Mt Rainier, Mt Rainier National Park, Washington

Mt Rainier, Mt Rainier National Park, Washington, originally uploaded by Marilyn Dunstan Photography.

Photo of Mt Rainier, Washington, taken as traffic was stopped for seasonal road maintenance.

President Obama’s Departure from Seattle, September 25, 2011

President Obama’s Motorcade Approaches, Seattle, Washington (image on Flickr)

President Obama visited Seattle, Washington on September 25, 2011, making a number of campaign stops, covered by here by PBS, here by The Daily Beast as “The New Obama” and here by the Seattle Times.

As our President passed by in his motorcade, I wondered at length and extravagance of campaigning, of the time spent by all parties, the Democrat President and his opponents in the Republican party. On the one hand, campaigning is a test of endurance and wills where the contender must consistently outperform opponents to prove him or herself. On the other hand, campaigning carries a heavy cost. A cost measured in campaign contributions and the expenses of campaigning. An opportunity cost as time spent campaigning is time not spent elsewhere. A cost measured in obstruction, as the party not in office sees no benefit in compromise.







President Obama Waving, Seattle, Washington, September 25, 2011 (Image on Photoshelter)

President Obama waved as he passed by, leaving Seattle, and on his way to more campaign stops in California. Campaigning, speaking the message, bringing in campaign contributions, a little over a year out from the election.

One could hardly fault President Obama for his new campaign tone. It has become increasingly clear that a group of Tea Party conservatives has frightened the broader Republican Party to the point that our American system of compromise has broken down. The resulting stasis has meant a government lurching from crisis to crisis. Obstructionism is no way to move a nation forward.

Surely there must be a better way.

Reform the campaign system.

The political process is getting in the way of governance.

There is a balance of risks involved.

Air Force One Leaving Seattle, Washington, September 25, 2011 (Image on Photoshelter)

Tenth Anniversary, September 11, 2001 Attacks

September 11, 2001 Damage, World Trade Center, New York, NY, December, 2001 (image on Photoshelter)

It is difficult to believe that ten years has passed since the terrorist attacks of September 11, 2001. The destruction of the World Trade Center Twin Towers; the attack at the Pentagon and the heroic action by the passengers of United Flight 93 in bringing down the hijacked jet before it could reach its target in Washington D.C. Almost three thousand lives were lost in the attacks.

So much has happened in the time frame since the attacks, including the war on terrorism instigated by President Bush in the aftermath of the attacks, and a continuation of the fight by President Obama.

Importantly, Osama Bin Laden, whose Al Qaeda organization was responsible for the attacks, was killed in Abbottabad, Pakistan, in a U.S. C.I.A. raid conducted by special forces, including the Navy Seals unit that killed Bin Laden. Bin Laden’s death provides a sense of justice for the horrific damage his organization has done; however, importantly, it also stopped his ability to conduct more attacks. His death, however, may provide the weakened Al Qaeda organization he leaves behind with motivation for future attacks.

These events string themselves along the arrow of time as particularly significant and memorable. They take their place in the hall of memories amongst the family gatherings, the company picnics, the morning rush hour, the vacations and the hometown football victories and vigorously drown them out. We will always remember where we were when the September 11, 2001 attacks were launched. We will remember what we were doing when Osama Bin Laden was killed. These events are etched in our memories and will march down the hallway of time with us as we age and relate this history to the younger generation.

We will remember those who lost their lives. Our hearts go out to them and the families they left behind. We stand behind our government in its efforts to bring Al Qaeda to justice and we applaud the raid against Osama Bin Laden that resulted in his death.

This tragic event has had an impact upon all of us that will be with us the rest of our lives.

September 11 Memorial, Lower Manhattan, NYC, December, 2001 (image on Photoshelter)

While a sense of time may give us pause to consider past events there is no place that shows the impact of time more than its impact on the health of first responders and others in the World Trade Center area who were exposed to the dust from the attack.

