It looks to me like a very normal cyclical development.

From The Angry Bear:

"Yield Curve

By Spencer:

The yield curve is strongly positive, and this is getting all kinds of blog comments.

They range from Arnold Kling saying "in my view, this is perfectly rational, and it shows that the short-run effect of the fiscal stimulus is negative"

To Greg Mankiw saying "that it signals future economic growth. In many ways, however, this is an unusual downturn, so it is not entirely clear to what extent historical relationships are a useful guide going forward'


It looks to me like a very normal cyclical development. For example according to this traditional indicator of what drives the yield curve the surprise ought to be that the yield curve is so flat.

I'm inclined to go along with Mankiw on this one and can not understand how this support Kling's conclusion that this demonstrates that the impact of fiscal stimulous is negative.

After responding in the comments section I thought I would add this chart to demonstrate my point. At the bottom in December the bond market was discounting a deflationary, depression.
Now it is discounting an economic recovery. It is a normal cyclical development.

Posted by spencer"

Me:

Don the libetarian Democrat says:

Today, 3:33:25 PM

“I don't understand the problem. From the point of incentives, you want: 1) Short term rates to stay low, giving investors a disincentive to buy govt bonds, but rather stocks and corporate bonds. 2) Longer term interest rates to be rising, so that investors will buy longer term bonds and feel confident about a recovery. Both of these are designed to attack the Fear and Aversion to Risk, which Bernanke believes is central to this crisis. I don't know what people expected, but that's what's happening, and I think that it's working. Slowly. Similarly, infrastructure investment is meant to show confidence in the future. A tax break for investment would presumably also be to attack the Fear and Aversion to Risk, by providing an incentive to invest now. I also favored a Sales Tax Holiday, to give people an incentive to spend now. I can see people disagreeing with my views, but I don't see that they are a priori false. By the way, this seems to follow from remarks by investors like James Grant, who see the current situation as a buying and investing opportunity, especially for Value Investors. Don the libetarian Democrat says: Today, 7:03:34 AM “"Rising long term interest rates will stifle both the economy and corporate profitability." It 'will' at some point, but we are nowhere near those rates of interest yet. "both could be happening at the same time. "I think it is probably a little bit of both, discounting the supply of new debt, but I detect...there is a pick up in confidence about the future," said Fisher." Thanks for the reference. That's what I'm saying. This is how it's going to work. We've just gone through a panic. Investors are still overreacting at the slightest doubt, which is why they're worried about much higher interest rates going forward. Yet, it is also showing confidence about the future, which is how it's supposed to work. The connection with interest rates on home loans is a little more problematic. It doesn't mean that they'll have to shoot up immediately, but, eventually, they will rise. By the way, I don't think holding down mortgage rates is a good idea.

For now, I would judge those to represent descriptions of serious frauds rather characterizations of actual PPIP loopholes

TO BE NOTED: From Angry Bear:

"PPIP: Bad, Maybe, But Not THAT bad

Tom Bozzo

I've been hearing about various potential schemes to game the PPIP, and Jeffrey Sachs gets in on the action with a pure self-dealing scenario (via Americablog):

Here's how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.

Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.

Did Sachs read the PPIP Legacy Securities term sheet [PDF] before writing that? That sort of transaction appears to be forbidden under the 'Governance and Management' section of the summary terms:

A Fund Manager may not, directly or indirectly, acquire Eligible Assets from or sell Eligible Assets to its affiliates, any other Fund or any private investor that has committed 10% or more of the aggregate private capital raised by the Fund. Private investors may not be informed of potential acquisitions of specific Eligible Assets prior to acquisition.

Geithner and Summers may or not be the poster children for 'regulatory capture,' but they're not stupid. (For that matter, Sachs's scenario presumes that only Citi can detect the underlying worthlessness of the asset, so FDIC will permit the maximum leverage under the program.)

Among these are some more sophisticated scenarios that use secret deals and kickback schemes to get around the anti-self-dealing provisions of the PPIP. For now, I would judge those to represent descriptions of serious frauds rather characterizations of actual PPIP loopholes. Such time as Treasury (or DOJ) is caught playing see-no-evil with those, then there may be something more than an attempt to pile on.

This is not at all to say that there are not serious and valid concerns regarding PPIP design. Among other things, I'd be much happier if I saw the likes of Larry Ausubel and Peter Cramton hired to ensure that the private managers effectively compete for the public subsidies and do not overpay relative to some reasonable assessment of fundamental (not necessarily 'market') asset values.

