THE COMING MUNICIPAL BOND CRISIS
The following segment on 60 Minutes this evening is a must see. The segment covered the state and local funding crisis in the USA. Meredith Whitney was a special guest and predicted that the crisis would unfold in the “next 12 months”. Whitney says the states are susceptible to hundreds of billions in losses and local insolvencies could be widespread.
This is a particularly interesting development if it were to materialize. Of course, municipal bonds have been very jumpy in recent weeks and as revenue constrained entities the states have been hit particularly hard by the crisis. The states are exactly like the nations of Europe so solvency is a very real concern here. Their bloated budgets and out of control spending has created severe balance sheets concerns. With a government that is leaning more and more towards small government it will be interesting to see if austerity impacts the US economy through the state funding channels.
We appear to have dodged a bullet in the form of maintaining a $1.3T deficit during this balance sheet recession (and through the coming calendar year), however, the risks at the state level remain largely unknown and difficult to quantify. If the shortfalls are as large as Whitney believes it’s likely that we won’t have the political will for more bailouts. Whitney believes the issues are potentially more frightening than the banking crisis:
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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81 Comments
unfunded liabilities and the wonders of cash accounting
don’t worry, stock will rise as sure as the sun tomorrow. everything is fine since we have Fed!
Another hugely overblown risk from somebody still, still, riding the coattails of her end of world forecast in 2007 for C.
Trust me, as has been the case over and over and over, the government WILL backstop the states if it comes to this.
There is still far more will for bailouts than there is for anything resembling sacrifice and tough decisions here. Was the Fed allowed to buy MBS? No. Did they? Yes. Will they buy munis if they have to? Yes. Did the Tea Party guarantee fiscal probity? Yes. Ok, where was their fire and brimstone talk the past few weeks when congress passed a new stimulus plan and spending bill?
The status quo is far more acceptable than anything else and stock markets KNOW this.
So ridiculous – all of this garbage IS priced in because ALL of it is a vestige of an event that is well in the past – the financial crisis. The ONLY thing test takes the market lower from here is some unknown event and at best, that is China (yes Europe will just buy the bombs).
as electrons are printed for these states(they saved GM, they’ll save cali), where is their reason to change going to come from?…..
judicous electron printing may not be inflationary in a deflationary environment, but who gets to do the judicious part?…..greenspan?….ben?…..w?….obozo?….maybe gov. christie.
if its not cullen or warren mosler then its ultimately over- and mis-used ….the genie will not go back into the bottle….i can just see cullen getting midnite phone calls from who knows who-but he would be saying yes sir instead of no money for u sorry……historical-see john kennedy
western social currency falls, gold (irrationally if u must) rises because nothing else does….its position is out of abdication of the others……but i don’t really care why.
lol – a rising market sure does induce cnfidence. judging by the responses.
B Farro, I completely agree with everything you said. All politicians will make the easy decision. At some point though, people will be fed up with the bailout game. I still believe a state bailout will not go over well at all with people in our country. How will the midwest states with massive unemployment feel about bailing out Cali? TPC likes to say we are united, and that might be the case currently, but no way will the people of Michigan and Ohio like hearing the amounts of money needed to bailout Cali and NY, even though their own states will need a bailout too.
I’m going to be very interested to see what happens in Ireland next month. I’m still amazed there are not riots over there.
This will be another way the Federal Government will usurp power from the States and centralize power in Washington. The bail outs will come with a price. That price will be loss of freedom, and accountability.
Agreed. The foundations of United States of America will be dismantled with states becoming nanny states ruled under quasi-socialist federal government. Our founding fathers must be turning in their graves.
Of course states can avoid this mess by declaring BK and restructure the gravy train pensions as it’s the underfunded pensions are the real cause. State and local employees had it easy too long as most if not all white collar workers in US do not get pensions. Chalk it to Jerry Brown of CA who allowed public employee union 25 yrs ago in CA.
