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Bernanke Plays Politics, Loses
The BABs story has gone political. And now the Fed is tossing
information into the hopper that just does not pass the smell test. The
question is; “Why is the Fed doing this?”
The real story on BABs is that Republicans want to nix the program as it
provides a very clear benefit to the three biggest blue states, CA, NY
and Il. The opposition does not want to really show their hand as being
purely political so they are attacking the extension on the merits. The
strongest reason to appose the extension is that it is a federal subsidy
that costs the taxpayers money and adds to the deficit. But the problem
all along is that no one in D.C. really has a clue how much this is
actually costing.
BABs was first sold as being revenue neutral at the federal level. The
talk was that the 35% interest subsidy paid by D.C. would be offset by
tax dollars created when the bondholders pay federal income on their
interest income. It never worked like that at all. The BABs bonds went
to tax exempt holders. 401k/501c accounts, foreign banks and other
tax-exempts bought the BABs bonds. In my opinion the Treasury is lucky
if it gets back 15% of the 35% they are paying out as a result of the
tax arbitrage that has been created.
I have consistently heard that some big takers of the BABs were foreign
banks. That makes perfect sense. Prior to BABs they had no ability to
build up state assets as they had no tax base to offset. But with BABs
that issue went away and an attractive asset class with a desirable
fixed coupon and long duration was created. The NYT had this to say about foreign bank participation in BABs:
“The
reason I know foreign holdings are going up is that I am selling more
and more muni bonds to foreigner investors”, said one municipal bond
banker in New York.
So what does the Fed do? It muddies up the waters with a new report. The
timing of the release is curious. But even worse, the numbers put out
by the Fed are very suspect. Previously they had reported that foreign
bank ownership of Muni bonds was rising quickly. Yesterday they threw
out all the old numbers and revised the estimates to show (surprise
surprise) that foreign ownership was in fact steady.
A spokeswoman for the Federal Reserve said the explanation for the drastic revision
is that the Fed “reviewed and revised the methodology it had been using
to estimate those numbers,” and applied the new methodology
retroactively to mid-2009.
Unbelievable. The Fed has skewed the data to make a case
that the tax subsidy for BABs is not leaking out of the country. You can
bet that the Democratic supporters pushing for a BABs extension will be
waving this “timely” Fed report to make their case.
The Fed wants BABs because it facilitates debt creation by munis. The
Fed wants as much new debt as possible as we all know that Debt=Growth and the Fed is desperate for some growth. So they spin a report to support their objectives. What a way to run a country.
There is still uncertainty on BABs. Possibly the new Fed report will
shift some votes. But one outcome is certain. The Republican leaders are
not blind. They will see that the Fed attempted to manipulate the
outcome. I doubt that those folks want the Fed playing in their sandbox.
I would imagine they are a bit miffed at the timing of the report. So
look for some payback on this. Ben is going to get raked over some
Congressional coals as a result of his meddling. I can’t wait.
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Ah...hadn't really realized the foreign angle. Interesting...so borrow Yen buy BABs?
Ben to Paul: BAB's were never sold to foreign investors/banks. Paul: Sure? Ben: 100% Paul: Can I get that in writing? Ben: No, Fuck-off!
END THE FED STOP THIS MADDNESS
Bohner is going to screw us all.
Seriously anything he can do to knock the Economy down he will do, sneakily of course.
Let the Bab's to float on their own forces the States and Cities to start hitting the middle class, it's all lining up that way.
they going to let the bush era tax cuts expire too!
Bruce, nicely done. I emailed the CA. treasurer after Tylers report and told him to stop kicking the can, file for bankruptcy and lets start over. No more BABS and no more stimulus.
doubt if I will get a reply. he he.
-----Bruce-----
Good article. I see that California is talking IOUs again. The incoming return Gov, Moon Beam Brown I think is the source. I don’t think anyone with any real knowledge would buy CA. Bonds. IF BABs does insure repayment and insures against default then that is maybe a reason to buy. Anyone know if Ca. defaults on Bonds does BABs cover the default??
No. BABs does not cover the default. It so says so right in the legislation.
But the language is almost identical to that of Fannie Mae and Freddie mac. Those two losers will cost us $500b befor all is said and done. Legally the US was not on the hook for a penny. Did not matter when push came to shove.
I don't think BABs is any different. If there is a a problem a few years down the road in Cali or some other state then the Feds will step in in just the same way the stepped in for F/F.
Silly article. We all know BABs are a ponzi cash dump to unions. No need to mince words
with a nice reach-around to the red states via redistribution...its all just one big financial inbred family at the end of the day.
Skippy...America...the country run like a Texas regional high school football comp...but, its all about the strength of the sport!
PS. personally I want hot cheerleaders in the background whence ever a politician speaks, be it, in front of a camera or the behind podium. Robo trader can do the hormone hiring...
We need to separate state and federal government (operations, funding, etc) wherever possible. End BAB.
Bruce:
Great article, as usual.
