View Full Version : Wall Street Set to Panic as Muni Bond Sales Slide

07-21-06, 11:28 AM
Wall Street Set to Panic as Muni Bond Sales Slide (http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_mysak&sid=arZ54mqPM6BA)
July 21, 2006 (Bloomberg - Joe Mysak)

Shut down the municipal bond department!

States and localities are likely to sell the smallest amount of municipal bonds in five years, a development sure to create havoc on Wall Street, where it's always, What have you done for me lately?

So far this year, about $200 billion in municipal bonds have been sold, according to Bloomberg data. With the year a little more than halfway done, it looks like the 2006 final total will be about $350 billion. That would be the smallest amount since 2001, when the final tally was $288 billion.

In the big biography of this fall, "Mellon: An American Life'' -- think Ron Chernow's "Hamilton'' or Jean Strouse's "Morgan'' or even David McCullough's "Adams'' for similar examples -- British historian David Cannadine writes of Thomas Mellon, famed financier Andrew's (1855-1937) father:

"He thought politicians, except for Senator James Ross, were self-seeking and dishonest, fiscally extravagant and financially irresponsible; they plunged cities and states into debt, resulting in inexorably and inexcusably rising taxes.''

Reading that line, I thought, my, how quaint. You have to struggle to find anyone who protests against cities and states plunging into debt nowadays.

AntiSpin: Mysak's criticisms aside, the Cato piece Mushrooming Muni Bonds (http://www.cato.org/pub_display.php?pub_id=6497) is very good.

"Most people know that the federal government is amassing large debts and unfunded liabilities. But they may not know that state and local governments are doing the same. The latest data from the Federal Reserve Board show that total state and local debt jumped from $1.19 trillion in 2000 to $1.85 trillion by 2005, an increase of 55 percent."

The problem with cities and towns going deep into debt is that cities and towns, unlike the federal government, can't print their own money or borrow from China or Japan. As the Cato piece warns: "The eagerness to spend is even spurring officials to securitize future federal aid payments in the form of 'grant anticipation' debt. Why wait for future federal housing or highway aid when you can go to Wall Street and turn promised aid into cash to spend right now? The problem is that when the future arrives and federal aid is consumed by debt servicing, politicians will likely declare a 'budget crisis' and demand tax increases."

Are you ready for a heady jump in local taxes?

Charles Mackay
07-21-06, 01:45 PM
You would have thought that the skyrocketing increase in property taxes from the housing bubble would have ameliorated some of this need but apparently not. :confused:

Pilot Fish
07-21-06, 02:11 PM
The state of New Jersey recently went through a shut down of all non-essential services for several days. For those not familiar with New Jersey, we got an earlier preview of Bush Fiscal policies when former Republican Governor Whitman cut taxes primarily to the benefit of the wealthy then proceeded to "borrow and spend" through most of her time in office. New Jersey typically leans Democrat but, not surprisingly, her "free lunch" campaign promises had appealed to enough voters to win her election.

The shutdown occurred when agreement on the state budget could not be reached by the prescribed deadline as current Governor Corzine held out for a 1% increase in the state sales tax which he eventually received to end the stalemate.

While nobody, including me, is happy with more taxes, Corzine should be given some credit for taking the unpopular, though fiscally responsible, stance.

Again, unlike the Federal Govt., the state of New Jersey cannot simply print money. And with our current interest payments on debt, I suspect we are not in a position to sell a ton of new bonds.

Pilot Fish
07-21-06, 02:31 PM

I am by no means an authority on such matters but I'll offer a few observations.

1. Municipalities typically don't reassess home valuations (for tax purposes) every year (thankfully).
2. Never the less, if New Jersey is typical of the nation, property taxes go up significantly every year regardless - housing bubble or not.
3. Again, if New Jersey is typical, when municipalities do see increases in revenue, they find ways to spend it.

07-21-06, 05:53 PM
We are also quick to blame Washington DC crowd for out of control spending. Meanwhile our local elected officials have been happy to incur debt for any new project. Have you seen a Skateboard/Rollerblade Park being built in your community - brought to you via Muni Bond offering. How about that fantastic jungle gym at the new school in town - just an extra $300,000-$600,000 on the new school bond issue.

Local officials are pleased to solve any problem with a debt issuance - the wise voters KNOW that borrowing for GOOD causes is a GOOD thing (ITS JUST LIKE TAKING OUT A HELOC for the Family room). Taking on debt to take care of the childern is an INVESTMENT.

What are we teaching our children about Money?!