Moral Hazard, part seven

Events have provided the excitement I feared. (Brace yourself for another digression.) S&P has announced that the U.S. government is about as reliable a debtor as Belgium, (which can scarcely agree on the language in which to debate issues.) Their published reasoning offers a little for each participant in the debate. They wanted firm commitments to larger debt reduction over the next decade. They were also dismayed there was no action to increase revenues. The larger message is one of uncertainty.

My window on the congressional debate did not come via CSPAN, as I have no television. What inspired this series of posts was way off headline news in the commodities markets. It took no special expertise to see that traders feared an economic slowdown. We've been through enough before to see some reliable indicators: oil prices fall and there is a shift in demand from luxuries to necessities. This time there were anomalies.

What caught my attention was a new pattern of volatility in prices on the CBOE which made no sense according to models based on business as usual. This said the problem was not in the values of the individual commodities, it was uncertainty about the value of money used to price them.

To be useful on a trading floor, a theory of value has to be something you can state clearly in a short sentence. Congressional debate on debt and budgets failed this test by orders of magnitude. It sent a dramatic message of confusion and uncertainty. The debacle over the FAA's authority to collect taxes on airline tickets, in which an attempt to save $14 million/year resulted in a loss of revenue greater than many years savings, convinced many observers legislators didn't even understand the short-term effects of legislation. This could be a salutary lesson about politics, experts and leaders.

American history is full of examples of political disagreement. With one notable exception, these were generally settled in ways which did not require armed conflict. That exception is commonly viewed as a catastrophic mistake.

Despite a constant struggle between parties and groups with conflicting agendas there have been a series of agreements where opponents found they could agree on some higher-level principle of government even as they disagreed about detailed consequences of some action. When this type of political process breaks down, there is nothing left but a mad scramble to get yours before the whole system collapses. This is a clear and present danger which faces us.

A forgotten earlier cycle led to an administration elected on the motto "Less government in business, more business in government". The exact nature of this business came to light later. Legal attempts to redress the matter ended with Secretary Fall acquitted of receiving a bribe one Doheny was convicted of giving. Can any readers with long memories fill in the blanks?


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