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Standard And Poor’s Is The Broker Who Lost All Your Money: There Is No Real Risk Of Default

What does Standard & Poor’s action lowering the U.S. outlook to “negative” mean? What are the likely ramifications of the U.S. deficit and debt? I do not want to conflate two completely different issues, so let’s take each in turn.

First, I have stopped paying any attention to anything that S&P says or does. Its performance over the past decade has revealed it to be incompetent and corrupt – it sold its AAA ratings to the highest bidder. It is the broker who lost all your money, the girlfriend who cheated on you, the partner who stole from you. Since the portfolios we run never rely on its judgment or analysis, we simply do not care what it says about credit ratings.

But big bond managers like Bill Gross of Pimco do matter – he invests hundreds of billions of dollars. We pay close attention when smart managers like him announce they are out of the Treasury market, which he did last month.

Many people misunderstand the U.S. deficit. First, it is stimulative to both the economy and the markets. Look at what happened under Reagan and Obama and most of Bush II – the economy recovered from recession and the markets rose along with the deficit.

Second, Social Security is fine. Sure, the retirement age will go higher, there will be means testing, and the income cutoff for contributions ($106,000) will likely double. But it will remain solvent. Medicare is much trickier, as the United States pays two times what most countries pay for health care but gets lesser care.

The current debate about deficits looks like more politics. Look at the voting records of those posturing about the debt. The “deficit peacocks” voted for new entitlements (the prescription drug benefit — Medicare Part D), went along with a trillion-dollar war of choice in Iraq, and supported (for the first time in U.S. history) a major tax cut during wartime. I find it hard to take their deficit noise as a bona fide fiscal concern.

After Standard & Poor’s missed the greatest collapse in history – indeed, they helped create it by rating junk mortgage backed securities Triple AAA – they are now over-compensating. As I mentioned on The Big Picture, there is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and you don’t want them in a Bear Market.” That especially seems apt with regard to S&P.

The deficit has been with us for a long time. Since investors are continuing to lend money to Uncle Sam at exceedingly low rates, there does not appear to be any real fear of a default. That is what matters most to bond buyers — and it’s why I never care what S&P thinks on this.

By: Barry Ritholtz, The New York Times, April 18, 2011

April 19, 2011 Posted by | Congress, Consumers, Debt Ceiling, Debt Crisis, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Lawmakers, Medicare, Politics, Social Security, Standard and Poor's, Wall Street | , , , , , , , , , , | Leave a comment

Judicial Elections: You Get The Judges You Pay For

Legal elites must come to terms with a reality driven by the grass-roots electorate: judicial elections are here to stay. Given this reality, we should focus on balancing important First Amendment rights to financially support campaigns with due process concerns about fair trials.

An ugly, expensive campaign for a seat on the Wisconsin Supreme Court is but the latest example of what is now common in judicial elections: millions of dollars in misleading television ads, subsidized by lobbies that have cases before the bench.

In 39 states, at least some judges are elected. Voters rarely know much, if anything, about the candidates, making illusory the democratic benefits of such elections. Ideally, judges should decide cases based on the law, not to please the voters. But, as Justice Otto Kaus of the California Supreme Court once remarked about the effect of politics on judges’ decisions: “You cannot forget the fact that you have a crocodile in your bathtub. You keep wondering whether you’re letting yourself be influenced, and you do not know.”

The need to run multimillion-dollar campaigns to win election to the court in much of the country renders the crocodile ever more menacing.

For more than a quarter of a century, voters have rejected efforts to move from an elective to an appointive bench. Last year, despite a campaign led by Sandra Day O’Connor, Nevada voters became the latest to reject such a change.

Scholars, judges and advocates who find intellectual comfort in seeking to eliminate judicial elections are indulging a luxury that America’s courts can no longer afford. Instead they should focus on incremental changes to what Justice O’Connor bluntly calls the “wrong” of “cash in the courtroom.”

More than 7 in 10 Americans believe campaign cash influences judicial decisions. Nearly half of state court judges agree. Never before has there been so much cash in the courts. Measured only by direct contributions to candidates for state high courts, campaign fund-raising more than doubled in a decade.

But this is only part of the financial story. Nationally, in 2008, for the first time, noncandidate groups outspent the candidates on the ballot.

Perhaps most tellingly, a study of 29 campaigns in the 10 costliest judicial election states over the last decade revealed the extraordinary comparative power of “super spenders” in court races. The top five spenders in each of the elections laid out an average of $473,000.

In 2009, the United States Supreme Court dealt with this issue, holding that due process is violated when a judge participates in a case involving a party that spent a great deal of money on the judge’s election effort. The case before the court involved a West Virginia Supreme Court decision overturning a jury verdict that awarded a $50 million judgment against Massey Coal Company.

One of the justices in the majority of that 3 to 2 decision, Brent D. Benjamin, had been elected after Massey Coal’s chief executive spent $3 million on his campaign. The United States Supreme Court held, 5 to 4, that due process was violated because of the lack of an impartial decision-maker. The court made clear, however, that campaign spending requires the disqualification of a judge only rarely.

A year later, the high court held, in the Citizens United case, that corporations and unions have the First Amendment right to spend unlimited amounts of money in election campaigns. In light of these two decisions, corporate and union officials must engage in a perverse guessing game: they want to spend enough to get their candidate for the bench elected, but not so much as to require the judge’s disqualification if the campaign is successful.

Rigorous recusal rules are an important step, but merely disqualifying a judge on occasion is insufficient. The most obvious solution is to limit spending in judicial races. States with elected judges should restrict how much can be contributed to a candidate for judicial office or even spent to get someone elected.

That solution has long been assumed to be off the table, though, because the Supreme Court ruled in 1976 that while the government can limit the amount that a person gives directly to a candidate, it cannot restrict how much a person spends on his or her own to get the candidate elected. Nevertheless, large expenditures to get a candidate elected to the bench undermine both the appearance and reality of impartial justice.

The Supreme Court’s 2009 decision properly focused on the $3 million in campaign expenditures, not the $1,000 that was directly contributed. In the legislative and executive offices, it is accepted that special-interest lobbying and campaign spending can influence votes; but that is anathema to our most basic notions of fair judging.

Thus, the Supreme Court should hold that the compelling interest in ensuring impartial judges is sufficient to permit restrictions on campaign spending that would be unconstitutional for nonjudicial elections.

States should restrict contributions and expenditures in judicial races to preserve impartiality. Such restrictions are the only way to balance the right to spend to get candidates elected, and the due process right to fair trials.

By: Erwin Chemerinsky and James J. Sample, The New York Times, April 17, 2011

April 18, 2011 Posted by | Campaign Financing, Constitution, Corporations, Democracy, Elections, Lawmakers, Politics, States, Unions, Voters | , , , , , , , , , , , , , | Leave a comment