Daily Archives: August 7, 2011

What Happened to Obama?

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What Happened to Obama? is the most eloquent exposition that I have heard of what could have and should have been, but now has little chance of ever happening in the next 5 years (unless we find a replacement for Obama).

The article is by Drew Westen,  a professor of psychology at Emory University and the author of The Political Brain: The Role of Emotion in Deciding the Fate of the Nation.

In explaining the story that Obama should have used in his inaugural address to explain the intent of his presidency, Westen offers the following:

In that context, Americans needed their president to tell them a story that made sense of what they had just been through, what caused it, and how it was going to end. They needed to hear that he understood what they were feeling, that he would track down those responsible for their pain and suffering, and that he would restore order and safety. What they were waiting for, in broad strokes, was a story something like this:

“I know you’re scared and angry. Many of you have lost your jobs, your homes, your hope. This was a disaster, but it was not a natural disaster. It was made by Wall Street gamblers who speculated with your lives and futures. It was made by conservative extremists who told us that if we just eliminated regulations and rewarded greed and recklessness, it would all work out. But it didn’t work out. And it didn’t work out 80 years ago, when the same people sold our grandparents the same bill of goods, with the same results. But we learned something from our grandparents about how to fix it, and we will draw on their wisdom. We will restore business confidence the old-fashioned way: by putting money back in the pockets of working Americans by putting them back to work, and by restoring integrity to our financial markets and demanding it of those who want to run them. I can’t promise that we won’t make mistakes along the way. But I can promise you that they will be honest mistakes, and that your government has your back again.”

I think he may have identified where I went astray in choosing Obama for my support from the presidential primaries onward.

Perhaps those of us who were so enthralled with the magnificent story he told in “Dreams From My Father” appended a chapter at the end that wasn’t there — the chapter in which he resolves his identity and comes to know who he is and what he believes in.

Perhaps we mistook for an open mind one that takes in all it hears and redirects it as something to come out of his mouth without being able to make a value judgment.

S & P – Decide Answer, Then Look For Evidence

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I find the following from the Bloomberg News report as published in The Boston Globe article, Treasury official faults credit rating downgrade:

S&P made a $2 trillion calculating mistake and then changed the rationale for its decision, raising “fundamental questions about the credibility and integrity of S&P’s ratings action,’’ John Bellows, acting assistant secretary for economic policy, wrote in a Treasury blog post.

The dispute stems from how S&P used figures from the Congressional Budget Office. The discrepancy didn’t change the downgrade decision, S&P officials said, because Treasury’s $2 trillion figure was derived by calculating government debt over a 10-year period while S&P’s ratings are determined using a three- to five-year timetable.

It appears that S & P may have come to the conclusion that it needed to downgrade the US credit rating and then went searching for the evidence that would justify the foregone conclusion.

In making hypotheses, I suppose there can be circumstances where your gut tells you what the hypothesis should be before you find the evidence to support it.  However, especially in this case where the hypothesis came before a formal search for evidence, you must be extremely diligent to not look only for supporting evidence.  You must be as diligent in searching for any evidence that would contradict your hypothesis.

As pointed out by Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, it doesn’t make any difference how many swans that you see that are white, seeing just one black swan is enough to convince you that not all swans are white.  Even before you see the black swan, you ought to be cautious about claiming all swans are white.

Yes, I know,  if I am to follow my own logic, I should look for evidence that S & P did not make its decision to stick by its original conclusion because of  confirmation bias.  I’ll leave that as an exercise for the reader.  After all, I don’t get paid millions of dollars for writing these blog posts.  I would say millions of dollars may be at stake for S & P if they should lose their reputation, what reputation they have left, for making good calls on the creditworthiness of investments.  Remember their investment grade rating of banks’ mortgage backed securities.

August 8, 2011 9:00 AM

As mentioned in the post Resistance To Revenue Increase Causes S & P Downgrade, I was able to read the full S&P report.

I can’t tell if I was reading the original report or the corrected one, but it does look to me as if the quote mentioned above from John Bellows on the Treasury blog may have been very self-serving.

Perhaps S & P didn’t so much as make a mistake as they did use different assumptions from the CBO report from which they took their numbers.  I don’t know if this difference was mentioned in the original report, but it is very clearly stated in the report that I read.

I think this shows that you cannot trust what either political side has to say about the report.  You have to read the report and decide for yourself what you think it says and what you think it means.

Here is the link where you can read the full 8 page S & P Report.

Resistance To Revenue Increase Causes S & P Downgrade

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According to the article Mainstream Media Ignores S&P Attack On Republicans:

Page 4 of the official Standard & Poors “Research Update”

…

We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

I did a Google search and could find no mention of this except in a comment on an article on one newspaper web site.  Of course, I only checked the first few of the 33,600 entries from the search S & P Downgrade “raise revenue”.  I had hoped for a link to the actual report so I could read it myself.

See if you can do any better finding this information.

I did a Google search on Reason US Downgrade.  Again I only found the reason in comments on news stories.  One of the comments cited the same article as I cited above.

In the article from Bloomberg News that I read in The Boston Globe, Treasury official faults credit rating downgrade, I did find the following paragraphs:

S&P reduced the US rating one grade to AA+ while keeping the outlook at “negative,’’ saying it was less confident that Congress would end Bush-era tax cuts or tackle spending on entitlements.
…
S&P was looking for $4 trillion in budget cuts over 10 years. The deal that passed Congress Tuesday would bring $2.1 trillion to $2.4 trillion in cuts over that time.

It is concerned that lawmakers and the administration might fail to make those cuts because Democrats and Republicans are divided over how to implement them. Republicans are refusing to raise taxes in any deficit-cutting deal while Democrats are fighting to protect entitlement programs such as Social Security and Medicare.

August 7, 2011, 11:03 PM.

I have now read the full 8 page S & P Report as have millions of other investors.

The original article from which I quoted left out an important sentence that makes the quote even more damaging in my opinion.  In the quote below, I put in the missing sentence along with the original.

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

Putting the missing sentence together with the original extracted quote makes it clear that S & P does not believe that President Obama will be able to prevent the Republics from making the Bush tax cuts for the wealthy a permanent fixture of our tax laws.  All Congressional Budget Office analyses assume a base line scenario that the Bush tax cuts will expire.  The CBO analysis of any proposed congressional legislation only rates what that legislation will do when compared to existing law.  The existing law says that the Bush tax cuts will expire in their entirety.  Even President Obama wants to keep the tax cuts for the middle class.

I am not faulting the CBO for their assumptions.  The job of the CBO is to make objective analyses without introducing any political speculations.  So the best thing they can do is to to not second guess the political process and clearly state their assumptions.  With the assumptions clearly stated, the reader can then make whatever different assumptions they want to make and then adjust the results as appropriate.  This seems to be exactly what S & P did.

No wonder the S & P is so upset with the prospects for our getting control of the budgeting process and appropriately adjusting the results of the  CBO report.