“Punting the Pundits” is an Open Thread. It is a selection of editorials and opinions from around the news medium and the internet blogs. The intent is to provide a forum for your reactions and opinions, not just to the opinions presented, but to what ever you find important.
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New York Times Editorial Baord: Betting on Default
Imagine a lender demanding that you miss a payment. That is the situation described in a recent article in The Wall Street Journal. In 2013, GSO Capital Partners, the debt-investing arm of the private equity firm the Blackstone Group, refused to renew a $122.3 million loan to the Spanish gambling company Codere unless it delayed paying interest on other existing debt. Why? It turns out that GSO had placed a bet that Codere’s existing debt would not be paid on time. When, lo and behold, the payment was late, GSO collected on its bet. [..]
The Dodd-Frank financial reform law was supposed to curb speculation in swaps. But as The Journal has reported, hedge funds are increasingly using swaps to wager on whether weak firms will live or die. RadioShack, the troubled consumer electronics retailer, is one of several prominent examples. In December, RadioShack’s total debt came to about $1.4 billion, but swaps outstanding on the performance of the debt totaled $23.5 billion. Similarly, J.C. Penney, the ailing department store chain, had total debt of some $8.7 billion, but swaps outstanding on the debt totaled $19.3 billion. [..]
The next crisis will differ from the last crisis in its origins and effects. But it is probably safe to assume that sooner or later, poorly regulated credit derivatives will again play a role in damaging the economy.
Edward D. Kleinbeard: A Republican Ruse to Make Tax Cuts Look Good
As Republicans take control of Congress this month, at the top of their to-do list is changing how the government measures the impact of tax cuts on federal revenue: namely, to switch from so-called static scoring to “dynamic” scoring. While seemingly arcane, the change could have significant, negative consequences for enacting sustainable, long-term fiscal policies.
Whenever new tax legislation is proposed, the nonpartisan Congressional Budget Office “scores” it, to estimate whether the bill would raise more or less revenue than existing law would. [..]
The Republicans’ interest in dynamic scoring is not the result of a million-economist march on Washington; it comes from political factions convinced that tax cuts are the panacea for all economic ills. They will use dynamic scoring to justify a tax cut that, under conventional scorekeeping, loses revenue.
When revenues do in fact decline and deficits rise, those same proponents will push for steep cuts in government insurance or investment programs, because they will claim that the models demand it. That is what lies inside the Trojan horse of dynamic scoring.
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