Added: The anti-self-dealing terms from the Legacy Securities program, quoted above, are from a 4/6 revision of the term sheet (thanks to KHarris for pointing that out) and may have crossed paths with Sachs's article (also of 4/6); they're a little different from the Legacy Loans terms sheet where a prohibition on self-dealing has been a feature all the time. Here's the original (and apparently current) language for the Legacy Loans sheet:

Private Investors may not participate in any PPIF that purchases assets from sellers that are affiliates of such investors or that represent 10% or more of the aggregate private capital in the PPIF.

It would take a lawyer to determine how this compares to the Legacy Securities terms. The ban on communication prior to asset sales looks new and makes it clear that schemes to coordinate Legacy Securities sales with purchasers are improper.

An issue with many of these critiques is that they seem to combine elements of the two programs. Sachs's example is based on leverage ratios allowed under the Legacy Loans program but not Legacy Securities, in which case other Legacy Loans program terms should apply.

Posted by Tom Bozzo"

"Without training in modern econometrics it is simply impossible to assume something that stupid."

Robert Waldmann with a good post on Angry Bear:

"Barro on Keynes Barro and Grossman

Robert Waldmann

Robert Barro wrote an op-ed in The Wall Street Journal. The substance of the op-ed is to report an estimate of the Fiscal multiplier 0.8 which is less than one. Thus, according to Barro, a stimulus will partially crowd out of investment, consumption or net exports and not just reduced leisure. Paul Krugman took Barro to task for using the huge WWII stimulus in his estimates, since the economy was at full employment during WWII. So have Matthew Yglesias using his Harvard BA in philosophy from Harvard and Kevin Drum using his BA in Communications from The California State University in Long Beach.

I might want to reassess Long Beach State, but I think the reason that Yglesias and Drum immediately make the same argument is Krugman is that Yglesias and Drum don't know about modern econometrics. Barro is using an instrumental variables regression in which wartime military spending is considered to be an exogenous variable which is correlated with government consumption. The implicit assumption is that we can safely assume that the fiscal multiplier today is identical to the fiscal multiplier during World War II, because the economy is basically similar. Without training in modern econometrics it is simply impossible to assume something that stupid. ( A GOOD POINT. I KEEP WONDERING WHAT BARRO'S PHILOSOPHY OF MATH AND THE HUMAN SCIENCES IS. )

There is also a severe gap in economic theory, at least as remembered by Robert Barro. Wouldn't one think that there must be some model( YES ) in which correlations( MATH IS A WAY OF EXPRESSING CORRELATIVE REASONING. HOWEVER, IT IS STILL SIMPLY CORRELATIVE REASONING. THE MATH IS SIMPLY A HEURISTIC TOOL. ) vary depending on the general conditions of the economy -- say like whether at current prices there is excess demand for goods or excess supply of goods.

Of course, no one could expect Barro to know that there is a vaguely Keynesian model, which differs from the neoclassical model only because of rigid nominal wages and prices, in which the economy can be in one of three different regimes, Keynsian (with insufficient aggregate demand), Classical (firms can sell as much as they want but real wages are too high so workers are unemployed) and repressed inflation (excess supply of labor and goods).

I'm mean who's ever heard of the Barro-Grossman model (A General Disequilibrium Model of Income and Employment Barro, Robert J.; Grossman, Herschel I.; American Economic Review, March 1971, v. 61, iss. 1, pp. 82-93 [stable JSTOR link added for those with access])? Certainly not Robert Barro.

The passage quoted by Krugman about what Keynes thought is inconsistent with The General Theory. However, it can be corrected easily. The accurate description of the history of economic thought is "John Maynard Keynes Robert Barro and Herschel Grossman thought that the problem lay with wages and prices ... will mean that wages and prices do not have to fall."

Look I sympathise. Like Barro, when I was young and reckless I did embarrassing things which I have tried to cancel from my memory. I really wish I could do that as well as he has."

The historical context must be considered when addressing the question of why people behaved as they did, even in economic behavior. This is what I call the Existential Context. The context of the 1930s was far different than ours.

Also, there is a difference between economics and political economy. Barro doesn't seem to see a difference. Too bad.

"severe poverty has increased since welfare was reformed is not mentioned in the discussion."

