Rob Johnson and Tom Ferguson on the Real Meaning of the S&P Downgrade and the Market Reaction

I feel as if I am too often making excuses for coming across good material on the late side, but between being distracted by the market gyrations of last week and figuring out how to write to Salon readers, I’m even more behind the eight ball than usual. But our initial reader comments confirm our instincts that this material is very relevant.

Readers have responded well in the past to Tom Ferguson’s cut-to-the-chase, curmudgeonly style, but I also wanted to call your attention to Rob Johnson’s observations. Rob, by contrast, is a very measured speaker, so on his scale of discourse, his remarks about Obama are remarkably blunt.

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  1. Candy

    For the meaning of the S&P downgrade, see Fed Watcher Lee Adler’s explanation:

    For people who can’t be bothered clicking the link, here’s what Lee writes:

    “Meanwhile, S&P finally did the dirty and dropped the D-bomb bowl splasher at 9:30 on a summer weekend Friday night. There are some people wondering about the timing. I’m not. It seems to me that the Primary Dealers, who are among S&Ps largest clients, finally called in a favor. They have been getting destroyed on the Treasury short positions which they have held for more than a year. The bond rally has been forcing them to exacerbate their own predicament by buying in their own short positions, as well as dumping stocks and pulling their bids on everything they make markets in. They are unable to maintain orderly markets. Chaos reigns. We’ve seen this act before, in the fall of 2008. The Fed had to rescue the dealers from bankruptcy at that time. A little Treasury downgrade from S&P under the circumstances seems not coincidental. “

    1. Cedric Regula

      Well, the shorts got killed even more post downgrade, so either the primary dealers were really, really dumb asking for it, or Lee thinks they are or maybe it’s just Lee that is dumb.

      Methinks the primary dealers are long and not dumb, since that is what they do, and will welcome the rally as an opportunity to take capital gains by selling high to the Fed or anyone else pursuing the flight to safety.

    2. Ignim Brites

      This is interesting. I have wondered whether the downgrade wasn’t to put a bid on French sovereigns.

    1. ambrit

      My Dear Munificent Lord Snark;
      Dead Peasant here. Alas and alack, we here in the ‘defunct production classes’ are unable to meet our quotas this cycle. A peculiar lack of motivation is infecting the moribund masses. Production of any and all types is in decline. Due to the grave conditions enveloping us at present, we must decline your kind offers of inclusion in the Pan Global Elite Maintenance Club. Any attempts at coersive measures will, as per tradition, be avoided by dissimulation, disaggregation, and disloyal distancing.
      In Humble and Obsequious Repose;
      Dead Peasant

    2. Rex

      I can see where the theme of austerity gives a wedge to break down Social Security and Medicare which should allow private “investments” to steal more from the rubes and the health megopolies to skim more.

      Is there more that I am missing about austerity? Seems soon they will strangle too many geese and kill the golden egg machine for themselves too.

    1. Rex

      Nice rebuttal there.

      Extrapolating your meager reply… No more stimulus for anyone and (I assume) balance the budget today.

      Yep. You are a genius. One of many. A lot of them are in D.C.

    2. Francois T

      Just another fact-challenged comment where the total lack of understanding of such a basic law like supply and demand is painfully obvious.

    1. Anonymous Jones

      What I find hilarious is the implicit assumption that crack is a bad thing.

      Is there some kind of conservation of crack principle? That if you give more crack to someone you’re taking it away from someone else?

      Crack is cheap, generally clean, and usually does exactly what it’s intended to do. That’s a lot better than most legal pharmaceuticals!

      How can more crack be a bad thing? Why *wouldn’t* a crackhead want more crack? Who the eff am I to tell this jonesing crackhead that his preference for more crack is a no-no in the delusional “World of Should”? Freedom, mother effers. Sing it to me like that dude who was once in Wham. Free-dom! Free-dom! Free-dom!

      Why is freedom restricted for crack lovers?!?!?! What did they ever do to you?!?!?!

      My slogan for ’12: More crack! It’s got an unfair rap!

      [Apologies to anyone who thought this was intended to be clever. It was intended to be the opposite of clever!]

      1. Anonymous Jones

        I think I was attempting to prove (in words, slimy little vermin-like words) the real reasons for the abandonment of all “hope for intelligent discussion”.

        I think I failed, but isn’t it only in failing that I could have ever succeeded?


        Where r me meds, again?

      2. ambrit

        Dear Anonymous Jones;
        (Any relation to Ol Lonesome?) Take a look at the actuarial tables relating to drug addictions of various sorts. Crack is the poster child for “Live Fast, Die Young.” Considering the percieved (around this corner of byteland at least,) war on the ‘lower classes’ being mounted by the ‘elites,’ widespread ‘hard’ drug addiction is an excellent way of ‘pacifying’ said ‘lower classes.’ “Panum et circuses” for the modern age.

  2. EB

    We do need a jobs program but to finance it we need to start taxing corporations, closing their loopholes abroad, and raising capital gains taxes among other things. The inequality of our financial system, where the top .1% owns almost everything, needs to be addressed. Congress needs to be thrown out and we need politicians that will work for the majority not the well-financed minority.

  3. Toby


    “The firm, to survive and thrive, can push labor costs more and more down, but labor costs are someone else’s income and consumption. That’s why it’s a self-destructive process.”

