This Week in Flubs

Strike two...

It’s been a bad couple months for credit ratings agency Standard and Poor’s (S&P). In their August downgrade of the US’s credit rating, the initial report contained a $2 trillion mathematical snafu. When pressed, S&P essentially acknowledged math is hard and they’d erred but stood by the new rating as it was based on political factors.

That said, erroneously sending an email announcing the downgrade of major European country is far harder to explain. And that’s what happened on Thursday, when S&P sent an email stating France had been downgraded. Except they hadn’t been. An hour later, S&P owned up to the error. But how exactly does a ratings agency—meaning their primary task and reason for existence is to rate—erroneously email a rating change? In their statement, S&P announced an investigation into what they call a “technical error” in an “automated system.”

The moral of the story: Reviewing credit raters’ historical accuracy and tallying up their errors shows skepticism regarding raters’ opinions is quite warranted, and reform of their government-directed oligopoly quite desirable.

Birmingham’s budget blues...

Alabama’s Jefferson County filed for bankruptcy this week, the largest municipal filing on record. And in its wake, many assume this means the widely feared, much-less-seen municipal default wave is coming. Or that Wall Street is somehow to blame.

Sure, Jefferson County defaulted. But in 2008, not 2011. This bankruptcy filing is just the latest chapter in a three-year-long story. In fact, municipal defaults are significantly lower this year than last.

Additionally, most of the blame for the incident should lie at the feet of the EPA and federal government, not Wall Street. Sure, Wall Street helped Jefferson County finance a bond issue. But the reason the bond was floated—that Jefferson County ultimately couldn’t afford—was the Clean Water Act’s application to county sewers, thus requiring an overhaul. Oh, and rampant graft and corruption in local government didn’t help.

The moral of the story: Regulation can carry unintended consequences. We highly doubt many in government considered cleaner water can cause county bankruptcy.

More political gamesmanship...
How long does it take to either approve or deny a new oil pipeline stretching from Canada to points in the US? Judging from the proposed Keystone XL pipeline, the entirety of a president’s first term.

For the past three years, this proposal has awaited federal government approval to begin construction. The route, logistics, construction and hiring are all planned. But due largely to a debate over environmental concerns, the government’s held off in okaying the job. Recently, President Obama weighed in—stating the buck stopped with him on the issue.

Friday, he announced his decision. In his statement, Obama said the government would study the issue and possibly re-route the pipeline around environmentally fragile areas. And decide by 2013. In no small coincidence, that’s just after next year’s elections. Pure politics, in our view.

The moral of the story: The US could do with a lot less red tape and an expedited process with reduced political influence.

Taxing (real) trees?

Apparently, the federal government believes Christmas trees are suffering from an image problem. At least, that was the announced motivation behind a proposed 15-cent tax on the purchase of real Christmas trees.

Apparently, left to their own devices, it appears Christmas fans have been buying an increasing number of fake trees. So they propose to tax real Christmas trees in order to fund a “buy real” advertising blitz.

But if your aim is promoting fresh trees’ competitiveness, shouldn’t the tax be imposed on artificial trees? That way, your competition’s prices marginally increase and the revenues fund your Christmas Tree Promotion Board (we didn’t make that up).

The biggest question is: Will the fake lobby take this lying down? Next year, will they lobby for the right for their own tax to promote pink tinsel trees? More rationally, they’ll likely sit back, content the real tree industry, with a self-imposed incremental cost increase, is inadvertently building the case for fake trees. Good thing those with Festivus poles have little to worry about . . . yet.

Most folks seem to figure out annually the appropriate type of flora on which to hang their collection of ornaments without government input. And whatever the industry, in our view, consumers are abundantly capable of making their own decision about which good to buy.

The moral of the story: All levity aside, the biggest problem here is the fact the government is engaged in picking winners and losers through policy. A tactic that’s proven ineffective myriad times (see Solyndra, for one).

Oh, and not to worry. The administration delayed the tax’s implementation shortly after the media frenzy kicked into full gear. Guess they were just kidding ‘bout that tree tax.

None of these flubs are likely to carry much market or economic impact, but the lessons gleaned—if implemented—could aid the US economy in future years.