The Coming Muni Meltdown

Discussion in 'Economics' started by Tom B, Jan 17, 2011.

  1. Tom B

    Tom B

    A muni meltdown?

    Last Updated: 1:03 AM, January 17, 2011
    Posted: 11:00 PM, January 16, 2011

    The municipal-bond market is in crisis, with prices fall ing and investors running for cover -- and for good reason.

    Munis -- bonds sold by states, cities, counties and other localities to finance government operations -- are in trouble because the Ponzi scheme of Big Government is coming unglued. The markets are merely reflecting this reality, as they always do.

    The $3 trillion muni market was once regarded as the safest of all investments because the bonds are backed by government taxes. Now it's showing all the earmarks of the 2007-08 meltdown.

    That mess began with investors fleeing from bonds tied to the housing market -- and ended with the collapse of the financial system. Mortgage-backed bonds were considered super safe because the housing market "always goes up," and any remaining default risk was covered by "super-sophisticated" securities.

    So banks held tons of those securities, earning huge returns on their "risk-free" investments. The feds used Fannie Mae and Freddie Mac to keep the market booming by buying up tons of mortgages, leaving the banks with more cash to initiate more mortgages -- ensuring that even the riskiest borrowers could play.

    As it turned out, the housing-bond market was a Ponzi scheme not all that different than what Bernie Madoff pulled off for so long. Eventually, the cash couldn't flow in fast enough to keep inflating the bubble. Once the folks who couldn't afford their mortgages could no longer flip out of the market, the whole thing burst.

    The municipal-bond market's assumption is that cities and states won't default on their debt because they need to keep selling bonds to build roads and bridges. Investors will keep buying munis because they think the state will always make good on its obligations (and with the added incentive that these bonds are free of state, local and federal taxes).

    But suppose taxes are so high that people leave cities or states in droves, depleting the pool of revenue need to pay bondholders? Suppose these states have so many other obligations -- from federal mandates, massive "guaranteed" pensions to government workers and more -- that they can't or won't make the vast cuts needed to keep paying on their bonds?

    Investors are now including that worry in their calculations of risk and price; the places where government has choked off the private economy and tax revenues the most -- such as New Jersey, California and New York -- are suffering the worst. The states in which the private economy flourishes have little trouble issuing debt even in this turbulent market.

    Sure, a huge degree of paranoia is sweeping the muni market. The Securities and Exchange Commission has launched a wide examination of whether states and cities are properly disclosing budget issues to investors in municipal debt.

    That review is prudent because even a few defaults would hit average investors hard. Munis, more than other bonds, are overwhelmingly held by individuals, not institutions.

    Prominent banking analyst Meredith Whitney (who accurately predicted the banking crisis in late 2007) recently warned that 50 to 100 municipal-bond defaults will happen over the next year, likely amounting to more than $100 billion in defaulted debt.

    Analysts I speak to are skeptical. Nothing like that happened even the worse years of the Great Depression, and with the economy improving, it's hard to see such a doomsday materializing.

    But the fear is there -- even if it is overblown at the moment. Just last week, after an off-hand remark by Gov. Chris Christie that mounting pension costs would eventually "bankrupt" New Jersey, the state had to cut back a municipal-bond sale because investors were too spooked to bid.

    In fact, Christie is a big reason that buyers should have faith in Jersey's bonds. He's the rare public official who understands the need to expand the tax base, rather than constrict it through higher taxes, and the need to slash the size of government -- all of which would leave more revenues to pay off bond holders.

    Still, while the gloom in the muni market may be tough on governments looking to borrow and on the investors and Wall Street firms looking to make money by helping governments stay fat and unmanageable through the sale of more and more debt -- it should be celebrated on Main Street.

    For decades, many of our biggest cities and such states as New York, New Jersey and California have grown mindlessly -- running up ever more debt and routinely hiking taxes on business and entrepreneurs. The market's now saying that the game will have to end.
  2. ashatet


    I think the great state of Illinois (Democratic state) is showing the world how to handle debt. Simply increase the tax by 75% and spend the money like there is no tomorrow. I just do not see how come California, NJ, NY, MI, (all democratic states) cannot simply double their taxes and just make good on their payments. Not everyone can go to Texas to avoid the taxes.

  3. Well I did and it was the best decision in my life.

    I am sorry for you that you can not move to Texas.
  4. There are 7 states that do not have any state income taxes...Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In Tennessee and New Hampshire, state income taxes are limited to dividend and interest income only.
  5. Not everyone can go to Texas to avoid the taxes.


    People who have a choice will.

    On the flip side, people who are out of the loop of paying taxes will move to states which have the best social services. These people will move to states like NY. We have a very supportive welfare system in NY.

    This grows a lopsided work force. The people capable of working have left. People with money have left.

  6. But among all those states with no state income tax, only Texas stands out with job growth, climate, affordability and diverse life style.
  7. They can't increase taxes without killing GDP in the long run
  8. how much of that $1 trillion in monetized debt is / are directly attributable to the horrific damage done to the US, the American people, the upsetting and debasement of the American middle class by the 8 (eight) year Bush II administration and its policies?

    how much?, certainly more than 3/4 of it, because he received a surplus and no 30yr T-Bond debt, and look at where we are at now, and what it is taking to stop that death spiral that that administration caused...

    mission accomplished...
  9. ashatet


    Not sure if the brilliant policy makers understand that.

    A friend of mine told me that his parents are teachers and they are retired and that they get 180K in pension between the 2 of them (this is what I was told by him, so, not sure how accurate it is) and that hey spend most of their time in their summer home in Hawaii. A top notch MIT engineer out of school does not make 90K starting salary and we have retired school teachers making 90K in retirement.

    There is nothing that we can do about any of this, just put up and sacrifice our consumption so that the retired state/local/city employees can consume. This year, we are also expecting an increase in the property taxes, Illinois is becoming a very fun and exciting place to be. Cities have jacked up different costs like parking, etc.

  10. achilles28


    Municipalities and States are near the end of their rope and desperate for cash to fuel their extravagant budgets and salaries. Bonds are headed south, so they intend to kill the golden goose to stave off the wolves.

    The problem is spending. Tax hikes will go to firm up balance sheets to enable further looting. While doing so, the productive sector - ie, the real economy - gets squeezed harder and private consumption drops, hastening the very thing they want to avoid: declining tax revenues.

    Their ace in the hole is the FED. Comptrollers across America know the FED will aggressively intervene with QE X if and when the country goes head first into another deflationary spiral. Which it will most certainly if all municipalities impose caviar-austerity. It's pretty much a lock Fuckhead will monetize State and Muni debt and in doing so, send commodities north again. The stock market definitely is bullish, but it's upside is really dependent on how bad the austerity goes. This is banana republic economics with a soon-to-follow toilet bowl currency. The bailouts can't continue without putting the dollar through the ringer. When the US consumer recovers, that's when the shit hits the fan. The average debt maturity is too short and too big to raise rates. Same for consumers. Fuckhead won't let the banks fail so it's buy buy buy and hope u beat the averages. I hear oil is going back to 150$-200$ soon.

    Americans have no one to blame but themselves. They voted these criminals into office so they could share a place at the table, feasting on the taxpayers meaty carcass. Now it's done and there's nothing left to eat but each other. So many greedy cowards in this Country it's fucking incredible. No morals, no work ethic, no ingenuity. Just rob and fuck the average hard working American. Really unbelievable.
    #10     Jan 24, 2011