“Our founding fathers must be turning in their graves.”
You should brush up on your history! The first thing the federal government did was take over state debts!
http://www.historycentral.com/nn/economic/Hamiltontorescue.html
To eludog
The people of the midwest wont feel it so they wont care other than general whining
If the fed govt went to every household and said we need you to give us 600 by dec 31 5o bail out california they would revolt. If the fed govt just” prints” 1T electrons what does the household in the midwest feel? Nothing. Just some comment about pain for future generations.
This is why the can be kicked for generations more, no one feels direct pain. Its just put on the national credit card and away we go to the next. Per mmt we can pay off every deficit and every pension liability and every debt to the moon and back. Its just an accounting identity after all.
They won’t feel that, but the outspoken media and various politicans will make sure the people think they will eventually feel the pain.
People and politicos clucking about some future pain is not pain. Things in this country would be far more lucid if pain was in the same time frame as the decisions. For example with medicare part B they put an extra however many trillions of unfunded liabilities onto future generations. Who cares? If it came out of todays pocketbook you would have national uproar. If even each one years of cost of that program was paid for in the parallel fiscal year you would have uproar because people would feel it. Instead it is classified as long term liability and we go about our business adding program after program with no associated pain, the exact same situation is why state and city pensions are out of control. Promises were made to buy votes where the costs were not accrued for in real time. Many states have skipped payments or have unrealistic (8% returns). If you went to every household and said look we need$ 1300 for medicare part B so you do your share to support it…oh yes we need$ 750 so our state workers can retire at age 54 with benefits you only dream of…along with countless other true costs than joe6pack wakes up. Otherwise it is all just words and some intangible” this has to be paid for in the future” which doesn’t hurt anyone.
There are big differences between U.S. states and Euro countries. The Euro countries are on the hook for bank losses plus critical welfare programs. U.S. states aren’t responsible for bank losses and the federal government controls the biggest share of social spending.
Cullen, any thoughts on this? It’s a pretty personal attack.
http://mercenarytrader.com/2010/12/weekender-the-trouble-with-modern-monetary-theory-mmt/
Superb reply!!!
Jack also seems to confuse monetary systems with bad government. He implies that MMT allows a government to make bad decisions. I’ve always said a government can screw up its own society without regard to the monetary system it utilizes.
Re, confusing monetary systems with bad government — I may well be guilty as charged, but on the other hand I find it hard to separate the two.
Monetary systems, and policy prescriptions stemming from an economic worldview, have to be weighed not just on their technical merit but on their real world results.
Take Keynesianism for example — a methodology that has been utterly corrupted and hijacked by real world political factors. Defenders of Keynes can say he never meant for governments to spend in the tough times and ignore saving in the flush times — leaving off half the equation — but this is pretty much what they have done. One could say “the ideas were not applied correctly,” but one could also say “did you ever really expect them to be?” As with investing and trading, irrationality and human nature are dangerous elements to leave out.
TPC States:
“If they just tax they will slowly drain the system of the currency in which they require us to transact. So, it is not rational to argue that Keynesianism is irrational. It is, by definition, IMPERATIVE.”
Drain the system of currency by taxing us…WTF. Do they not ever spend those receipts? Do they trash all tax receipts received? Do they vaporize them? That statement is stupid!
Everyone has an opinion. But not everyone who has a pulpit is responsible.
Opinions are like a certain part of the human anatomy. Everyone has one, and they all stink!
Well, the govt doesn’t spend your tax receipts, but that’s beside the point.
You ignored the whole point. If the govt runs a surplus and does not spend any money then what happens? You say my comment is somehow irresponsible (even though you clearly misunderstood it) so I hope you’ll explain to us all what would happen if the govt ran a perpetual surplus by not spending any money every year and simply taxing us to maintain this surplus.
What a delightful concept. The government collects taxes and does not spend any money at all.
