This may be one of the most important chart out there for understanding the bursting bubble in our near future. (Here is a bigger version, for those eager to look at the details, via Felix Salmon.)
The Financial Times offers an explanation:
It comes from a new report, issued by the BIS and Basel Committee’s joint forum, on the subject of securitisation incentives. But what it shows has much wider, more current implications.
According to the report, between 1990 and 2006 — the year in which issuance of Asset-Backed Securities (ABS) peaked — assets with the highest credit rating rose from a little over 20 per cent of total rated fixed-income issues to almost 55 per cent. Think about it. More than half of the world’s debt securities were, for all intents and purposes, considered risk-free. In 2006, that was nearly $5,000bn of assets.
The financial crisis had a lot to do with triple-A ratings being slapped on to subprime securities which didn’t warrant them, we know that. The report says between 1990 and 2006 ABS accounted for 64 per cent of the total growth in the amount of AAA-rated fixed income, compared with 27 per cent attributable to the growth in public debt, 2 per cent to corporate and 8 per cent to other products.
But watch what starts happening from 2008 and 2009.
The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply. The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it’s true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut of central bank liquidity facilities accepting government IOUs as collateral. Where ABS dissipated, sovereign debt stood in to fill the gap. And more.
It’s one reason why the sovereign crisis is well and truly painful.
It’s a global repricing of risk, again, but one that has the potential for a much larger pop, so to speak.
This is not good. Anyone interested in cutting spending?
Veronique, thanks for continuing to provide such outstanding information on NRO. You are truly one of the few beacons of conservative light at this site.
By the way, your recent debt limit talk at Hillsdale was a superb explanation of the situation for a layman such as myself.
Reply to this commentLinkReport AbuseVeronique, nice article.
You ought to reprint your article from Reason the other day on how the Red States actually are leeches from the government. As you put it, "The role of ideology may be to make contradictory impulses seem coherent and connected. "
A lot of "conservatives" get a pass around here because they talk a good game.
Good read.
External Link
Reply to this commentLinkReport AbuseDatDude, here is a snippet of Veronique's article:
"One possible explanation is that the voters are misinformed. According to this theory, the people who benefit the most from federal spending simply don’t understand how much money they receive; they assume their tax dollars are subsidizing others when in fact they are the ones being subsidized. People in rural states might be convinced that liberal urban Northeastern jurisdictions get large subsidies for entitlements, welfare, and industry bailouts, while failing to understand how much their own states benefit from agricultural and welfare spending. They may mistakenly equate life in a low-density environment with self-sufficiency. Subsidies and welfare from the federal government help maintain this illusion, enticing them to vote for advocates of smaller government. By contrast, voters in highly urban areas may assume they are the ones who get the most subsidies. In turn, they vote for big-government politicians, thinking that welfare spending will ease social frictions in big cities. Ultimately, everyone is wrong.
Another explanation holds that voters are simply irrational. In the words of the George Mason economist Bryan Caplan, “Voters often see themselves as they want to be, not as they really are. People in red states tend to think that ‘government is the problem,’ so they tell themselves that big government is mostly a problem in blue states. People in blue states tend to think that ‘government is the solution,’ so they tell themselves that their government takes care of people.”
A third reason is politicians in red states talk one way about pork in their districts/states and often vote another way in D.C. Very few voters actually have a clue how their representatives vote outside issues that get a lot of media coverage.
Reply to this commentLinkReport AbuseWait, you're telling me partisans are mis-informed? ;)
It's a good read, I like to see the cognitive dissonance among partisans. It helps me find the flaws/inconsistencies in my own theories.
Not a lot of difference between the avg Daily Kos reader and Red State reader. They are just emotionally irrational for different reasons.
Reply to this commentLinkReport Abuse55% of sovereign debt issued is considered risk free? This sounds like grade inflation and giving every kid in little league a participation trophy -- another symptom of our culture that just can't stomach the idea of saying no.
On the other hand, maybe its just like idyllic Lake Wobegon, Minnesota, where "all the children are above average."
Reply to this commentLinkReport AbuseWow. If I could engrain one idea into the popular culture, it would be the fear of the unseen. So often, people will analyze things based on what they see without understanding the "unseen" effects. For instance, when the government issues a bailout to a company in the form of a loan (whether it was Lockheed in 1971, Continental Illinois in 1984, or GM in 2008) and the company pays back the loan, people think the bailout was a good idea. But they fail to see the unseen effects on the price of risk for companies going forward. Once companies take on some belief that there will be a bailout, they will also take on more risk than would otherwise be prudent. This explains why Lehman Brothers, as well as Lehman Brothers' creditors, accepted more risk after the Bear Stearns bailout; they expected to be bailed out. The Lehman collapse was the result of an unseen effect. Of course, most people took the opposite lesson: that the failure to bailout is the problem...
Reply to this commentLinkReport AbuseAs depressing as it is, these posts are the best thing on NRO most days. Great info about the coming train wreck.
I suspect Derb has it right. There is no will to make the changes that reality requires. Therefore those changes will be against our will. It will be a disorganized retreat from the status quo, perhaps punctuated by periods of panic and civil unrest.
What comes after is open to conjecture.
Reply to this commentLinkReport AbuseAnyone interested in cutting spending?
Nope, just in giving Obama the discretion to do pretty much whatever he wants to.
Reply to this commentLinkReport AbuseYour chart also highlights something interesting about corporate bonds...the incredible expansion of corporate triple-A ratings during one of the worst recessions in history. On its surface, this seems counter-intuitive...unless the rating agencies have lost their objectivity or they've become a political tool for this administration. It's worth closer inspection of that slice of the chart alone...the magnitude of the change from 2007 to 2008 and 2009 is astounding. It looks to be over a 10x increase.
Reply to this commentLinkReport AbuseHow about we cut spending by nearly 4 trillion dollars over the next ten years plus raise a little revenue by closing some loopholes and eliminating some tax expenditures. With a mixture of, say, 83% spending cuts and 17% revenue increases we could have a pretty good start.
But it appears a solution like this is simply impossible so we will end up at the last minute passing a clean(ish) debt ceiling increase of 2 trillion dollars with no spending cuts. Certainly no Medicare cost control.
Nothing like the uncertainty of Obamacare, of course. This uncertainty about the credit rating of the USA is mostly Kabuki so I wouldn't worry about it much.
Reply to this commentLinkReport Abuse"Why cut spending, when you can simply log onto the computer at the Fed, and print more money? Easy peasey, I don't see what the big deal is." - Ben Bernake
Reply to this commentLinkReport AbuseGreat chart.
Curious to see 2010 numbers.
Reply to this commentLinkReport Abuse