A good point by Robert Waldmann on Angry Bear:

"Welfare Reform "Not a Disaster" ?

Robert Waldmann

Pieter Beinart serves up some conventional wisdom in the Washington Post. Unfortunately he is totally wrong, because he hasn't checked the facts in the past 7 years.

Beinart wrote

"Older liberals remember .... They also remember the welfare reform debate of the mid-1990s, when prominent liberals predicted disaster, and disaster didn't happen."

Oh didn't it ?

Try telling it to the severely poor

Beinart is a lazy fool, as I argue after the jump.


I'm afraid Mr Beinart will be down to one example soon. The welfare reform was promptly followed by an amazing boom which no one predicted. Then he lost interest in the issue. Beinart decided that, since poor people did OK in the late 90s, welfare reform was a good idea.

What happened with welfare reform and without an extraordinary boom ? The number of Americans in "severe poverty" grew 26% from 2000 to 2005, that's what happened. "Severe poverty" is severe, "A family of four with two children and an annual income of less than $9,903 - half the federal poverty line - was considered severely poor in 2005."

So welfare reform worked great didn't it ? Now one might argue that the problem was that the economy was horribly bad from 2000 to 2005 (and the comparison is with 2000 not 1996) however the 2005 severe poverty rate was the highest in 32 years including the severe recession in 1982. The immense severe poverty rate was achieved with moderate unemployment.

All data from this McClatchy article

Beinart only concludes that welfare reform wasn't a disaster, because he only paid attention to what was happening to the poor for a few extraordinary years.

In 2000 one could argue whether the improvement in economic conditions of the US poor was due to the booming economy, due in part to the booming economy and due in part to welfare reform or more than 100% due to the booming economy which more than undid the damage of welfare reform. Now, with more data, it might still be possible to avoid reaching the third conclusion, but I haven't read the argument. The fact, the plain simple fact, that severe poverty has increased since welfare was reformed is not mentioned in the discussion.

This is important, because the nonsensical clearly false claim made by Beinart is definitely the conventional wisdom. Notice that Obama only promised to cut the taxes of 95% of US families. The other 5% mostly weren't those so rich that he proposed raising their taxes (that would be between 1% and 2%). They were the poorest who could only be given more money by unreforming welfare.

It is well known that welfare reform was followed by an improvement in the economic conditions of the poorest Americans. The minor fact that this is no longer true and hasn't been true for years is not worthy of notice. "

This does need to be addressed. The lack of a decent social safety net is essential for even a small government arrangement.

"I do not think this is a good way of looking at the data. "

As a big fan of Alex Tabarrok and Angry Bear, I didn't find this disagreement particularly insidious, but I'm glad about this post from Alex Tabarrok:

"Comparing Recessions II

Earlier I posted some graphs from the Minneapolis Fed comparing this recession to a mildest, median, and harsh recession. Questions arose as to how the Fed was defining these categories - harshest overall? how defined? at what point? I took a look at the underlying data and saw a sensible procedure which seemed to make sense of what the Fed was doing and I posted that in the comments. After further questions, however, and after contacting the Fed it's now clear that the Fed is doing something else.

The mildest, median and harshest recessions in the Fed's graph are Frankenstein recessions, recessions cobbled together by taking bits of pieces of each past recession and assembling them to create a mild, median, and harsh recession - none of which ever occurred. I do not think this is a good way of looking at the data( I AGREED WITH THIS VIEW IN AN EARLIER POST ). To avoid some of these problems I have simply graphed all of the data below for every past recession. In the extension to this post you can also find the Fed's justification of their procedure from an email to me.

From Terry Fitzgerald at the Minneapolis Fed.

You are correct that the "mildest, median, and harshest" recession lines do
not represent single recessions. Please allow me to try to justify our
procedure. We spent considerable time weighing alternative approaches.

In drawing our timeline "length of recessions" graphs, we wanted to
illustrate where the current recession lies relative to past recessions at
each month of the recession. So for each month (or quarter), the lines
would tell you what had been the largest, median, and smallest decline in
any recession to that point.

The median line would indicate that one-half of the past recessions had
experienced larger declines, and one-half had experienced smaller declines
to that point. Similarly, no recession had a larger decline to date than
the "harshest" line. (And similarly for the mildest line.)