New York City Fireman and Police Vehicle, Lower Manhattan, NYC, December, 2001 (image on Photoshelter)

For those exposed to the World Trade Center’s dust, time is not simply a memory of the event; it represents the impact of inhaled noxious pollutants, marching in physiological time within the body, damaging bodily systems. A witches brew of toxic substances contained in the dust has triggered a variety of dangerous health effects. It is clear that as time marches on, the toxic aftermath of September 11, 2001 still impacts first reponders.,

There is a World Trade Center Health Registry for people that lived, worked and went to school in the World Trade Center area.

Legislation has been passed to provide compensation to first responders, however it does not currently cover cancer, as discussed in CNN’s Dr. Sanjay Gupta’s coverage of the dust impacts of September 11 attacks.

The impacts of the the World Trade Center attacks will more fully emerge as time unfolds and the effects of dust, particles, toxic and alkaline substances play out on the people affected.

Standard and Poor’s Downgrade of the United States Long Term Sovereign Credit Rating from AAA to AA+

American Eagle on Perch, Skagit Valley, Washington (image on Photoshelter)

Rating agencies, including Standard and Poor’s, Moody’s and Fitch, use different, proprietary models to rate debt and financial strength. While there may be no such thing as a perfect model, each company promotes its own model and methodology. Rating agencies serve a purpose in providing the marketplace with information on the financial health of the companies, governments and financial instruments they rate.

Taking into account differences in models (and agency inclinations), it is not surprising that rating agencies should differ in their ratings from time to time. Thus, Standard and Poor’s downgraded the United States credit rating from AAA to AA+ while Moody’s and Fitch have maintained their ratings while warning that future downgrades were possible if the United States did not enact debt reduction measures and if the economy weakened.

A more definitive statement would have been made if all three major rating agencies had dropped the rating of United States debt.

Standard and Poor’s rating change reflects their perception of the political stasis leading up to the recent move to raise the debt limit.

The Standard and Poor’s downgrade remained in place after a $2 trillion dollar error in their calculations was discovered by the Treasury department. Standard and Poor’s defended their decision, reinforcing the perception that the downgrade reflected to a large degree the inability of our government to get the job done.

Standard and Poor’s is under attack for their rating of mortgage backed securities involved in the financial debacle of 2008. These securities were rated AAA just prior to their default. The U.S. Justice Department is investigating Standard and Poor’s for their ratings of these instruments.

The ratings process is complex. Complex models are involved. When the ratings model indicates problem areas indicating a potential downgrade a number of paths may be taken. A rating agency may work with the organization to solve its problems (or to assure the model is adequately capturing an organization’s weaknesses and strengths). Either way, the focus is to assure capital adequacy.

This may give the organization an opportunity to avoid a downgrade while fixing the problem and risk a potential disastrous cascade into insolvency. There is a balance of risks -- a cascading failure could be a far worse alternative both for the organization , related entities and the economy. However, measures taken to solve the underlying problems should be appropriate, rather than window dressing which overvalues assets or undervalues liabilities.

If the agency does not downgrade an organization (or financial instrument), they risk a potential hit to their reputation if the entity does tank while holding the original, pristine rating.

In many instances companies pay a significant fee to be rated. This raises the issue that the agencies are serving the companies they rate rather than the overall public (or potential investors). This issue is to some degree offset by the reputation issue that rating agencies face when they fail to downgrade a company (or financial instrument ) that fails. Their services are judged by their ability to accurately rate entities.

The actual downgrade aside, Standard and Poor’s was correct in its appraisal of the ineffectiveness of our government in addressing the national debt issues. Standard and Poor’s mentioned the political brinksmanship, differences between political parties, and the failure to consider tax increases among other issues.

The sad thing is that our elected representatives performed so horribly that it gave Standard and Poor’s an opportunity to downgrade government debt from AAA for the first time in the history of the United States. There are many that depend on the United States to provide a stable financial milieu; the threat of a default; the inability of some representatives to compromise was an arrogant abrogation of their electoral duty to act in the best interest of the United States.

