Deflate the Bubble — There’s Only One Way

John Kostrzewa sees municipal deficits as “the next big bubble,” specifically related to municipal bonds. If cities and towns begin to default, then investors will stop considering them so safe and, per those who support public debt, the sky would fall.

In outlining options for Central Falls, Mark Pfeiffer, the state receiver, said bankruptcy should be a last resort because a filing in federal court would ripple across the country, sending a message that Rhode Island is a risky place to do business. Investors would demand more interest on any municipal bonds sold here, or they could pull out and not buy at all.
Investors would also be spooked because the federal courts could change the terms of bond sales, leaving investors with more uncertainty and less safety about what they had purchased.

I say, “good, let it happen.” It’s time that financially incompetent politicians learned to stop treating debt as a revenue source. Those playing with public dollars ought to be the most financially conservative; saving up for investments and improvements, rather than passing bond issues in political blasts and obligating future taxpayers to cover the expense.

0 0 votes
Article Rating
Subscribe
Notify of
guest
7 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Patrick
Patrick
10 years ago

Actually, this is something that Meredith Whitney has been talking about for a while. She has a think tank that researches this stuff and she was the first one to publicly go on the record that the biggest banks in the US were in deep trouble. People laughed at her at the time. And just like with the banks, Moody’s is saying she’s wrong with the municipalities.
The only problem with “let them fail” is when it was the banks, the people who *caused* the problems were still in charge. If we let municipalities fail, the people who caused it, elected politicians over the last 50-100 years, are no longer in charge to take the heat. I understand what you’re saying that someone needs to be told “you can’t do things that way anymore”. But the only people who will really be hurt is the taxpayers. But I get where you’re coming from. Borrowing will be more expensive. So don’t borrow. Ok. But current flexible borrowing rates would increase, not just in the defaulted city, but other similar ones, possibly pushing them over the brink, and starting the domino effect. It could be an interesting world if the Central Falls and Harrisburgs are allowed to fail.

mangeek
mangeek
10 years ago

I have a good friend who’s an economist.
Over too much wine last winter he basically explained to me how if consumers and governments started operating using sane and sound accounting instead of borrowing everything, we wouldn’t be able to hide the fact that we’ve borrowed ourselves into prosperity anymore.
That didn’t sound so bad, until he explained what would happen to the money supply, interest rates, and the overall standard of living.
We both agreed that it needed to happen, that living ‘in reality’ is much better than making the reality worse and worse for that day in the future when the payments can’t be made anymore, but it’s a crappy platform to get elected on:
“I promise less services, higher taxes, a lower standard of living, and more hard work for twenty to thirty years. But at least your kids will never have to worry about living in a welfare dystopia. Vote for me!”

Tommy Cranston
Tommy Cranston
10 years ago

“I promise less services, higher taxes, a lower standard of living, and more hard work for twenty to thirty years. But at least your kids will never have to worry about living in a welfare dystopia. Vote for me!”
LOL. Yeah, your friend has it right all the way.
The Progressive House Of Cards, built on bloated social programs, open borders,perversity and depravity made normal and obscene compensation for government “workers” is reaching the End Game.
We must be flying RyanAir because we’ll be in Dublin very soon!

Warrington Faust
Warrington Faust
10 years ago

“That didn’t sound so bad, until he explained what would happen to the money supply, interest rates, and the overall standard of living.” That position supposes that everything stays the same except that which you altered. I can’t make a full list, but here is a for instance. If consumers bought out of savings, rather than borrow, prices would not have escalated the way they did. Consumers could not/would not have paid them. This is what gave us the pick up truck as a “guy thing” in the 70’s. While cars roughly tripled in price during the 70’s, pick ups did not. Suddenly the “pick up” became the thing to have. WHile the price advantage has disappeared,the pick up went from something nobody had in 1970, to the best selling product for Ford. People often think of the 50’s as a “boom time”, and it was, at least in the sense of what a dolar would buy. Auto production almost tripled and houses were thrown up everywhere. Still, there was almost no credit except for home mortgages, auto loans and 30 day store credit. Your friend takes a almost Keynesiam view of the consumer marketplace. I believe he makes the mistake of thinking that of things had not happened as they did, they would not have happened at all. Granted the McMansion might not have existed without the easy money. Drive through Jefferson Park (am I right on that name) in Warwick, those houses were the 50’s ideal. With continually rising taxes, energy and repair bills, I don’t think those large, but poorly constructed, McMansions are going to represent very good “investments”. When did a home become an “investment”? Your friend also ignores the effect on living standards of technology, from TV recording devices to vinyl siding. Funny how technology… Read more »

mangeek
mangeek
10 years ago

Warrington, what you’re saying is what I was saying to my friend. It wouldn’t be so bad to live within our means. The lifestyle alone would probably instill the kind of values that the social conservatives here respect. At it stands now, my welfare-dependent niece is complaining that her iPhone needs to be replaced, it will be the third $400 dollar device she needs replaced in a year.

Richard Langseth
Richard Langseth
10 years ago

It is very doubtful that a reorganization of a city or town in Rhode Island would lead to a municipal bond failure. Don’t forget, most of the municipal bond holders in a given state are residents of that state. It gives them a tax break. These people are generally wealthy and know how to protect their assets.
Woonsocket is now trying to float a series of deficit bonds. Figure that one out?

Warrington Faust
Warrington Faust
10 years ago

Mangeek
” her iPhone needs to be replaced, it will be the third $400 dollar device she needs replaced in a year.”
Another time I have to ask myself, how many people really need an Iphone. Mobile phones, that only communicate voice, are available from about $20.00. I don’t think the more expensive phone really improves “life style”, it is just bling.
Without easy credit, the I phone might not be common. But technology has driven the cost of a mobile phone to about $20.00.
The Town of Brookline, near Boston, has spent a fortune burying telephone lines (telephone poles are unsightly) since 1920. Their problem may be solved.

Show your support for Anchor Rising with a 25-cent-per-day subscription.