are they so important if they cant even pick up on Greece one or two years ago? All they are doing now is creating a panic in the world markets and frankly driving Greece over the edge and here again we have to question their issues with conflicts of interest. They get paid by companies like Goldman Sachs who are no doubt ably earning a pretty nice penny or two on Greece going down the tubes all of a sudden. How can we be sure they are impartial? Shall I remind you of Lehman Brothers AAA rating the day before they went bust? Or the Goldman Sachs who admitted they sold "crap" to its customers, crap that had a high rating?

    In the broader context, risk management needs to be improved markedly. It is not clear that risk management is qualitatively better than it was in the past. Early findings concerning such models as the Value at Risk (very widely used) suggest that such models may actually have amplified the risk as the financial crisis was beginning to develop. Judgment, reliance on historic cases, understanding/research in market structure, among other approaches need to be given much greater weight in an improved risk management environment.
    Problem is a lack of transparency in the market place. Without transparency we cant have reliable risk management. If anything this crisis has clearly shown that the lack of transparency in the derivatives market, the way ratings agencies rated financial packages sold by the big financial institutions and the overall complex financial products, all lacked a massive amount of transparency. But so far nothing has been done about it in the US and the rest of the world cant do jack**** without the US taking the lead on this.. very frustrating.

    Looking at your point, I think "legacy" was the wrong word to describe the situation. To rephrase it, there is a prevailing conventional wisdom under which it is taken as an article of faith that the U.S. won't default, the UK won't default, etc. IMO, such assumptions are not helpful when one is actually trying to get a better understanding of sovereign debt risk.
    I agree, and there was a prevailing conventional wisdom 100 years ago that Jews were evil and ran the world and that the black man could not shoot straight, think or function right in society. How right were they about that? Conventional wisdom means jack**** if you ask me.. facts mean everything.

    I looked a little further into the matter on Ireland. Reasons for ratings agency confidence--which may or may not be justified--included:

    It is "too early to conclude that most of the factors that contributed to (Ireland's) economic vitality have been structurally eroded." "Ireland has some room to manoeuvre." The government's financial strength heading into the financial crisis/recession was "very high."
    And I ask yet again... Spain had like Ireland a budget surplus, low debt and high growth before the crisis. There is no factual reason to treat Ireland any different than Spain, or on many fronts considering the deficit in Ireland.. Greece. So one must come to the conclusion that there is some other unseen reason for this ignoring of the Irish problem by the mass media, mostly English speaking mass media and the financial markets.. mostly English speaking and dominated.
    PeteEU

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    Re: Portugal Suffering Greek Contagion Pressures EU Bonds

    Quote Originally Posted by PeteEU View Post
    The so called long term imbalances are due to governments "lending" from the money pool to pay for their deficits or so I understand the over all problem. So fixing the short term problems will help a long way in fixing the long term problems.
    The use of revenue streams that are intended, in theory, for specific purposes e.g., payroll taxes that finance the Social Security program, for general purposes is problematic. Reform should not fail to address that issue. Of course, that means the federal government will need to determine what discretionary programs it seeks to maintain/grow/or cut, what new revenue increases might be needed to finance those programs, etc.

    I agree. A much more pragmatic than ideology based economic and political discord is needed. Sadly that is seriously lacking at the moment in the US.
    Unfortunately, at this time, the environment in the U.S. is quite politicized. One can see anecdotal evidence of that in discussions here in DP where issues are invariably cited as policy problems. Bad public policy plays a role. But there is far more to the story than bad public policy in many cases e.g., the recent financial crisis.

    Long term maybe, short term no. A lot of taxes are needed to plug the holes.
    Just so it is clear, I was not arguing that revenue increases would not be needed. I believe they will. I was just suggesting that the tax rates/revenue increases might be smaller if various loopholes/exemptions/deductions are eliminated, because eliminating those provisions of the tax code would broaden the overall base of taxable income. Hence, the tax rate required to achieve a given revenue flow would be lower than the one required to do so with a narrower base of taxable income.

    I have no problems with deductions, as long as the are targeted the vulnerable in society and not the well off.
    Social objectives will need to be considered when doing so. It is not in the nation's interest to increase the incidence of poverty. The lessons of the financial crisis also suggest that the economic costs of distortions that helped fuel the housing bubble, including but not limited to tax provisions that favor investment in real estate, were very steep and the benefits perhaps very small when comparative cases in countries such as Canada are considered. Best practices, not all of which originate in the U.S., should be studied and applied when possible.