The only time I sleep well is when the US CONgress is in recess – which is actually over 80% of the calendar year.
Just think – they turn the lights out and leave them out.
Brilliant!
Genius!
Hakuna Metada!
A Perpetual Surplus!? Why don’t we talk about water skiing in the Sahara Desert? The reality is that surpluses are anomalies, and very temporary ones at that.
And yes it is appropriate that the government attempt to infill this “divot” in personal consumption. In fact, they should probably fill-in the entire loss the public has experienced in housing and financial securities.
Oh! That’s right, they already did that for their wealthy masters, they just forgot about the other 99% of the population.
Here is a NEW concept: How about we as a nation begin to address the structural problems that underly all these “symptoms” that clog up blogs such as this? Problems like education, real financial regulation, the rapid attrition of the middle class.
Oh no, not that Mr. Bill!
So, in essence, you’re not willing to answer my question. The answer, in case you care, is that if the govt runs a perpetual surplus it will slowly drain the pvt sector of the currency in which it requires us to do business. Think about how that might impact economic growth. The govt balance sheet is not like that of a household or state. Therefore, it should not be treated as one.
I have little interest in idealogy and generally seek to avoid political labels. I am registered independent and hold views that likely qualify me as an equal opportunity offender for all major political parties. My distaste for Keynesianism does not include arguing that the government should never spend, and I agree there are certain aspects of capital ‘L’ Libertarianism that do not make sense — though this could be further applied to essentially all the ideological extremes.
I think the same (and appreciate what you do)…
Likewise. Thanks for the productive discussion.
Re Keynes,”leaving off half the equation” describes Governments financial behavior exactly. Also,I am waiting for an economist who factors in dishonesty when describing his theory of financial behavior.
Ever heard of Bill Black?
Nope, not meant as a personal attack in any way. Which is, in fact, why I went out of my way to say in the beginning it’s not personal at all.
“The hidden assumption in thought processes such as these it that we do not have to be vigilant, that we do not have to operate with a mindset of prudence and constraint, because “the government will never run out of money” and so we don’t need to worry”
Absolutely NOT!!!
Some people may want you to think that but NO! Again any monetary system can be abused and if the populace is not vigilant it will get fleeced. Take for example right now… The super rich who out right own the Republican Party (and have a very big down payment of the Democratic Party) want us to believe we live in a world where the government is fiscally limited and that government is evil. Do they really care or do they just want everyone who votes to care? Just the voters! Just look at the last “stimulus” passed. The super rich kept their tax cuts and it only cost them 2% decrease in SS tax – which in 2 years will be used to justify steep cuts in benefit because WE MUST cut benefits because SS is insolvent without them. No, the super rich want us to think we are on the gold standard not because they care about fiscal austerity, but because they want to ensure that the government stays the peoples enemy so that they can continue to increase their obscene share of the economy. If the government was their to serve the average person it would probably do so at the expense of their share of GDP. The last time the US economy was near full employment and sustained (1960′s) with reasonable stimulus and government management the super rich’s share of GDP was small and declining. And by the late 1970′s their share was its smallest ever and the Reagan revolution began – “Government is not the solution, but the problem”… he wasn’t talking to the average Joe there!
And in the sixties the rich paid their share of the taxes, remember a top margin 90%?
Your belief system that allows for a government / private partnership is a fatal flaw and some would argue is not what this country was founded upon. To those people I say “the only thing new is the history you don’t already know”. The difference now is that the technology that we use to discuss these salient points brings the “partnership” into full view and to some, with the covers pulled back it is a shocking view. To others including me, I say welcome to reality and now that you are awake and realize your marginalized position in this world get up off your arse and make a change, be self sufficient and do your part to starve this beast that you have just now realized is sitting at your dinner table and is happily eating your Childs applesauce.
