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HomeSteady Decline Through 2060?
Posted by Larry Doyle on June 28th, 2010 1:12 PM |
What type of legacy are we leaving our kids? Will we leave them so burdened with overwhelming debts and deficits so as to strangle and choke off real opportunities? While Uncle Sam is able to play charades in an ever increasing and dramatic fashion, Sam’s smaller brethren at the state and local levels do not have those capabilities.
On that note, let’s look westward. I wrote in May 2009, “As California’s Economy Goes, So Goes the Country.” Along the same line, today we read from Bloomberg, States of Crisis for 46 Governments Facing Greek-Style Deficits:
Californians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end. (more…)
IOU? . . . No You Don’t
Posted by Larry Doyle on July 7th, 2009 11:00 AM |
They may make nice bathroom wallpaper, but major banks have no interest in continuing to accept California’s IOUs. The Wall Street Journal highlights this pathetic fiscal folly in writing, Big Banks Don’t Want California’s IOUs.
These IOUs, respectfully designated as warrants, will pay a rate of 3.75% and mature in early October if financial institutions choose not to redeem them. The statement by the major Wall Street banks speaks volumes. What are they saying?
1. They have no confidence in the California legislature to start putting their fiscal house in order.
2. They have no reason to believe Uncle Sam will step in to bailout California as that would open the door for 49 other wayward ‘children’ to march on Washington looking for the same handout.
3. They do not believe the rate of 3.75% properly prices the risk, especially relative to other opportunities to allocate capital.
If these large banks are not willing to accept the IOUs, then why should any individual? I wouldn’t.
Where is this situation headed? I think we can get a strong hint of the direction this situation is headed from an article I posted in the Newsworthy tab here at Sense on Cents. This article from The Washington Post, States Straining to Repair Budgets, highlights that:
The Obama administration has studied several Capitol Hill proposals to help the states but has decided not to move forward on any of them, according to an authoritative government source who spoke on the condition of anonymity because no announcement has been made about the discussions, which were private. One idea was to let struggling local governments borrow at lower rates from the municipal bond market.
Lower rates from the municipal bond market? What? Do you think California would be issuing IOUs if they could tap longer term financing via the municipal bond market? I seriously doubt California could successfully place longer term debt at anything resembling a reasonable rate of interest.
Then just what does the administration mean about “letting struggling local governments borrow from the municipal bond market?”
With short term interest rates on CDs, Treasury bills, and money market funds so excessively low, do not be surprised to see municipalities across the land trying to lure funds via issuing x-Tender securities covered up in municipal money market funds.
For regular readers here at Sense on Cents, you know that I believe these x-Tender securities (municipal auction-rate securities) represent significant risk. Prior to purchasing a municipal money market fund, please review my post entitled “Municipal Money Market Funds: Caveat Emptor.”
As California Goes, Part II: Other People’s Money
Posted by Larry Doyle on June 9th, 2009 11:41 AM |
A few weeks back, I wrote As California’s Economy Goes, So Goes the Country to address the financial precipice of the largest state in our country. As California faces financial armageddon, the state finds itself challenged with the prospects of massive budget cuts, significant tax increases, or a combination of the two.
Are we witnessing the prequel for what our entire country faces? I believe we are. Let’s navigate.
“Governator” Schwarzenegger is adamant about not raising taxes. The prospect of significant spending cuts is causing a firestorm with rank and file union members. Democratic pols find themselves between the proverbial rock and a hard place. The Los Angeles Times writes, State’s Budget Crisis Opens Rift Between Unions and Democrats:
The Capitol’s usual political alliances are being tested by the state’s severe financial problems as interest groups scramble to hold onto as much as possible of the state’s shrinking coffers.
The relationship between Democratic leaders and some of their labor benefactors has turned particularly frosty: Many of the programs union members rely on for paychecks — and the unions rely on for dues — have been slated for deep cuts.
In a period of massive fiscal deficits, obviously no stones are left unturned, everybody must contribute, and pain is felt by all parties. Really? If that were the case, then what good is politics and winning elections?
We may want to think that our political process achieves the greatest common good. In my opinion, though, the political game has become a function of “get as much as you can for as long as you can.” In the process, the politicians have become wedded to their constituencies and incestuous relationships have developed deep roots.
To this end, it is no surprise to see the large unions in California enraged at their political cronies for not “taking care of them.” The LA Times provides insights on this angle:
The friction started when the Democrat-dominated Legislature produced a budget in February that raised taxes but also cut programs and included a GOP-driven plan to put the brakes on state spending. A handful of labor groups then spent millions to help defeat the May ballot measures that the budget spawned.
“Many public employee unions, teacher unions [are] thinking that they were thrown under the bus in the last budget,” said Assemblyman Charles Calderon (D-Montebello). “So now they’re asking themselves: If these Democrats are not going to stand up for us, then what good is it to have them there?”
Why are the California unions so enraged? Well, all we really need to do is review what has occurred on the national level. Why is it that the Supreme Court is reviewing the sale of Chrysler to Fiat? Very simply, Obama overran standard bankruptcy procedures in delivering for the UAW. He justified his “means” because he viewed his “ends” as best for the economy. He ran the same play in the GM bankruptcy.