One feature of this approach is that the mildest, median, and harshest lines do not shift over time. So we can update just the "current" line in our graphs without all the lines shifting.

...I knew that insightful readers might wonder about this point, and I hoped that the note would at least explain what we did.

We are not trying to do anything deceptive or misleading with these charts.
Our aim is only to provide some empirical context to the current recession."

Just post the recession data as it's gathered. That's suspect enough without fiddling with it.

So I tried to reproduce the chart and came up with something that looks like this.

From Spencer on Angry Bear:

"Honest Research?

By Spencer

This chart from the Minneapolis Federal Reserve is starting to appear on various web site.

Minneapolis Fed

Among others, Alex Tabarrok of Marginal Revolution published it.

Marginal Revolution


It is an interesting looking chart, very similar to many I do.

But it struck me as odd, there was something wrong with it.

I can not remember a single recession where employment did not fall as this chart shows.

So I tried to reproduce the chart and came up with something that looks like this.

Source: www.bls.gov via Haver Analytics

Note that it shows the 2001 recession as the mildest recession and it did experience falling employment. This line as well my line for the harshest recession in 1957 are very different
than the chart published by the Minneapolis Federal Reserve and referenced by several
libertarian/conservative blogs. Their harshest is about a full percentage point deeper than mine.

But the Minneapolis Fed did publish their original work and I was able to determine that there chart was not of an actual recession. Rather their lines representing the mildest and harshest recessions are completely artificial creations that have little or no relation to any actual historic event.

Rather than show the 2001 recession as the mildest recession, they went through all of the first months of the 10 post WW II recession and found the smallest observation and made that the first observation of their mildest recession line. Next they went through the second month of the ten recession and found the smallest observation in the second month of recessions and made that the second month of their mildest recession. They repeated this process for 18 times, each time making the smallest observation of that particular recession month for their line of the mildest recession. So their line might take observation one from 1957, observation two from 1981, observation three from 1973, etc., etc., . Their so called harshest recession line was created using the same methodology.

Here is exactly how they described the lines in their publication:

This page places the current economic downturn into historical (post-WWII) perspective. It compares output and employment changes during the present recession with the same data for the 10 previous recessions that have occurred since 1946.

This page provides a current assessment of “how bad" the recession is relative to past recessions. It will be updated as new data are released. This page does not provide forecasts, and the information should not be interpreted as such.

The following charts provide information about both the length and depth of recessions.

Minneapolis Fed

This strikes me as a major case of intellectual dishonesty. At no point is the reader shown that their mildest and harshest recessions are completely artificial creations that have no relation to any actual recession.( THIS IS BAD IF TRUE )

The other point that strikes me is how libertarian/conservatives like Alex Tabarrock uncritically accept such biased research from fellow right wing sources without any question. It strikes me that a tenured, PhD, economist should know that there was no post WW II US recession where employment did not fall and should have recognized that there was something wrong with this chart. But more than likely, this chart will now be passed around and used by libertarian/conservatives to demonstrate that there was a post WWII recession where employment did not fall and that will become one of their standard talking points.

Am I being too harsh on the Minneapolis Fed and people who uncritically accept and pass on such biased research?

P.S. This is not the first time I have caught the Minneapolis Fed or Alex Tabarrock misrepresenting data.

Posted by spencer at 2:49 PM "

I don't put too much stock in government statistics. They are of limited use. However, the objections to this research seem to make sense. Also, it fits in with my belief that it is too soon to tell where we are going in this downturn. I, of course, hope for a much easier time this year than others, if the correct policies are put in place.

" The credibility they sold was worth tens of billions to the financial innovators who bought it."

Robert Waldmann on Angry Bear about the Credit Ratings Agencies:

"Waxes poetic about the lost credibility of the AAA rating. For possible comic value I share my reflections.

What went wrong with the ratings agencies ?

I think the central problem is that the ratings agencies long provided a service of immense value to society, and were paid a tiny fraction of that value to do so. The loss of credibility of the ratings is one of the causes of a terrible recession ( TRUE ). This loss is more likely to cost the world trillions in lost output than mere hundreds of billions. Sure seems that the credibility of the ratings agencies was worth, at least, hundreds of billions to the world economy. That dwarfs the market capitalization of the ratings agencies ( TRUE ).