I don’t think our founding fathers would be so upset with our progress. In fact, I am quite certain they’d be quite proud of what they built and the importance that it has taken on in the world. Contrary to what many would have you believe, this is still a democracy. The little guy still holds the power to enact real change. Part of generating that change is understanding the system in which we live and learning what is causing the current imbalances in the USA.
What our founding fathers did not envision is a country run by the banks and for the banks. They did not envision a country whose middle class is being destroyed on a daily basis. There are very real and simple causes to these problems and they will only get worse if people do not begin to understand the system in which we live and why these problems persist.
And an undemanding educational system.
“Your belief system that allows for a government / private partnership is a fatal flaw and some would argue is not what this country was founded upon.”
If it wasn’t what this nation was founded upon then why was it founded on a democratic republic? What is the purpose of giving the masses the right to govern themselves if the point is to not have a partnership?
Our founding fathers were very much in favor of using the government for the greater good. They nationalized state debt from the revolution; subsidized the news media; doubled the nation with a treaty; made public education a cornerstone of our democracy; etc…
If you want to know what some of our founding fathers would have thought about MMT, check out Ben Franklin’s views on paper money:
http://www.cooperativeindividualism.org/franklin_money.html
Misinterpreting MMT is behavior based on an unrecognised feeling that there is some kind of moral good in money itself that is being violated by governments. People often worship money but absolutely refuse to admit it to themselves. This results in a refusal to admit it is all relative in its valuation, and (for good example)a faith in gold.
The interesting thing is that, while she claims 50-100 muni defaults, she never mentions that there are thousands and thousands (well over 10 000) of bond issues out there. That’s 99.5% at minimum that don’t default. In addition, of those 50-100 that default (IF that even happens), 99% of those will eventually be made whole including coupon payments.
Yes, local defaults would cause a hiccup, but without a state default we’re not talking about any crisis. Whitney appears to be blowing this a bit out of proportion. I am not saying there aren’t huge problems because the austerity that will come from all of this will have very real impacts on the economy, but we’re not talking about anything on the scale of Europe or Lehman.
I believe this was tackled pretty well by, https://self-evident.org/ recently. Tackles this idea of municipalities being similar to Europe, and Whitney having no experience in bond markets.
The federal government is not revenue constrained until it goes bananas.
I know,I know …it can’t go bankrupt etc .. its got that special button that creates digital money when needed but that as its limitation and is not always that visible at first.
Is it not an illusion.
Think of a pubic corporation that trades at a fraction of a penny, it still exist does it not? They very likely could have converted all there bonds in to shares could they not. No more debt How nice …
They dilute them self in to worthless paper. But just a year before those shares may still have looked good.
Is modern money not like having some kind of a Generic Corporate Government issuing new shares called “Money” instead of borrowing. Can’t go bankrupt but it sure can go down hill can it not ?
It’s not possible to go against gravity.
At some point you have to actually be able to prove that this dilution is occurring. You can’t just keep saying the USA is going bankrupt or that the dollar is collapsing. Most of these people calling for a collapse of the dollar have been doing so for years and years. They’ve been wrong. At what point will they ever be right?
TPC, ok, you’ve got me, my thinking is lined up pretty much with yours on MMT. Your last retort WAS EXACTLY correct. Look, I am libertarian/conservative as they come, but the whole idea of an efficient market or that banks will regulate themeselves IS LUDICROUS.
We need fairly efficient, non CORRUPT and non STUPID regulators/prosecutors to guard the gates. They should be paid WELL, so that actual market participants, who know what the hell goes on and have experience, will be on guard.
Are you telling me Goldman held a position for a YEAR to “make markets”. Please, anything beyond a week or more likely a day is a DIRECTIONAL BET.
It’s all so very frustrating.
And let me be clear that I am not trashing libertarians. I just don’t believe it’s so black and white. I am all for personal liberties, but there have to be rules or else the corrupt among us will take advantage of the lack of rules. I would argue that the financial sector has to be heavily regulated as its productive capacity has proven far less necessary (and far more destructive) than other components of the economy. Don’t make Google jump through hoops to get things done. But please make Mr. Banker jump through hoops before he creates the next ticking timebomb derivative.