    That “can” is important in my opinion. What lies behind flat wages these last few decades is technology. Productivity climbs while our need for labour falls, hence profits can be siphoned towards capital. And since capitalism is about profit maximisation, which is justified as being the best way to deliver maximum possible social good via the infamous Invisible Hand, the ideology has no problem with the rich getting richer, cannot perceive the flaw. But anyway, were labour needed to keep this rising productivity going, wages would climb too, since workers would have bargaining power, they would be needed. There are factors other than technological employment involved, but I suspect it is the major one.

    But this need not be the death knell for human civilization, far from it. Where is it written that ever increasing consumption of pointless junk is humanity’s endless future? Who really believes that we get ever happier and healthier, collectively and individually, the the more money we get, the more economic transactions are taking place in the economy. Why must money and the price system have a such a monopolistic lock on where we believe value lies?

    Research shows again and again that happiness flatlines at about $60,000 a year, which is merely a figure representing access to shelter, travel and transport, education, creature comforts, etc. Isn’t it the case, therefore, that we need an entirely new raison d’etre, an entirely new justifying and motivating story? Capitalism has delivered as much positive as it could, now it’s time for something new, a new money system designed around new priorities such as environmental health, societal cohesion, democratic freedom, localised autonomy in a globally interconnected network of freely shared information. Shouldn’t that be what we’re trying to construct, rather than resurrecting ‘Growth’ and ever increasing amounts of economic activity?

    I believe so.

  4. MB

    Excellent measured commentary. I agree. It’s unfortunate that the reality is, a President must “go out in flames” to be able to try to mediate and negotiate a centrist solution.

    Nobody denies that cuts, waste and fraud need to be addressed, however:

    Nobody acknowledges that two facts have decimated the country all stemming from however you term it: maximizing and satisfying insatiable shareholder “return” via fraudulent financial devices and strategy and the gutting of the machinery of an economy to focus on two industries, both taxpayer funded ultimately – war and financial bombs. Exacerbated with funneling 50% of all worldwide revenue to private accounts with fictionalized taxation obligation, and we have a bankrupted nation.

    The narrative that it’s all due to the social net that taxpayers have paid into which are dragging us under is just an argument in an another complete universe – viewed from the universe of greed. The greed that would dump toxins their own children’s water, kill their kids with radiation spills and destroy their own children’s and grandchildren’s future. All for financial “return”.

    The right says, “free me from the obligation to others financially”. We would be happy to free you, if you would be willing to stop warring and stop implementing every financial fraud device you can devise. Stop exploiting everyone and we’ll set you free. You can’t have it both ways. Till then, pay your fair share for these policies of humanity destruction.

    1. blunt

      Well done, MB. Although I sometimes have to admit that I would rather set them free on an ocean liner, a large one, that would hold most of the world’s extraordinarily rich, and send it, like a ship of fools sailing the ocean blue, forever. Allowed to port for fuel and provisions, but never to disembark a passenger.

  5. Justicia


    No need to apologize for “late” posts. NC in 1st gear beats most blogs in 3rd. Just read you Salon post on “Why Big Banks are Getting Off Scott-Free.” You nailed it!

    I graduated from HLS in 1980 and during my three years there the law and economics boosters were competing with the critical legal studies (CLS) movement. Roberto Unger (who went back to Brazil to advise the Lula government — and look at whose economy has zoomed) was my jurisprudence prof. He shredded the law and econ ideologues. But who got the funding? Not CLS.

    One of my close relatives was a Federal judge and she was regularly invited to the judicial training seminars that you referred to. We had a long conversation after she attended one of these indoctrination sessions. I’m happy to say that I had at least some influence in helping her see the class bias of the law and econ stuff she was being fed as economic truth. Alas, she’s now deceased and her court (SDNY) has been colonized by law and econ ‘bots.

  6. TC

    My analysis completely confers with Rob Johnson’s: collapse is at hand. Likewise do I agree with the scope of solutions he mentions, save an infrastructure bank as proposed by Rohatyn. Glass-Steagall first, then reconstitution of the Bank of the United States. The “infrastructure bank” Rohatyn and marionette Obama propose is the fascist sort further institutionalizing a public-private partnership throwing good money after bad and widening the chasm between haves and have nots.

  7. Jack Parsons

    The missing word is velocity. If I had ever watched Sesame Street I would know how to explain it better, but: the economy consists of money moving. The faster it moves, the better the economy. This is the “velocity”.

    The best way for a government to achieve velocity with a stimulus is to target the stimulus where it will most increase velocity. This means, people who are more likely to spend it than save it. This mean poor people, the poorer the better. Paying the 90% of the workforce who cannot get jobs that can support a family to “lean on a shovel” is the best possible stimulus, as they are the mostly likely to spend it. Plus, “leaning on a shovel” keeps people in the habit of getting up in the morning and putting on clothes; an important life habit that has major effects on labor availability in better times.

    Duchamp said, “museums are where art goes to die”. Putting money in a bank or rent-seeking is not velocity. Rent-seeking is where stimulus goes to die.

    1. gs_runsthiscountry

      Velocity indeed, Bernanke has done his part, and then some, and then some, to the the determent of savers (as has been well written in the blog-o-sphere and elsewhere).

      Why people keep turning to the FED for the next move, and not calling their senator or congressman I have no idea. The ball has been in the fiscal court for quite a long time now, time for 535 and the prez to play ball.

      Maybe James Carville’s new catch phase should be, “Its Demand Stupid.”

    2. A.Lizard

      “Rent-seeking is where stimulus goes to die.”

      Wish I’d said that. But since I didn’t, I’m sure I’ll find occasion to quote it.

      Interesting pseudonym.

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