It seem that the rating agencies are, in a way, a force unto themselves that rest above governments and pass judgement upon them. Do we really want the institution of money to rule us in this way?

Wikipedia article on 2011 downgrade.

Entitlements

Entitlements

Completing the George Washington Memorial Bridge (Aurora Bridge-SR99), Seattle, Washington, 1932 (B&W)

This photo of the George Washington Memorial Bridge (Aurora Bridge or SR 99) was taken by my father as it was being completed in 1932, during the period of the Great Depression. It was converted to black and white. Connecting Seattle’s Queen Anne Hill to Fremont, spanning over the Lake Washington Ship Canal, the Bridge’s construction was an engineering accomplishment in the midst of hard times.

A bridge spans an obstacle to bring two areas together, to allow passage. It may be used symbolically in others areas such as a music bridge, an interlude that connects two parts of a song, or a bridge loan (interim financing).

For me, it also symbolizes bridging the gap between work and retirement.

In these days before the August 2, 2011 deadline to raise the national debt limit, it also symbolizes the need to bridge the gap between parties, to compromise on a solution to our national debt problem. Should that attempt fail, it will symbolize solutions to solve the financial gap.

As we march towards a potential default of the national debt, a large part of the debate centers around the impact that entitlements have on our nation’s expenditures. Entitlements consist of Social Security, Medicare and Medicaid. Entitlements have grown to comprise a large portion of our nation’s expenditures and contributions to our nation’s burgeoning national debt.

Social Security comprised 20% of the nation’s 2010 fiscal year budget while Medicaid and Medicare together comprised 23% (Wikipedia). Together, the three programs comprised 43% of the nation’s 2010 fiscal budget. Moreover, the cost of these three programs are expected to grow over the coming years.

With such a considerable portion of our nation’s budget tied up in entitlement programs, it is difficult to find areas to cut. If you leave entitlements alone, you are left with 57% of the budget. If military expenses (20%) are left untouched, only 37% of the budget is left to work with.

Historically, the concept of cutting Social Security has been likened politically to touching the electrified “third rail”. Social Security, Medicare and Medicaid have a storied history and a large degree of public need and acceptance (and entitlement) that makes them difficult to reduce.

There has been a greater willingness to tackle the issue of entitlement programs in the recent national debt talks; however such endeavors may leave a sense of disconnect with the public who may be unaware of the cuts should they actually occur.

There are many factors reflected in the increases in entitlement costs (and their projected costs into future years). One common factor is demographics.

Demographics

Baby boomer demographics is a major reason for the increase in entitlement costs now and into the future. Baby boomers are considered to be those individuals born between 1946 and 1964, following World War II. There was a peak in births during that time period that has resulted in increased proportions of individuals for that cohort as the cohort has progressively moved down the arrow of time from birth to retirement.

Consider a snake that has swallowed a mouse for dinner; you can see the progress in the snake’s digestion of the mouse as the mouse’s shape progresses down the long sleek lines of the snake’s body. In a demographic diagram, the baby boomer population exhibits somewhat similar characteristics, impacting each age group disproportionately as it ages.

Thus, the increased birth rate during the baby boomer years results in increased expenses as baby boomers age. These increased older populations will stress entitlement programs, with fewer younger workers to provide the population base to pay for benefits for the older population.

The Challenge

The projected growth in entitlement spending represents a real challenge, and must be faced by creative solutions that address the problem for not just the immediate future, but for the long term. Such solutions must address needed social needs while at the same time managing costs.

Political Risk

Mt St Helens crater and Toutle River, Cascade Range, Washington, 2011 (image on Photoshelter)

Discussions between Congress and the White House regarding raising the National Debt Limit are an example of the considerable political risks in our current system. My concern is that failure to agree on a solution to raise the debt limit may cascade into financial disaster. It is a balance-of-risks issue that our leaders will ultimately be judged on.

Political risk issues include:

• The polarization of political parties such that the more extreme elements dominate each party, and become nominated for office, crowding out the moderates.

