One can almost imagine ex-chairman Bernanke shaking his head in
disbelief. (For the record, I cannot conceive of Simple Ben possessing
the capacity for what follows, so this is an indulgence in creative writing.):
"I gave them every opportunity to get out of the mess they had created.
Here we were, after the bust in 2009, a generation of irresponsible and
sometimes criminal municipal management was obvious. States and cities had
spent money like a ship full of drunken sailors, who then sold the ship to keep
drinking. They built the most unnecessary monuments to satisfy contractor
payoffs, union shakedowns, and school-board extravagances." [Bloomberg,
January 24, 2014 - "Engineers spotted 'hundreds' of cracks in welds on
parts produced for the San Francisco-Oakland Bay Bridge in 2008 and were
encouraged to stay quiet rather than delay the $6.4 billion project.... 'This
is the first time in my career the engineering wasn't allowed to be done
right,' said Douglas Coe, a former Civil Engineer for the California Department
of Education."]
"The phony
housing boom had mushroomed property tax receipts, but even these temporary
handouts had not been enough to balance their budgets. I have done my best to
keep property-tax receipts at such an inflated level ["Home prices in 20
cities climb by most in seven years" - Bloomberg, December 31, 2013], but
only a fool could think the central bank can keep prices for 100 million houses
rising forever. The huge increase of income tax, sales tax, and capital-gains
receipts had also increased beyond belief. This once-in-a-century transfer
could not sate these spendthrift governments.
"We at the Fed ignored the preposterous 8% earnings rate assumption made
for public-pension assets. This assumption extends into the hereafter. All I
could give them was through 2013. I produced 8% rates-of-return across markets
for four years! This was their chance to get their affairs in order; to
whittle down the rate-of-return for the future when markets are bound to
regress. [As I said, this goes well beyond Ben's potential imagination. - FJS]
To stop spending as if the Fed could QE their pleasure palaces without losing the
world's trust in the dollar. To stop building professional football fields when
consumers could not possibly continue their animalistic buying, with incomes
falling.
"We worked every contrivance to keep them doing so. Such as: Financial
Times - January 24, 2014: 'In Vegas, a panel on securitizations of subprime
auto loans - made to riskier borrowers who want to buy cars - was standing room
only. Investor demand for the higher-yielding securities has led to intense
competition to originate and bundle the auto loans.... 'At some point there
will be a failure [of a subprime auto lender]. There will be some
consolidation,' said Chris D'Onofrio, of rating agency DBRS." [Not
mentioned in the story, but you may have gathered from the "intense
competition," most subprime auto loans now being made are to buyers (sort
of) whose credit is so poor, they do not even have credit scores. -
FJS]
"I offered an opportunity to municipal bond markets: for ratings firms and
bond managers to read the fine print. To understand municipalities had started
(by 2009) to borrow for operating expenses, even the operating expenses
they were forecasting, two or three years in the future. All of this is
illegal and remains unspoken.
"We at the Fed thought [sic - FJS] municipal bond managers would
pick and choose through the wheat and chaff. Yet, today, almost every municipal
bond fund has at least one percent of its assets in Puerto Rican bonds. I knew
the average mind at the FOMC was senile, but what gives with these managers?
Their funds are often leveraged. And the rubbish being sold is as revolting as
the justification for these issues. For example, from Bloomberg, December 17,
2013: 'Phillips Academy, the oldest incorporated boarding school and one of the
most exclusive, is tapping the municipal bond market for over $80 million this
week in new money and refunding debt....The school has an endowment of $869
million. The fall, 2013 enrollment was 1,129. Only 13% of the applicants were
admitted.... 'These schools need to compete for students and invest in their
facilities,' said [Susan] Fitzgerald, [senior vice president at Moody's].'
"She's a senior
vice president? I can get away with not knowing what I am talking about before
a bunch of senators, but she has a real job. Or, maybe not."
"And now,
reading the Wall Street Journal from January 31, 2014: "DETROIT -
This bankrupt city is proposing to favor pension funds at roughly double the
rate of bondholders to resolve an estimated $18 billion in long-term
obligations..."
"Et cetera, et cetera."
For those not up on
Bernanke's limited verbal energy, see "The Professor
Who Did Not Save the World."
Note: The question of pensions vs. bondholders will probably wind its way to
the Supreme Court, even though there are many jurisdictions. In the meantime,
there will be plenty of reasons for municipal bondholders to run, the Puerto
Rican holdings being immediately pertinent.
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