Victim Culture is Poised to take Down State Finances

Posted on December 4th, 2010 by admin in Political Economy

We all recognize the USA economy is  hairball of dangers lurking in plain sight. One of the threads visible is the muni-bond market. This giant market is usually considered almost risk-free, since the bonds are usually linked to tax streams. But with states and cities staring at financial calamity, the muni market poses historically huge financial dangers.

An extremely clear and concise tutorial on the situation is available here:

Tutorial: Will Municipal Bonds be the Next Disaster?

As the author says in his conclusion:

Finally: In recent years, there has been a change in our national understanding of the sacred nature of contracts. We have seen untold numbers of homeowners default on mortgages with the justification that the bank should never have lent them the money. We have seen the banks improvidently speculate with other people’s money and then justify it by saying that they were only doing what the customer wanted. This same mentality is evident in municipal government. Harrisburg, Pennsylvania councilwoman Susan Brown Wilson exemplified the ominous trend when she said recently, “By no means should the citizens of Harrisburg (alone) be strapped with the debt created eight years ago by a prior administration.” Are we not responsible for what past administrations have done? Isn’t that principle what secures any bond issuance? If Ms. Wilson’s is becoming the prevailing attitude, muni bonds are nothing more than colorful paper.

The number of muni bonds on dealer desks wanting bids is as large as at any time in history. Maybe this is dumb money getting out, creating a golden opportunity. But it could also be smart money running from a market that has a lot of the characteristics of the pre-2008 mortgage markets: lack of transparency, legal obscurity, inflated values and deteriorating economics. That’s a risk investors can no longer afford to ignore.

You can see in this quote a slice of the attitudes now prevailing in the muni markets. But these attitudes of entitlement and avoidance of responsibility appear in the popular press, too, as exemplified by the endless blame game played by politicians and consumer groups.

States face dramatically growing pension obligations they created to buy votes, and their cities have broken finances. The states cannot print money. The new Republican congress almost surely will not add to state bailouts. So the pain will be transmitted to directly to states and some will suffer much more than others. Like California.

But the form that pain will take is unknown now, but it cannot be avoided.

One Comment on “Victim Culture is Poised to take Down State Finances”

  1. Finance

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