Neel Kashkari on Whether a Debt Downgrade Will Be Worse Than Lehman. "Many are asking whether a downgrade could itself lead to a financial crisis," observes Neel Kashkari. "With the example of 2008 still fresh in many minds, the question has become: Would it be as bad as the Lehman Bros. bankruptcy?" He points out that although it is not possible "to accurately predict the consequences of an economic shock," recent examples "offer guidance." In 2008, "a number of once-cherished beliefs were turned upside down" (e.g., that home prices would never fail, that AAA-rated subprime securities are sound) and "when the beliefs were revealed to be false, massive shocks were inflicted on the economy." To judge whether or not this is possible with the debt, consider the following factors: "How strongly is the belief held?"; "How big an asset class does the belief support?"; "How wrong was the belief?"; and "What is the economic context in which the shock is taking place?". He runs the belief that Treasury bonds are risk-free through this metric, and comes to this grim conclusion: "These factors suggest that a U.S. downgrade has the potential to be as bad or perhaps worse than the Lehman shock... We may not be certain what will happen if U.S. credit is downgraded, but there is no upside to finding out."
Aluf Benn on Netanyahu's Overreaching Diplomacy. "[D]iplomatic successes, like battlefield victories, can inspire overreach," writes Aluf Benn of Netanyahu's foreign policy. "When he visited America in May, Mr. Netanyahu picked a fight with Mr. Obama over a formula for peace proposals. That raised his popularity at home and pleased Republicans in America. But in the long run, it could cost Israel dearly." At this point, in Benn's estimation, "America needs Israel, but Israel needs America much more" -- and the "Palestinian problem will not go away." Following the Arab Spring, Netanyahu should have established "a new understanding" with Obama regarding the American-Israel friendship, rather than picking a fight: "He should have worked out an agreement on how to reignite the peace process, rather than antagonize the American president." But it's not too late for Netanyahu to change course in light of the Arab Spring. The "Arab storm" has not yet reached the shores for Israel. Until it does, Netanyahu should take more "political risks at home," or else his "timidity and cynicism will prove costly for Israel."