More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.
Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.
"Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy," Whitney told the CBS 60 Minutes programme on Sunday night.
"There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars' worth of defaults."
Pained Muni Investors Cry Uncle
Munis are wobbling as Uncle Sam's aid looks set to come to an end. Will Uncle Ben step into the breach? One whisper is that, in the unlikely event Federal Reserve Chairman Ben Bernanke were to decide next year on yet another round of quantitative easing, munis could be a target. But his hands are tied, and it isn't clear it would make sense even if he had unfettered room to maneuver.
Rising yields on Treasurys, growing funding gaps and the likely end of the Build America Bonds subsidy have driven states' borrowing costs up, sharply for weaker states like Illinois and California.
Muni yields overall are back above those of comparable Treasurys, according to Robert Nelson of Thomson Reuters Municipal Market Data. That seems irrational considering their tax-exempt status, until one considers state debt and municipal debt aren't nearly as safe as Treasurys.
This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.
Last week, retirees asked the City Council for some help before Christmas. More Photos »
Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.
New Jersey Pension Gap Hits $54 Billion
New Jersey’s pension gap grew to $53.9 billion in the last fiscal year, up from $45.8 billion, thanks to market losses and a lack of state funding, according to figures released Thursday.
Gov. Chris Christie’s administration said the gap, which reflected the state’s investment positions as of June 30, highlighted the need for proposed cuts to current public workers’ pensions. The $53.9 billion figure reflects the difference between the retirement benefits the state has promised to roughly 780,000 state and local workers over the next few decades and the amount on hand to pay those benefits.
For most of the past decade, New Jersey politicians from both parties have skipped required payments to the pension fund while giving increases in benefits to workers. Faced with a tight budget, Christie skipped a $3.1 billion payment this year, which experts said all but ensured next year’s gap would be even higher.
WSJ noted that property tax changes generally lag housing prices by about three years, due to the timing of assessments. So we've seen big hits to housing that haven't even shown up yet in tax receipts for cities.
Hedgeye charted the data, showing tax receipts against Case-Shiller, with a three-year lag.
Mon Dec 27 2010
The Fallacy of a Pain-Free Path to a Healthy Housing Market (dallasfed.org)
House Prices Probably Fell, Weak Link in "Recovery" (bloomberg.com)
Buy vs. Rent: An Update (economix.blogs.nytimes.com)
Los Angeles house prices fall in November (dailybreeze.com)
California house sales down 12% from one year ago (firsttuesdayjournal.com)
Evidence grows of house price 'double dip' (ocregister.com)
Posh neighborhoods beware - the housing bust is heading your way (surkanstance.blogspot.com)
California housing in 2011 (doctorhousingbubble.com)
Economists: Expect No House-Price Growth in 2011 (blogs.wsj.com)
House Sales Struggled Again in November (nytimes.com)
Housing market's bumpy ride isn't over (seattletimes.nwsource.com)
House loan demand drops, lowest in nearly 1 year (news.yahoo.com)
Economist survey: Growth improving but not jobs, housing (money.cnn.com)
NYT: Banks accused of illegally looting houses (msnbc.msn.com)
How Merrill Lynch Bankers Blew Up Own Firm With Mortgage Bonds (propublica.org)
Melbourne's Median House Prices Vs Wages 1965-2010 (simplesustainable.com)
New Zealand Deleverages (unconventionaleconomist.com)
Huge Unspoken Threat To Muni Finances: Falling Property Tax Revenue (businessinsider.com)
Obama's tax gift to billionaires (washingtonpost.com)
Photos: Mom, Dad, baby live happily in 380 square feet (latimes.com)
Pittsburgh Council Passes Tax Plan to Fund Pension, Avoid State Takeover
The municipality of 334,563, whose pension problem was called a “financial Armageddon” by two councilors yesterday, joins cities such as Chicago and states such as Illinois and New Jersey that may cut services or raise taxes to meet ballooning retirement costs. Those states and 18 others skipped payments or underfunded their pension systems from 2007 to 2009, according to an October report from Loop Capital Markets in Chicago.
This chart is in fact much worse than it first appears - that break has now taken out critical support from 2008 before everything fell apart!
I have warned of the potential risk in these funds and municipal bonds as an asset class before.
The fact that no realistic action has been taken to address these issues, and that they may rotate into United States credit - that is, Treasuries, forcing big reductions in spending, is a serious problem.
Folks, the States are absolute pikers when it comes to this - The Federal Government is literally borrowing 40% of every dollar it's spending at the present time. This cannot continue indefinitely, and yet if it is pulled back GDP is going to instantaneous collapse by a double-digit percentage and the stock market will implode as profits go down the toilet immediately.
Is this a "sure things, short the farm" play? No. As we've seen the goofballs in our government are hellbent for leather on continuing to play Ponzi, borrowing ever-more in a furious (although ultimately futile) attempt to prevent recognition of the fact that we simply do not have the final demand and cannot manufacture it via borrowing on a durable basis to support our claimed "output" and "profits."
Bernanke, Obama and Congress think they're Khan - and invincible.
