Wednesday, February 16, 2011

The Next Bubble

Detroit:  The city liberalism destroyed
Are Cities and States Too Big to Fail?  We're about to find out

The socialists of all parties in the federal government created the housing bubble and the ensuing, inevitable crash, by encouraging lenders to abandon prudent, time testing lending practices. Low interest rates ushered in an era of easy money, and Freddie and Fannie backed everything mortgage companies could shovel their way, regardless of the stench.

Wall Street gambled and the taxpayer lost
Dirty Hank and his gang of pirates blew a hole in the side of the US Treasury and made it all good. Wall Street is back to record profits and bonuses, while working people despair of ever again finding a job, and the big banks are still too big to fail. 

Blissfully ignorant and unencumbered by any capacity to learn from experience, the federal government has turned on the money spigot to our fiscally incontinent states and cities. It’s stimulus, dontcha know. See how stimulated everybody is and how the job market is booming?
Since 2000 the total outstanding state and municipal bond debt, adjusted for inflation, has soared from $1.5 trillion to $2.8 trillion (see chart). The recession didn’t slow the spending. (Reason)
So the drunks are teetering on the brink of the train platform with a high speed locomotive bearing down, and good ol' Uncle Sam hands them another bottle of hooch...
The Build America Bonds program, part of the American Recovery and Reinvestment Act of 2009, was aimed at subsidizing bonds for infrastructure projects. Under this program, the Treasury Department pays 35 percent of bond interest to the issuing government. 

If a state or local government issued a bond at a high rate to make it appealing to investors—10 percent, say—the Treasury would make a 3.5 percent direct payment to the issuer. [...] It’s no surprise that, starting in 2008, states and cities increased their debt dramatically, while investors enabled this overspending. (Reason)
Our federal government encouraged irresponsible state and local government to be even more irresponsible by backing their bonds and even paying part of the interest collected by investors.  All funded by We The Taxpayer, and money borrowed from China.

This wouldn't be so bad if cities were using this federal largess to pay down debt and put themselves on sound fiscal footing, but they are doing just the opposite.  In his informative article, State Budget Bunk, Steven Malanga catalogs the cheap tricks that are putting cities and states deeper in hock.

Write your elected officials and preemptively tell them "NO" to any state or city bailouts.  Tell them these failed states and cities must file for bankruptcy like other financially irresponsible people are forced to do.
Further Reading:

Muni bond Prices Drop

State Budget Bunk


Always On Watch said...


The meltdown is coming.

At the same time, local governments are losing their tax base as more and more homeowners are in default on their mortgages even after those homeowners got federal assistance a while back so as to be able to keep up payments.

And let us not forget that mortgage payments also include in those payments the real-estate tax bill, monies to go to the local governments to pay for various programs and public-school systems.

And what will happen to retirement plans run under the aegis of local governments and state governments? I've read that those retirement plans are already in trouble -- New Jersey and Illinois, I believe.

Divine Theatre said...

As a resident of the State of Illinois I read Peter Schiff's blog with a true sense of unease and trepidation.
The question round these parts is not "if" but "when".

Sam Huntington said...

The residential bubble was the first, but we haven't gotten to the commercial bubble yet. When entire multi-million dollar malls start collapsing, America's banks (and anyone who invested in them) are going to be in serious trouble.

Our cities, towns, and states cannot seem to spend quite enough of our money, and we cannot get enough "free stuff." Thanks to illegal aliens and leftists, California is on the verge of economic collapse. As California goes, so goes the nation and that is a very scarey thought.

But here's an idea: why don't we just borrow the money from China? I mean, choke me with a spoon, it's not like we have to pay it back, ya know?

Fredd said...

Doom and gloom seems to be the nature of the Zeitgeist, but take heart, a not-so-small group of grown ups were elected to do something about this.

And if they can't get their child-like counterparts to join them at the adult table, instead of insisting on remaining at the fairytale believing kiddie table, there's another election in about 20 months from now that will throw these kiddies out into the streets and replace them with adults that will continue to roll this tomfoolery back.

Silverfiddle said...

I hope you're right Fred. I am cautiously optimistic that maybe, just maybe, the GOP will stand up on it's hind legs and fight this time.

Jersey McJones said...

"The socialists of all parties in the federal government created the housing bubble and the ensuing, inevitable crash, by encouraging lenders to abandon prudent, time testing lending practices."

It is astonishing to me that any intelligent adult would believe such utter and complete nonsense. You obviously have NO DIEA WHATSOEVER as to what caused the Mortgage Meltdown. I do. I did some work in the business. If you want to look at the causes, you have to look at the repeal of Glass-Steagal first and foremost. Then you have to look at the unregulated derivatives market, and CDS's and such. Then you have to look at unvested agency. Then you have to look at the privatization of F&F, the disconnect bewteen the states and the national banks, the reckless speculation in markets awaiting the retirement of the Baby Boomers, and on and on.

This simplistic ideological take of your's is just plain wrong. And it is exactly that kind of thinking that allowed this maess to happen.


WomanHonorThyself said...

Detroit is the perfect example Silver...sheesh. Have a great rest of the day~!:)

Jersey McJones said...

Oh, and as for the municiple bond market, this whole "panic" was a sham, the yields are back up again, and yet redmptions are way down from the that simplistic speculation by Whitney.