It’s not as simple as that, but I hope you get my point. It’s not political to me.
Ok TPC, now that I’ve caved to your cooky monetary theory, cave to mine and buy you some f’ing copper and rare earths!!!
And I’d be very wary on Google, their scumbag leader said that someone who does not believe in global warming is committing a criminal act. WTF?? but yeah, you gotta watch those banksters the most for sure.
Right on the mark, TPC, your teaching is important.
The libertarian utopia is a rampant meme on in US Culture. Smart people (some on Wall Street) know it’s garbage. Thanks for your fine blog. You are doing great work!
<<>>
“The more corrupt the state, the more it legislates.” –Tacitus
Or, the more complex the state and the larger the state, the more it legislates.
Thank you.
TPC
You are correct as long as the drain of dollars from the United States to foreign countries is accepted and continues it is price deflationary in the United States. There are more dollars floating around the world than in the US.
It’s the US major export,its differed inflation.If and when the dollars flow back in to the United States then inflation will become obvious. Until then the FED is almost like a would central bank.
You may want to check out the comment section at:
http://www.ritholtz.com/blog/2010/12/state-budgets-the-day-of-reckoning/
Who owns 60 Minutes, and how much can corporate media be trusted.
TPC – Just why can’t the European Central Bank continue to “create” Euros out of thin air and buy up the distressed debt of the cash-strapped members? And then down the road – forgive (restructure – it will never be paid off) that debt?
And why can’t the Fed do the exact same with the States?
And in fact, through inflation over the years everyone has been playing that game to one level or another.
The ECB is buying bonds from the nations in trouble.
Just a side-note to that, the ECB is collecting capital from the central banks now to shield for losses on those investments. Would the Federal Reserve also require a capital infusion if they incur losses?
“It should not shock anyone that there is a steady growth in the money supply. In fact, this is 100% necessary to meet the growing demand of a growing population and growing economy.”
I’m surprised that you embrace this myth. Any quantity of money can support the economy. After all, money is just a number. It’s not a consumption good.
I’m not saying there is no potential advantage to creating more money. For one thing, it generates income for the government. But it’s not “100% necessary” for growth, that’s for sure.
Its not the amount of currency its who gets it first.
I’ve spoken with a couple of sharp Wall St analysts today who reiterated the comments from S&P – Whitney is blowing this way out of proportion.
http://www.cnbc.com//id/40753330
MIght cause a hiccup, but I don’t think the govt will let a state go bankrupt and without a state bankruptcy this will cause minor tremors in the market, but nothing that will totally derail the economy.
“I don’t think the govt will let a state go bankrupt and without a state bankruptcy this will cause minor tremors in the market, but nothing that will totally derail the economy.”
I tend to agree with you, but what makes you think that the gov’t will move before the problem comes to fruition? They have never proven the willingness or ability to be proactive, and while leaders will ultimately bail out whomever needs to be bailed out, there will be a political hullabaloo (due to political positioning) before that happens.
They won’t have to be too proactive. If it came down to it they’d write a check. They’ve vowed not to let a bank go under again so there is absolutely no chance in hell they’d let a state go down.
From what I can best surmise, Currency valuation is simply based on faith. People by their nature are “irrational and corrupt” but they are also self preserving and nothing speaks louder than where people put their trust than with their money.
Regardless what American bashing pundits would have you believe; The US dollar is accepted as trade medium in every corner of the world (where not illegal by force).
Why, because people have faith in these United States and her peoples. They prove it by using our money as a store of their wealth.