They're all wrong - The Market is in fact Captain Kirk.
“I’m one who believes that pension funds can go bankrupt and then you reorganize, and that’s the hardest thing to say.”
Moderator Richard Stengel, managing editor of Time Magazine, then asked Daley: “Let them go bankrupt?”
“Yes, and then you reorganize it. I think the way government is trying to do it, we keep cutting and then some way, we’re going to tax everyone. I think even government can go re-organization, you want to call it go bankrupt, reorganize it, to the tune of this economy and this century.”
In other words let workers starve while the CEO’s and banksters make off with record profits and one percent of the population gets 34% of the American income.
Mayor Richard Daley this afternoon expressed his frustration with the city's pension situation, suggesting that the retirement funds need to be fixed before leaders are forced to declare them bankrupt as a way to restructure.
Speaking on a Global Metro Summit panel at the University of Illinois-Chicago with Philadelphia Mayor Michael Nutter and Los Angeles Mayor Antonio Villaraigosa, Daley at first appeared to indicate that allowing the pensions to go bankrupt so they could be reorganized was something he believes could happen.
"I’m one who believes that pension funds can go bankrupt and then you reorganize, and that’s the hardest thing to say," Daley said.
Moderator Richard Stengel, managing editor of Time Magazine, then asked Daley: "Let them go bankrupt?"
“Yes, and then you reorganize it," Daley replied. "I think the way government is trying to do it, we keep cutting and then some way, we’re going to tax everyone. I think even government can go reorganization, you want to call it go bankrupt, reorganize it, to the tune of this economy and this century.
Talking to reporters afterward, Daley sought to clarify his remarks.
“No, no, what I said is the whole idea that if you allow this to go, unfortunately, there would be a dire financial situation," he said. "And that’s why we’re all part of the solution, and not part of the problem. And in that sense, that’s the end result of something that would take place, but we should not get to that position.
Asked about using the term "bankruptcy," Daley said: "Yeah, well, yeah, just in the sense that it comes to financial crisis, you don’t want to get to that. What we’re saying there are solutions prior to that."
The mayor's comments came after much of the Chicago City Council sent a letter to Gov. Pat Quinn today urging him not to sign a pension reform bill passed by the General Assembly and Daley again lambasted the plan.
Daley has been publicly attacking the bill at every opportunity over the past week, saying it would lead to the biggest property tax increase in Chicago history. Daley said he doesn't know whether Quinn will listen to Chicago officials' pleas not to sign the legislation, but he said he and Quinn have different views on raising taxes.
"(Quinn) wants to tax people. What can I do?" Daley said.
"We can't go tax crazy, but people may want to go tax crazy," the mayor said.
“Throughout the country, 90 percent of cities and states are going to go bankrupt within the next five years, many of them sooner.” So says former Los Angeles Mayor Richard Riordan.
Reason.tv’s Tim Cavanaugh sat down with Riordan to discuss state and local budget crises, public-sector unions, and why Riordan recently became a fan of current LA Mayor Antonio Villaraigosa.
Fed to Buy Extra $600 Billion of Treasuries to Boost Growth
November 3, 2010
The Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation.
Backlash against Fed’s $600bn easing
November 4, 2010
The US Federal Reserve’s decision to pump an extra $600bn into the economy has galvanized emerging market central banks into preparing defensive measures and sparked criticism from leading global economies.
... Brazil and Germany on Thursday criticized the Fed’s action a day earlier, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows.
G-20 Nations Criticize U.S. Fed's $600 Billion QE2 Stimulus
November 8, 2010
The G-20 countries have frequently criticized the foreign exchange stance of fellow member China, with the U.S. one of the most vocal on the issue. Congress has even considered taking action through legislation. Now, the U.S. finds itself on the other side of the argument as many other G20 countries are criticizing the Federal Reserve's $600 billion bond buying plan, which could further devalue the dollar. World leaders say the move breaks the vow of unity made during the last G-20 meeting in Toronto.
The dollar plays a special role in the global economy because many commodities, from oil to gold, are dollar denominated. Hence, any weakness in the dollar makes those commodities more expensive.
Officials from Germany, Brazil, China and South Africa were among those expressing concern ahead of the G-20 summit in Seoul Thursday and Friday. They accused the U.S. of joining the global currency war, saying that the Fed's policy could weaken the dollar, drive up commodity prices and send cash into emerging markets, Reuters reported. This could result in inflationary asset bubbles in those countries, and push their exchange rates to uncompetitive levels against a dollar. ...
Analyst Meredith Whitney said on CNBC that she expected accelerated withdrawals from the municipal-bond market as state finances deteriorate in the next six months. Last month Whitney, who correctly predicted Citigroup Inc.’s dividend cut in 2008, forecast 50 to 100 significant muni-bond defaults this year totaling “hundreds of billions” of dollars.
Investors have pulled a net $22.7 billion from municipal-bond mutual funds in the past nine weeks, according to data from the Investment Company Institute in Washington.
http://www.fa-mag.com/fa-news/6680-vanguard-drops-muni-bond-fund-plans.html
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