The problem with bonds anyway, is not the ability to pay them back - defaults are rare and will never get up to where Whitney invisioned. Remember, all you have to do to pay a bond is raise the tax revenue. Yes. It happens. Sometimes taxes go up. Issuers realize they can not let their necessary investments become too risky from investors.

The GOP is blocking the renewal of federally subsidized taxable bond sales. Yet more proof of the souless moral vacuum that is the GOP. These bonds mean jobs and development, they most certainly can be paid back, and their taxability keeps the market from over-expanding. On top of that, they help to contain risk in and of themselves.

So, the GOP wants to make things worse. Meanwhile, Wall Street is moving in, so without that taxable market they may just create another bubble similar to the
Mortgage Meltdown.

Bonds are a great way to invest in the community. They are an essential tool for our society to grow and progress. Morally, they distribute the cost for projects that will effect people 10, 20, 30, 40, 50 years or more on down the road over the course of the projects usefulness. So people aren't paying the total cost for things they may never even enjoy, or certainly not as much as the next generation.

Bonds, like housing, are vital to our nation. Allowing Wall Street to come in and over-speculate in that market is so intensely stupid, you'd have to be functionally retarded to think that's a good idea.


Silverfiddle said...

Jersey: You do not know what you are talking about. Had the rules not been relaxed, there would have been no rotten mortgages to package into toxic securities and derivatives.

When the government plays in the market it distorts it and eventually wrecks it, just like it did the mortgage market.

Finntann said...

Come on SF, lending money to people who can't pay it back just makes good fiscal sense! It devalues the housing market enabling more people who can't afford to buy to get into even more houses. Eventually housing will be free and we will all live in the socialist paradise our betters have planned for us... can't you follow the logic?

The next thing we need to do is eliminate income/debt ratios in loan determinations for the general populace like we are doing for the federal and state goverments. The logic is flawless... if I can always borrow more, I'll always have money to pay back what I've already borrowed.

Stop the crimethink and duckspeak and embrace the prolefeed on the telescreen before the thinkpol turn you into an unperson.


"Oldthinkers unbellyfeel Ingsoc"

Jersey McJones said...

Silver, believe me, I understand this - the feds were backing taxable bonds. That was the whole point of the Build America Bond program. These bonds were even safer than tax exempt bonds, which are very safe themselves. The fear now is that the program is dead, Wall Street will move in and over-invest in the tax exampt market to bolster hedge funds and insurance money.

In it's two years, the program worked well. Remember, this is NOT the government playing in the market - this IS a government borrowing market that the feds were making safer and more cost effective.

I think you need to read up on the muni markets.

And of course I did not miss the point about why the Mortgage Meltdown happened! Did you even read my comment??? You missed the point. It's not that second tier paper was issued - it's how. I know about that business. You apparently do not.

Look, I was investigating a mortgage disposition some years ago. I discovered that the issuing bank, a national bank that had purchased the mortgage after yet another purchase before, had "transferred" (essentially sold) the fully paid mortgage to a branch in another state, without the knowledge of the homeowner. The loan was rated essentially riskless and lumped in with high-risk loans and the bunch of them were sold as a security! Do you see what happened there? That's the kind of shenanigans Wall Street was playing with the mortgage market. There was NO goverment inducement to do that. The problem is that the government didn't STOP them from doing that. It was a scam. And it had NOTHING WHATSOEVER to do with F&F, who actually only backed a samll percentage of the bad paper. Fortunately, the government stepped in and put an end to that practice after the Dems took the congress. It cost me some money - as real estate lawyers didn't need investigators to hunt down mortgages anymore - but it was the right thing to do. I care about my country first, my ideology and profits second.


Silverfiddle said...

You still don't have the full story, Jersey.

If muni bonds are such a great deal, why does the federal government need to sweeten the pot? It makes no sense.

Nobody denies Wall Street shenanigans, but they didn't cause people to default on their loans--shoddy lending practices did, and the federal government did indeed force lenders lower the standards.

Back in the 70's you needed 10 to 20% down and income something like four times your piti. Before the big crash, you didn't need anything close to that.

So will you continue trying to tell us the lending standards weren't lowered?

As more people bought homes, the mortgage industry became huge, creating a secondary market, and the lenders were happy to shovel them out the door, so the bad ones would blow up in somebody elses face.

This is what happens when government intervenes in the market. It creates a false market where signals are masked, causing dysfunction.

jez said...

Lending standards obviously were lowered, but the reason this infected the whole economy instead of just a few repossessions is because the bad debt was repackaged so as to obfuscate their true nature from the ratings bodies.

While the investment bankers continue to try and out-maths the ratings bodies with obfuscated packages, and the ratings bodies continue to grant good ratings to packages they don't understand, the economy remains vulnerable to banking crises. I don't think fixing the mortgage market is a sufficient response: we've also got to fix the ratings mechanism.

Silverfiddle said...

If government would tell the bankers and investment houses to go to hell, we're not bailing them out anymore, immediate sanity would be injected into the markets.

It's easy to gamble with other people's money. Putting your own skin on the line sobers a person up.

jez said...

Guess that probably would help and couldn't make the markets any worse (assuming that no calamity devastates us once and for all). But the underlying problem would remain: deliberate obfuscation + herd mentality to investment implies vulnerability.

Silverfiddle said...

We can't eradicate human nature, Jez.

We will always have foxes and we'll always have chickens ripe for the plucking...