Bernanke/Senate to States: Buzz Off! – Or Not?

Our boy Ben B met with senate leaders last week to discuss the sorry state of the States. It looks like all talk and no action, so far. I wanted to write about the non-event to have a record. When Ben reverses course later this year I will be able to point to this weekend’s comments and say, “I told you so”.

The setting was a hearing of the powerful Senate Budget Committee. The Chairman is Kent Conrad (D-ND). Last I heard ND has no muni problems, but it was pretty clear that this group of Senators were well informed on the issues that cities, towns, counties and states are facing. Senator Conrad: (Link to Bond Buyer story)

We’re talking about a significant problem here. We need to be prepared with a plan in case we are approached by one or more states.”

A “plan? What plan? From Senator Joe Manchin (D-WV)

“20 to 30 states could be in serious problems”

Jeepers! 30 States Joe? Senator Manchin sounds like he is more bearish than Meredith Whitney. John Cornyn (R-Tex) added to the sense of concern. From a spokesman:

“Senator Cornyn is exploring ways to address the state financial crisis, including amendments to the bankruptcy laws

BK? A State? What is that about? Is this the “plan”? A state bankruptcy has not happened in more than 100 years. Chairman Conrad summed it up:

His panel needs to come up with a plan to help states that approach Congress seeking assistance because of serious financial troubles.

We all know that munis across the country are in the crapper. That said, I was surprised at some of the hard language. Normally these folks don’t talk like this. I am thinking, “What do these guys know that I don’t?” “Why is there a need to revise the bankruptcy code to facilitate Municipal default?” The answer to those questions can be found in the words from the committee and comments from Bernanke. D.C. Inc is not throwing any life-lines to the sick states. Senator Conrad:

“I don’t think the House or the Senate are going to be very interested in bailouts to states.”

“Not interested in a bailout?” The understatement of the new year (so far). But the real interesting stuff came from Bernanke. He says he is not going to be there if the States need some of that fast cash he is providing to the federal government with QE.

“We have no expectation of intention to get involved in state and local finance”

That’s nice to hear. But my concern is that Bernanke seems to be in denial as to the extent of the problems with munis. In his world if the S%P is higher then all must be well in the economy. When asked if there could be a problem in muni land he responded:

“We don’t at this point see anything of that magnitude happening.”

“State and local governments have the tools to deal with their fiscal problems and debt”

“The municipal bond market currently seems to be functioning reasonably well”

Huh? Not a big deal? States can handle it, no problem? Muni market doing just fine? (what the hell was December?) Ben is not concerned about this as he is flooding the markets with liquidity. He thinks liquidity is the solution to solvency:

“The bottom line is that there is a lot of liquidity in the muni bond market and it seems to be doing okay.”

Bernanke went on to confirm that EVEN IF NECESSARY the Fed could not intervene. Apparently it is against the rules:

“I don’t think the Federal Reserve has the authority and I don’t think it would be appropriate for us to do that”

The message I get is that (a) Ben is in denial and his hands are tied and (b) Congress is not going to lift a finger to help out the states. An interesting state of affairs.

Wait a minute. That is not how things are done in the USA. When there is a need, we bail! Right? We have already spent a few Trill doing that. I mean, do “they” think that saving Citi a few years ago is more important than saving California or NY is 2011? Let’s put it this way, if Cali goes down it will bring a dozen states with it. This would be a situation far worse than anything that we saw in 08.

When push comes to shove (it will) Cali/NY are going to prove once again that they send more tax dollars to D.C. than they get back. That fact is going to be impossible for Washington overcome. The bailouts that the Fed doesn’t see as necessary and congress doesn’t want to touch will happen. It has to. The reality is that Ben does see the problem and congress knows that it will HAVE to get involved. They admitted as much with this exchange:

Senator Conrad
“Maybe there are ways to help with creative financing.”

Chairman Bernanke
“We do have the authority to buy very short-term municipal debt”

Tell me again why I should be rushing out to buy some long-term muni bonds?

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About Bruce Krasting 208 Articles

Bruce worked on Wall Street for twenty five years, he has been writing for the professional press for the last five years and has been on the Fox Business channel several times as a guest describing his written work.

From 1990-1995 he ran a private hedge fund in Greenwich Ct. called Falconer Limited. Investments were driven by macro developments. He closed the fund and retired in 1995. Bruce also been employed by Drexel Burnham Lambert, Citicorp, Credit Suisse and Irving Trust Corp.

Bruce holds a bachelor's degree in economics from Ithaca College and currently lives in Westchester, NY.

Visit: Bruce Krasting's Blog

1 Comment on Bernanke/Senate to States: Buzz Off! – Or Not?

  1. ben is basically setting the table for what is to come. buying trillions of dollars in state dept, which all but guarantees qe3 and maybe even qe4.the presses’s will be runnin wide open indefinately

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