    Kudos, rare we hear this coming from an American.
    There are some major cost-related issues. For example, the F-35 project has led to substantial cost overruns and delays. IMO, contractors making bids for business should reasonably be expected to perform in a fashion that they had committed to do so when bidding for business. Otherwise, the bidding process is meaningless and seeking multiple bids is actually a wasteful exercise. Under such circumstances, prospective contractors could enter artificially low bids to secure business, and then completely ignore the parameters of their bids once they have secured the contracts.

    I disagree. The focus should be on be on an over all solution. The "greatest imbalances" are not always the root of the problem.
    I think you might have misunderstood me and/or I was not sufficiently clear. The imbalances are a starting point. When one begins to resolve those imbalances, one needs to get to the causes of those imbalances. The causes may lie well afield of actual programs. For example, I noted that part of the effort to deal with Medicare's imbalances (Medicare is the federal program for older Americans) will actually require dealing with health care reform, as the U.S. health industry has an excess cost problem, not to mention other issues. So, to be clear and to use Medicare as an example, budgeting, revising the program's benefit structure, possible means-testing, and increasing revenue is not the whole answer. A significant degree of the program's imbalances are associated with the phenomenon of U.S. health costs rising well in excess of economic growth/national income, particularly in the hospital sector. Hence, addressing Medicare's problems would require structural health industry reform.

    Take the US. As I understand it various US governments have used social security as a deficit hole plugging instrument and gotten away with it. You cant just then say.. hey your pensions got to be cut in the future and all you young people have to work till you are 90 and STILL continue to use social security to plug your massive deficits.
    We agree on that point. I believe credible reform will need to end such a practice.

    I agree. The US needs to go away from a employer based healthcare to a non employer based healthcare. On top of that the US needs to live up to its reputation of the free markets.. something that most certainly does not exist in the healthcare industry. And if that fails.. massive regulation and forcing private companies to compete.
    There are real limitations concerning employer-based health care involving issues of relative competitiveness and the procyclical nature of such coverage (during bad economic times people are more likely to lose coverage under such a framework due to firms losing money, laying off workers, etc). The current U.S. tax code contains a preference that favors an employer-based model. As you noted, and others such as Harvard Business School Professor Michael Porter, have acknowledged, the U.S. health care system is far from market-oriented despite all the political rhetoric one hears.

    Good question. We can both agree on I bet that they are very influential, and one could easily say too influential considering the conflict of interest they are in.
    By deeply embedded, I mean widely used and influential. IMO, there is too much reliance on the ratings agencies. As a result, the overall picture of risk is skewed.

    Problem is a lack of transparency in the market place. Without transparency we cant have reliable risk management. If anything this crisis has clearly shown that the lack of transparency in the derivatives market, the way ratings agencies rated financial packages sold by the big financial institutions and the overall complex financial products, all lacked a massive amount of transparency. But so far nothing has been done about it in the US and the rest of the world cant do jack**** without the US taking the lead on this.. very frustrating.
    I agree about the lack of transparency. I believe all market transactions should be in the open. Hence I believe mechanisms such as "dark pools" that can be used to avoid disclosure of prices at which financial instruments change hands should be barred, the algorithms/details for any models that are used to generate publicly disclosed accounting information should be provided in the notes to financial statements, the use of off-balance sheet vehicles should be curbed, etc.

    And I ask yet again... Spain had like Ireland a budget surplus, low debt and high growth before the crisis. There is no factual reason to treat Ireland any different than Spain, or on many fronts considering the deficit in Ireland.. Greece. So one must come to the conclusion that there is some other unseen reason for this ignoring of the Irish problem by the mass media, mostly English speaking mass media and the financial markets.. mostly English speaking and dominated.
    IMO, the changes affecting Spain probably represent fears/reaction to the Greek crisis than a deterioration in Spain's fundamentals. I do believe Greece should have been at junk status well before the downgrade, Portugal should have had a lower rating, Ireland's rating is probably too high, and the U.S. should be on negative outlook given its structural deficits/lack of political commitment to develop a credible fiscal consolidation program and then implement it when the economic recovery is sustained (probably beginning in 2011).

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