California union members want a bite from the same apple. Why aren’t they getting it? The great equalizer in our country and economy!! What’s that? The fear of failure. That is, Democratic politicians in California know the pulse of the overall electorate as reflected by the energy embedded in the April 15th “Tea Parties.”
The Times again provides interesting color,
But even some of the most liberal Democrats say some union leaders are ignoring the reality of an angry public, a sour economy and a state government approaching insolvency. Moreover, more taxes would require Republican support in the Legislature, and the minority party has made clear that there will be none.
“We have an economy which is in intensive care, and another round of tax increases . . . would put that patient in cardiac arrest,” said Assembly GOP leader Sam Blakeslee of San Luis Obispo.
Barack, Nancy, Harry….are you listening?
Insights from our friends on the “left coast” are always appreciated!!
LD
Hotel California Revisited: Prisoners Here of Our Own Device
Posted by Larry Doyle on May 20th, 2009 4:30 PM |
“Tonight we have heard from the voters and I respect the will of the people who are frustrated with the dysfunction in our budget system,” Gov. Arnold Schwarzenegger said.
The Wall Street Journal provides full coverage, “California Voters Reject Budget Measures.”
What does California’s budget nightmare mean? The state will be forced to cut upwards of $20 billion from an $82 billion budget. How and why? In the face of the the massive recession, California’s tax revenues are insufficient to meet the state’s fiscal needs.
In years past, California and other states would tap the municipal bond market with bond insurance provided by a monoline insurer, such as MBIA or Ambac. Given the enormous losses suffered by these monolines, primarily on structured mortgage deals, they are no longer strong enough to provide insurance sufficient for California to raise funding. In a similar vein, California can no longer source a letter of credit provided by a large money center bank.
Where is California looking for a backstop to its financial woes? Well, much like the United Auto Workers, the strongly Democratic constituencies in California will look toward Washington for a backstop/bailout.
California’s representatives are downplaying the severity of the situation. California Treasurer Bill Lockyer, much like Barney Frank, condescendingly comments on the historically low level of defaults in municipal finance. Do I have to remind Bill and Barney that historical analysis was also highlighted in providing AAA ratings to sub-prime mortgage deals? (more…)
As California’s Economy Goes, So Goes the Country
Posted by Larry Doyle on May 12th, 2009 5:15 PM |
Political hacks assert, “all politics is local.” In a similar vein, armchair economists propose, “as California goes, so goes the country.” Why is that? California represents such an enormous part of our country in many respects, including the following:
– 8 of the 50 largest cities
– population of approximately 37 million people (that we know of), a full 12% of our national population
– an economy similar in size to Italy, ranking it as one of the top 10 in the world (I have seen rankings of 8th and 9th)
– California’s economic output represents 13% of our national GDP!!
– an unemployment rate north of 11% compared to the national average of 8.9%. With a high unemployment rate amongst illegal immigrants, it is not a stretch that California’s unemployment rate is approaching 15% and its underemployment rate is greater than 20%!!
The results of the Bank Stress Tests indicated that Bank of America and Wells Fargo had the greatest capital shortfalls. Why is that? BofA already had a huge market share in California and it grew exponentially with its purchase of Countrywide. Wells Fargo also had huge market share in California and it only grew with its purchase of Wachovia. Hey LD, Wachovia is a North Carolina based bank, how could that correlate into increased California exposure? Wachovia purchased Golden West Financial, a southern California based bank which had been one of the most aggressive lenders of a mortgage product known as pay-option ARMs. Suffice it to say that product has been a disaster in terms of delinquencies, defaults, and foreclosures.
Earlier this year, California faced a massive budget shortfall and experienced significant political turmoil in passing a budget. Well, the Governator Arnold Schwarzenegger is right back in the ring as California’s fiscal situation is faced with more sinkholes. The WSJ reports, Cuts Loom in California if Propositions Fail.
While politics may be local, the economic fallout from California can not be walled off from the rest of the country. The capital cushions that BofA, Wells Fargo, and many other banks are forced to set aside against consumer, corporate, and municipal defaults literally ripple across our entire country. The WSJ reports:
California’s fiscal plight is worsening. In a letter sent Monday to the state’s legislative leaders, the governor said the Golden State now projects a new $15 billion shortfall, up from a previous estimate of $8 billion, because of plummeting tax revenue amid the recession. That figure would jump to $21 billion if Californians next week defeat the propositions, Mr. Schwarzenegger said.
Professors Ken Rogoff and Carmen Reinhart, in a dissertation, “Aftermath of Financial Crises,” highlighted declining tax revenues as one of the driving forces to increased fiscal deficits, greater government borrowing, further crowding out, and an underperforming economy. While the Governator is locked in a battle with the legislature, municipal unions, and other constituencies over the state’s fiscal follies, is California an opening act to the same show in Washington over the next few years?
Would our friends from California please share some perspectives? I thank you.
LD