• The emergence of non-elected individuals ‘asking’ that candidates sign ‘pledges’ which politically tie candidates to certain positions, limiting their flexibility to act.

• The inability of politicians to act in the interest of the nation.

Politicians need to be able to consider the best interest of the nation as a whole. Their inability to do so jeopardizes our nation. The clear and present danger is that the United States will default on its debt on August 3, 2011 if the national debt limit is not raised by that time.

Should the United States default on its debt, there would be serious ramifications. Ratings agencies have already given warnings regarding our debt rating. In this July 14, 2011 Bloomberg story, Moody’s placed the United States’s Credit rating under review for a downgrade. In this July 16, 2011 LA Times article, Standard and Poor’s has also warned that they may cut the United States’s top AAA debt rating as a result of the lack of an agreement to raise the debt limit.

In an article in Reuters 7/18/2011, Moody’s stated that the United States should “eliminate its statutory limit on government debt to reduce uncertainty among bond holders”.

A decrease in the United States’s ratings by rating agencies would likely result in an increase in the interest rate that our country pays on our debt. This would increase the cost of financing the United States debt and also have reverberations throughout the marketplace, driving up interest rates generally. Failure to raise the debt limit could conceivably cascade into a financial catastrophe.

The seriousness of what could be a cascading financial disaster is brought home by an article in the Insurance Journal: S&P Threatens Downgrade of Insurers, Financial Firms Over Debt Ceiling” indicating that S&P could downgrade a number of financial institutions should the government fail to act to raise the debt limit.

Currently, Treasuries are regarded as “risk-free” currencies. Should our Government’s rating be downgraded they and other government securities may well be assessed higher capital charges in regulatory and rating agency models. The securities would included various securities including Fannie Mae and Freddie Mac, the latter two key to the mortgage market. Increased capital charges may potentially result in financial institutions being downgraded by rating agencies. If a financial institution is so downgraded as a result of the government failing to act on the national debt, it could trigger other events. “Ratings triggers” in the financial institution’s policies could be triggered, allowing a large withdrawal of policyholder funds from large investors, perhaps at book value,

An increase in the interest rate would have impact in the marketplace, in valuation of assets, in home and auto loans and refinancings. It would alter institutional and personal behavior. Depending on the size of the interest rate increase, an increase in rate could impact stable value funds that promise payout at book value. Importantly, it would cost more to finance the United States debt with a higher interest rate.

Treasuries have been long regarded as ‘safe’ and it is be “interesting” to speculate how changes in their quality rating would reverberate throughout the financial marketplace in the event the U.S. government fails to raise the debt limit by August 3, 2011.

President Obama does not want to “kick the can down the road” instead preferring a longer term solution to the problem that includes spending cuts and revenue increases. The Republicans do not want to consider revenue increases. Some have signed a pledge not to increase taxes and are constrained by that.

The danger is that the United States will default on its debt on August 3, 2011 if it does not raise the debt limit.

We have an examples in history where one small thing cascaded into a major calamity. One event that comes to mind is the Great Seattle Fire of 1889 where glue boiling over into a gasoline fire ignited wood chips and eventually burned down 32 blocks of Seattle, including business district, wharves and railroad terminals.

Do we want our government leaders shackled by the bounds of rigid ideology, watching the debt limit “glue pot” boil over into the “incendiary” market of interest and credit risk, cascading into a market conflagration that “burns” many in our economy?

I would hope our leaders get wise and come to an agreement that will avert disaster in our financial markets. Maybe I am wrong. Maybe these risks won’t materialize or will do so to a minor extent. However it is uncharted waters and do you want to bet the farm that the serious risk will not materialize? President Obama needs to consider a short term deal that gets us over this deadline. The Republicans need to consider raising taxes, even if it means violating a pledge not to raise taxes.

In 2012 the voters will hold our leaders accountable if they watched the pot boil over into the flames and cascade into disaster when they could have come to agreement.

It is an issue of balance-of-risks. The risks of watching the debt pot boil over and cascade into a financial conflagration over over some ideological shackles are just not worth it.