We lost that because we collectively decided to take it from them rather than paying them what their credible ratings were worth. For decades they provided messages of one to three letters which were collectively worth hundreds of billions per year. They were paid their costs plus a normal profit margin, just as if it wasn't a miracle that so much value could be created with so little effort.

Their credibility was immensely valuable but not to them.

Then they were tempted by innovative financial instruments and also got tired of getting only a tiny fraction of the social value of their services. So they sold their credibility for a few billions. The problem is credibility gets damaged in the deal( LOST ). The credibility they sold was worth tens of billions to the financial innovators who bought it( VERY TRUE ). They converted it into cash, but they have paid themselves much of that in bonuses and blown the rest buying into their own spin. Now it's gone ( I HOPE SO ). If I knew what it came from in the the first place, I would have an idea as to how to recreate it, but I never figured that out ( TRY FRAUD ).

"they trusted the ratings agencies and that they assumed that the national average house price would certainly not decline. "

Robert Waldmann on Angry Bear agrees with me, I think, about the Citi problems with CDOs:

"Eric Dash and Julie Creswell who argue that Citibank took insane risks holding CDOs on its books, because of a failure of the fixed incomes risk management team, reckless 'short termism' and two amazing mistakes. The two alleged mistakes are that they trusted the ratings agencies and that they assumed that the national average house price would certainly not decline. These are actually similar mistakes as at least one rating agency, S&P, making the same insane assumption about house prices.

They write:

when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.

Later that summer, when the credit markets began seizing up and values of various C.D.O.’s began to plummet, Mr. Maheras, Mr. Barker and Mr. Bushnell participated in a meeting to review Citigroup’s exposure.

The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting and reviewed by The New York Times.

and

C.D.O.’s were complex, and even experienced managers like Mr. Maheras and Mr. Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup’s business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt.

and finally

To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person [who worked in the CDO group] said,

This is amazing. It's not as if no one with an Op-Ed column in the New York Times was discussing the possibility of a national housing downturn. I can't believe that this was an honest oversight. The anonymous source doesn't say either "“I just think senior managers got addicted to the revenues and arrogant about the risks they were running. As long as you could grow revenues, you could keep your bonus growing.”

Wow.

Brad Delong argues that 43 billion is a small part of Citibanks problems. He is talking about market capitalization not book equity which matters given capital requirements. I mean also not a tiny part, and 43 billion here 43 billion there and soon your talking real money. "

I actually believe that this was either fraud, negligence, or fiduciary mismanagement.

"the value of the reputation of the credit rating agency is so huge that no client can afford a large enough bribe.

Robert Waldman on Angry Bear addresses the following:

"The meaning of AAA changed after the introduction of CDOs and is different for corporate bonds and CDOs. Those are facts which an economic model should seek to explain. I have an explanation. What is your competing theory ?"

This means that implicit collusion can be maintained. That is, there is an equilibrium in which both agencies give generous ratings to new instruments and both damage their reputations when the crash comes. This is an unusual result. For a plain old cartel it is more difficult to maintain a collusive equilibrium -- a firm can profit in the short run by deviating. In this case, deviating to toughness is costly in the short run and well deviating is always costly in the long run because of the other agencies response.

So in this equilibrium, they rate sludge AAA. Then the crash comes and -- so what. They all have roughly equal amounts of egg on their faces. We can't do without credit rating agencies. They will still get as much business rating non-innovative assets as they would have if they were both tough. The new class of assets might vanish, but that was inevitable given the fact that the new assets are very risky and offer modest returns. The agencies profit from the period in which the toxic assets were issued and rated. So long as they gave similar ratings, the damage to both of their reputations won't hurt them at all.

Of course it will hurt investors who will have to do more research on their own, since they can't trust the credit ratings agencies as much as they would have been able to trust them in the world without financial innovation."

Okay. This is an answer to a question that I asked about Moody's: Namely, why should anyone trust them now?

The answer seems to be we have to, or at least trust someone who's as poor at this ratings business.

So, I asked this question:

"So in this equilibrium, they rate sludge AAA. Then the crash comes and -- so what. They all have roughly equal amounts of egg on their faces. We can't do without credit rating agencies. They will still get as much business rating non-innovative assets as they would have if they were both tough. The new class of assets might vanish, but that was inevitable given the fact that the new assets are very risky and offer modest returns. The agencies profit from the period in which the toxic assets were issued and rated. So long as they gave similar ratings, the damage to both of their reputations won't hurt them at all."

