The Gold Standard | Wrong label

In his latest Op-ed. for FT, Dr. Roubini calls the S&P action misguided. I do not agree. As I had written before, they named their criteria for the US to avoid default; the US political establishment did not come anywhere near fulfilling those criteria. They got a downgrade. What is wrong with that?

If this action is misguided considering the context in which it arrived, then there was never a right time to downgrade European sovereign debt in the last two years. It is no surprise that European politicians are frothing at their mouths at the credit-rating agencies. But, I doubt if any commentator called the credit-rating agencies names for downgrading European sovereigns.

In any case, we all know what the fundamentals are and do not need the credit-rating agencies to tell us that. Their rating actions are affirmations of well-known facts and not new information.

His proposed solutions – countries with market access to borrow heavily for the short-term but commit to a credible medium-term fiscal plan and for the European Central bank to engage in quantitative easing, etc., – are not without their costs. Perhaps, space constraints prevented him from discussing the costs or that there are only inferior alternatives. Another mitigating argument in his favour is that he proposes these solutions to avoid a depression risk and not a recession risk which, he now thinks, is a foregone conclusion.

Perhaps, in his judgement, any price is worth paying to avoid a depression.


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.