As a resident of NJ I want out. The NJ Transit union has the politicians by the balls, don’t believe everything you read about Chris Christy. I’ve had to ensure TWO fare hikes this year on my commuting fees, I’m now paying close to $4,000 per / year to take a train to Manhattan. It used to be close to $2,300 only two years ago. They also killed out school districts subsidy since I’m in the wealthiest county, so now our local school taxes are sky rocketing. The only difference now, is that it get these uninformed sensatinist journalistic reports, but in reality NOTHING HAS CHANGED. The Unions and Mafia still run the state and make every decision to self enrich themselves. We still pay out double per / mile of road compared to the next state – Yes, NJ pays the most per / mile for roads compared to any other state, we also have the highest property taxes in the state. There’s almost no homes in Bergen County that pay under $10k per / year for property taxes, in my town most are paying between $15k to $20k or more.
There is a union for everything in NJ, and they all get to retire on full salary after 20 to 30 years of lazy service. See the movie “The Cartel” and you’ll be sick to your stomach about what goes on, and that’s just the teachers union. The Department of Education is a HUGE FAILURE that we’re still paying for and should be disbanded.
http://www.thecartelmovie.com/
Thank God there is no inflation.
ok, you are better off than Californians…state infested by Dem and Pelosi supporters
Ah, the myth of great big liberal CA. If only that were true. It’s much more right wing out here than the media and hollywood would have you think….
While it’s true that many Californians are more conservative than many people realize, it’s still a fact that our state keeps voting in liberal Democrats election after election. Look at our current top office-holders – Brown, Pelosi, Feinstein, and Boxer. Moonbeam and the three women all look like they were picked by central casting to play “ultra-liberal Berkeley-based politicians”.
Part of the problem is that the Republicans here keep picking right-wing nutcases to carry the flag. Well, that’s not strictly true. In 2010, the Republicans actually picked some centric politicians, and they still got crushed. And the percentage of incumbent victories would have made any communist party in the old Comintern proud.
Sad but true – looks like the only way we’ll get any real change in California is if we really do go bust.
SM
True, but it wont happen….
I think you forget that Pelosi is elected by her congressional district, rather than the state. But yes, CA is still the worse than the worst.
with my full payroll tax suspension and other adjustments to restore aggregate demand to full employment levels where it should be, stocks would double as would state revenues from sales taxes and property taxes and income taxes, etc. and the problems would go away.
TPC said:
“They’ve vowed not to let a bank go under again so there is absolutely no chance in hell they’d let a state go down.”
This is my feeling as well. What form will support take though? Another interesting facet of the debt game.
If it came down to it they’d write checks. I am sorry to all the free market people out there, but CA isn’t going bankrupt. It’s just not going to be allowed to happen. The US govt would be better off just folding up shop on the spot and I am not going to bet on that.
“Why, because people have faith in these United States and her peoples. They prove it by using our money as a store of their wealth.”
http://www.businessinsider.com/chinese-students-laugh-at-tim-geithner-2009-6
In his first official visit to China since becoming Treasury Secretary, Mr Geithner told politicians and academics in Beijing that he still supports a strong US dollar, and insisted that the trillions of dollars of Chinese investments would not be unduly damaged by the economic crisis. Speaking at Peking University, Mr Geithner said: “Chinese assets are very safe.” The comment provoked loud laughter from the audience of students.
There is big difference how foreigner look at DOLLAR/TB before and after 2008 crisis.
I would think muni support will have to be some kind of “program” so that regular investors feel ok playing along. I will not even approach how silly that is at the core, this is what we have.
I think Meredith has had her day in the sun – i seriously cannot imagine a scenario where the US govt would let a state file for bankruptcy. No matter how large the hole ends up being, it will get filled.
This is bs fear mongering. Meredith Whitney is a prop.
so, regardless the size of the debt and deficit, United States will never fail as long as Fed is willing to back stop everything, as long as the rest of the world continue using USD as the reserve currency? in that case, why are these governors in the TV clip worry at all?? just let the debt go infinite and beyond once and for all….
No one ever said the size of the deficit doesn’t matter.