Friday, January 14, 2011

Muni Meltdown: Should You Play?

Yes, but only if you know for sure what federal policymakers will do AND when. I do not so I am staying out. Also, quite simply, I do not know enough about the market (outside of a few ETFs) to feel comfortable: there is a very wide variety of issuers, underlying collateral, income tax considerations, and so on. But the policy response, basically whether we have QE3 for certain muni obligations or not, will be decisive. Despite the posturing of the newly elected majority, I simply do not see them letting a major electoral state go without money or borrow at prohibitive rates, as they should, for too long. Mass support will be easy to get: just inconveniencing people by not having their kids in school will stir the pot quickly; let alone having a major hospital shutdown. So there will probably be a bipartisan agreement of some sort, kicking the can down the road as this seems to be the only approach our elected officials use.

Of course, the tough choices will be made for them sooner or later.

Here's Obama's primetime TV statement, coming in a few months:
"Fellow Americans, I am very pleased to announce that today I signed into law a bill passed almost unanimously by Congress to solve the difficult situation that our states and cities are finding themselves in.

Like many hardworking American families, states and cities have been mislead by unscrupulous Wall Street bankers into borrowing more than they need on terms they did not understand. Through no fault of their own, our firefighters, policemen, teachers and civil servants were likely to suffer deep, devastating cuts in salaries, benefits and pensions, thus putting a dent in the fragile economic recovery and reversing the improving employment situation.

This 999-billion dollar bill is an investment in our communities that will help tide them over through the rough economic patch. The Treasury Department's investments in municipal bonds will be financed by the newly extended and very successful quantitative easing program of the Federal Reserve. It is time that we take a stand against the big bank bailouts and bonuses, and for the prosperous future of hard-working American families across this great nation of ours. Thank you."

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