Why don't new ratings agencies, unsullied by this stupidity, start up and compete? What's the entry problem?
Don the libertarian Democrat | Homepage | 11.16.08 - 2:37 pm | #

Here's the answer:

"Dear I forget who Why doesn't a new credit rating agency enter about now ? I sure wouldn't advise anyone to try. The reason is that a credit rating agency is only worth anything (to its shareholders) if it has a reputation better than "who is that ?". This means that there is a huge barrier to entry. I would think that a new credit rating agency would have to rate for free for years and years before anyone would pay them anything.

That is to say I think that, even now, Moody's S&P and Fitch have valuable reputations -- less valuable than they were last year but still much better than no reputation at all."

Well, if there's an impossibility of entry, then you don't need to worry.

Here's my next comment:

Here's another point from "I forget who". The only way that your explanation works, namely, as long as they're all equally awful, is if there is an impossibly high entry fee. Since that's the case, you're pretty much stuck with your list of choices, however poor. It's true that you can do your own research, but that has its problems as well. However, if they're all equally awful, at least you could try and get them to compete on fees, so that you would at least pay the least amount that you can for this product. That, I believe, is regulated.
Don the libertarian Democrat | Homepage | 11.16.08 - 11:44 pm | #

We'll see if there's an answer.

Here's an older post on ratings agencies:

"Wednesday, October 22, 2008

"products that later turned out to be extremely risky, and in some case, worthless. "

NY Times posted on the congressional hearings on the ratings agencies. How timely:

"Members of Congress leveled sharp criticism at the major credit-rating agencies Wednesday morning, as the House Committee on Oversight and Government Reform held a hearing on these firms’ role in the current economic crisis.

Several lawmakers vented their frustration over what they considered to be egregious lapses at the agencies, Fitch, Standard & Poor’s and Moody’s.

Mark E. Souder, a Republican from Indiana, described their conduct as “gross incompetence.” Another lawmaker read from a series of instant messages, sent by employees of S&P, in which one analyst said they would rate a deal even if it were “structured by cows.”

In many cases, these ratings agencies assigned super-safe, triple-A ratings to structured products that later turned out to be extremely risky, and in some case, worthless.

These investment products, such as mortgage-backed securities, were created by financial institutions ostensibly to mitigate risk by pooling loans and selling parts of them off to investors. But many of the loans that were packaged in these securities were made to people with poor credit histories, little equity in their homes or overstated income."

Here's my comment:

“In the final few months of 2007, Moody’s downgraded more bonds than it had over the previous 19 years combined”

Interesting post on the FT by Sam Jones on Moody’s and the rating system:

“Then, on August 16 last year, after an internal revision of its ratings practices, Moody’s made an announcement that heralded the beginning of the credit crunch.”

And:

“The action was the first in a series of surprises for the credit markets. In each of the succeeding weeks, it seemed, Moody’s and the other rating agencies had more bonds to downgrade. And each set of downgrades was a convulsive shock. In the final few months of 2007, Moody’s downgraded more bonds than it had over the previous 19 years combined. Panic gripped trading floors. Titanic structured vehicles, created by banks to warehouse their “riskless” mortgage bonds, became untouchable for short-term investors. As a result, two big German banks revealed that they were within a whisker of collapse, and virtually overnight all the world’s banks stopped lending to one another.”

Please read it.

Let’s see, that was…about a year ago. Nice work

— Posted by Don the libertarian Democrat

And another post:

"Friday, October 17, 2008

"In the final few months of 2007, Moody’s downgraded more bonds than it had over the previous 19 years combined"

Interesting post on the FT by Sam Jones on Moody's and the rating system:

"Then, on August 16 last year, after an internal revision of its ratings practices, Moody’s made an announcement that heralded the beginning of the credit crunch."

And:

"The action was the first in a series of surprises for the credit markets. In each of the succeeding weeks, it seemed, Moody’s and the other rating agencies had more bonds to downgrade. And each set of downgrades was a convulsive shock. In the final few months of 2007, Moody’s downgraded more bonds than it had over the previous 19 years combined. Panic gripped trading floors. Titanic structured vehicles, created by banks to warehouse their “riskless” mortgage bonds, became untouchable for short-term investors. As a result, two big German banks revealed that they were within a whisker of collapse, and virtually overnight all the world’s banks stopped lending to one another."

Please read it.