Tuesday, April 3, 2012

Austerity Isn't Working

Paul Krugman makes two clear points in his brief blog (reposted below). First, the bond rating agencies are not credible in that they have demonstrated, quite dramatically, that they have no ability to predict future corporate performance. This was obvious in the 2008 meltdown of our economy that they actually helped create the problem, and again when they downgraded America's bond rating just as investors started buying them as a hedge against a worse disasters abroad. But it is Krugman's second point, made in a chart below, that I wanted to point out here. The austerity policies in Europe are having a disasterous effect on unemployment.


Paul Krugman

April 2, 2012

Ratings Disaster

Jonathan Portes has a righteous rant about Eurocrats talking to the wrong people — namely, rating agencies:
These agencies have repeatedly been proved wrong; they have flawed and frequently conflicted business models; and their ratings have no predictive power. All this is well established. Moreover, when it comes to assessing sovereign debt “credit risk” they – and I mean this quite literally – do not know what they are talking about. By that, I mean they quite simply don’t understand what they themselves are saying.
And he directs us to a blog post making that case very effectively.
Obviously I share that view. We saw very dramatically what the rating agencies are worth when S&P downgraded America — nothing. Bond yields actually fell.
The point is that while maybe, maybe, S&P or Moody’s or Fitch know something about corporate debt, they know less than any competent macroeconomist about sovereign debt.
In other news, great results from European austerity:

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