The setting was a hearing of the powerful Senate Budget Committee. The Chairman is Kent Conrad (D-ND). Last I heard ND has no muni problems, but it was pretty clear that this group of Senators were well informed on the issues that cities, towns, counties and states are facing. Senator Conrad: (Link to Bond Buyer story)
We’re talking about a significant problem here. We need to be prepared with a plan in case we are approached by one or more states.”
A “plan? What plan? From Senator Joe Manchin (D-WV)
“20 to 30 states could be in serious problems”
Jeepers! 30 States Joe? Senator Manchin sounds like he is more bearish than Meredith Whitney. John Cornyn (R-Tex) added to the sense of concern. From a spokesman:
“Senator Cornyn is exploring ways to address the state financial crisis, including amendments to the bankruptcy laws”
BK? A State? What is that about? Is this the "plan"? A state bankruptcy has not happened in more than 100 years. Chairman Conrad summed it up:
His panel needs to come up with a plan to help states that approach Congress seeking assistance because of serious financial troubles.
We all know that munis across the country are in the crapper. That said, I was surprised at some of the hard language. Normally these folks don’t talk like this. I am thinking, “What do these guys know that I don’t?” “Why is there a need to revise the bankruptcy code to facilitate Municipal default?” The answer to those questions can be found in the words from the committee and comments from Bernanke. D.C. Inc is not throwing any life-lines to the sick states. (or so they say) Senator Conrad:
“I don’t think the House or the Senate are going to be very interested in bailouts to states.”
“Not interested in a bailout?” The understatement of the new year (so far). But the real interesting stuff came from Bernanke. He says he is not going to be there if the States need some of that fast cash he is providing to the federal government with QE.
“We have no expectation of intention to get involved in state and local finance”
That’s nice to hear. But my concern is that Bernanke seems to be in denial as to the extent of the problems with munis. In his world if the S%P is higher then all must be well in the economy. When asked if there could be a problem in muni land he responded:
“We don’t at this point see anything of that magnitude happening.”
“State and local governments have the tools to deal with their fiscal problems and debt”
“The municipal bond market currently seems to be functioning reasonably well”
Huh? Not a big deal? States can handle it, no problem? Muni market doing just fine? (what the hell was December?) Ben is not concerned about this as he is flooding the markets with liquidity. He thinks liquidity is the solution to solvency:
“The bottom line is that there is a lot of liquidity in the muni bond market and it seems to be doing okay.”
Bernanke went on to confirm that EVEN IF NECESSARY the Fed could not intervene. Apparently it is against the rules:
“I don’t think the Federal Reserve has the authority and I don’t think it would be appropriate for us to do that”
The message I get is that (a) Ben is in denial and his hands are tied and (b) Congress is not going to lift a finger to help out the states. An interesting state of affairs.
Wait a minute. That is not how things are done in the USA. When there is a need, we bail! Right? We have already spent a few Trill doing that. I mean, do "they" think that saving Citi a few years ago is more important than saving California or NY is 2011? Let’s put it this way, if Cali goes down it will bring a dozen states with it. This would be a situation far worse than anything that we saw in 08.
When push comes to shove (it will) Cali/NY are going to prove once again that they send more tax dollars to D.C. than they get back. That fact is going to be impossible for Washington overcome. The bailouts that the Fed doesn’t see as necessary and congress doesn’t want to touch will happen. It has to. The reality is that Ben does see the problem and congress knows that it will HAVE to get involved. They admitted as much with this exchange:
Senator Conrad
“Maybe there are ways to help with creative financing.”
Chairman Bernanke
“We do have the authority to buy very short-term municipal debt”
Tell me again why I should be rushing out to buy some long-term muni bonds?
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Bill Gross certainly knows that there will be a bail out of the states. He is personally purchasing muni bonds:
ReplyDeletehttp://quantinvestor.wordpress.com/2010/12/14/bill-gross-is-bullish-on-municipal-bonds/
http://quantinvestor.wordpress.com/2010/12/17/bill-gross-continues-his-fixed-income-closed-end-fund-buying-spree/
“We have no expectation of intention to get involved in state and local finance”
ReplyDeleteSo the UST can 'get involved' -- it'll issue the debt which the Fed will buy.
Explain how a California defaults pushes any other state into default please.
ReplyDeleteExplain how a California defaults pushes any other state into default please.
ReplyDeleteOffhand I can think of two ways: 1) it'll instantly raise interest rates (aka borrowing costs) for other states and make it that much more difficult for them to affordably roll their existing debt and sell new debt (once potential buyers see that a state can and will default they will demand a much higher interest rate); 2) simply by removing the stigma.
Besides the situation in the United States, something else worries me - China. Now, I know the bears are warning of a China bubble for quite a year or so. And I share their opinion about a possible bubble. But this year it seems to get very interesting or at least ugly:
ReplyDelete1) Food price indices (-> cooking oil)
2) Coal and Iron price (-> Queensland flood)
3) Inflation is rising (-> double digit fears)
4) Export situation (-> low profit margin)
5) Shanghai Index (-> Sign or not?)
6) Housing market bubble
---
Now, do you think China can manage some of these points?
Xie recently wrote in Caixin of a showdown between the USA and China - Chinas inflation or US debt - one would trigger the next financial crisis. In his opinion the United States would win from a worse situation in China.
anon 7:56
ReplyDeleteI agree with EH. There would be a domino effect. Cali goes, Il. goes, Cali and Il go, NY goes.
Nuclear winter if we get this far....
"Harry Schultz, after a remarkable 45 year period of publishing the International Harry Schultz Letter, has retired. His final letter, just out, included this warning":
ReplyDelete"Roughly speaking, the mess we are in is the worst since 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that. And, alas, the courage & political will to recognize the mess & act wisely to reverse gears, is absent in U.S. leadership, where the problems were hatched & where the rot is by far the deepest."
http://www.economicpolicyjournal.com/2011/01/87-year-old-dean-of-investment.html
wonderful Weasel pictures they certainly fill in the blanks!
ReplyDeleteSuperb blog post, I have book marked this internet site so ideally I’ll see much more on this subject in the foreseeable future!
ReplyDelete