But what's to prevent the more populous, fiscally-troubled states from simply "earmarking" money from the budget to pay for these same projects that would've been funded by BABs? For sure, the Senate might filibuster such an attempt. But Congress might pass it as revenge for the tax deal.
Either way, BAB isn't going away without a fight.
Hey guys its junior here. It's always possible that this is not a conspiracy or a manipulation. Statistics is a very complex subject. But I know that conspiracy porn sells t- shirts.
Yes all the outrage at BABs and not a word about a trillion dollar tax cut extension. A true deficit hawk to be sure. This country is so broke and so corrupt that until they go after the theft at the top (the banks) I see no reason to deny the lesser criminals their stipend. All it will do is cause social unrest as austerity would be being imposed capriciously.
...i'll get excited about this when someone says he needs to be assassinated.
"Ben is going to get raked over some Congressional coals as a result of his meddling..."
and then what?? is someone going to scold him, "bad ben, don't do that again or else..."
Great, great story as usual Bruce. No matter the topic, I read you articles.
Okay, DCRB, I don't want to be the fly in the back-slapping ointment here, but...
Bruce didn't tell us what go "changed" or how. Do we just naturally assume that the purpose was to jigger the numbers for political reasons? The NYT articles essentially says the same thing at length. "Some suspect..." is not good reporting. One bond banker in New York's anecdotal evidence is not evidence.
Sorry, Bruce. Some depth into the figures, or links thereto, would have made a more convincing article. I expect you to look under some rocks. Love ya, dude, but I just have to use the same yardstick for all articles, including those from my faves.
Give me a break Rocky. I am a blogger. I get maybe $4 a day and I spend a fair bit of time at it.
I am connecting dots, you think my case is thin? We shall see. BABs is a hot button. There will be more propaganda from both sides this weekend.
Love you to.
b
Yeah. You're right. The Coon concedes.
Thanks for your articles.
Bruce, Kudos. What should Congress or the Fed do if LA or Trenton, NJ totally goes Tango Uniform? Are we ready yet to let failures actually fail?
No large corporation, and any size state or muni, will be allowed to fail. Not so with medium to small business, and of course, the middle class. Its all about 'influence'.
you're going to witness the failure of a massive employer of "real people" in the form of A&P this weekend. "Only the beginning" as Chicago sang.
So 2Big2Fail really means "I've got dicks in the pocket of my Sunday vest." to quote an old Jethro Tull lyric.
Bruce, thanks for continuing to post. I like how you take a close look at very specific topics behind the macro.
O/T: Anyone know what caused silver to spike up off the day's low so hard?
If you mean the spike in the afternoon, it was due to yields in the ten-year coming off their highs after the trade deficit announcement. Right after that, though, they traced back up.
If yields on the ten-year continue much higher, precious metals are going to get hammered while the USDJPY ramps. If USDJPY moves higher on yield spreads, expect the AUDUSD (gold diggers...) to tank in inverse relationship.
:D
Buyers. You don't want to think about the fairy dust "explanation" the talking heads have every day; it's just word salad.
Thanks Bruce - always enjoy your insightful analysis. However, I fear that the Fed's may see this as "incite-ful" and "not helpful to the situation", and therefore illegal. IF not illegal yet it will soon be.
Somehow, Bruce always sees the "political agenda" of the Republicans, but never the obvious, in your face, vote buying with taxpayer dollars, of the Demoncrats, Hmmmmm.
Fine summary as far as it goes, but the monster issue is moral hazard. Bail one state, school, or sewer district, you have to bail them all. How many more plates do these bastards think they can keep spinning, and how would this ever end well?
All of the incentives run the wrong way.
Astute point kaiserhoff.......if the DEMS use the skewed FED report to serve a political purpose then what is the difference between the DEMs and the REPubs in the long haul........none, I think is the correct answer.
Where's the Craic at?
you need to read that again, very slowly, Bruce was on both political parties there.
I did, language matters, and ideas have consequences. There is a world of difference between pointing out budget fiction in Washington, and the constant grinding, calling out of only one party. I'm not the first to notice a "statist bias" here.
Bruce is a gifted writer, who has an uncanny knack for focussing on important, otherwise overlooked details. I wouldn't give him grief if I didn't think his work was important, but we can all get better at this, so thanks for the comment.
Okay. I accept the criticism. I am going both ways with this. I hate everyone, Dems and Reps the same.
BABs is a subsidy. I hate subsidies. They ALWAYS cause problems. So at the end of the day I want BABS to die.
But for the Reps to make this a political agenda versus an economic one is also sickening.They want to screw the nice folks in NY, Il and Cali so they have a better shot at the White House in 2012. Vomit.
The Fed is not supposed to be political. But the timing and uturn in results tells a different story.
Who's right in this story? No one. Not even me...
We love ya Bruce, but the stakes have never been higher. It's been a bad year for western civ. So what's your take on Shameful's question? What's the chain of events if Mad Ben starts buying Munis?
I live in NY. Screw the nice folks who live here who vote for bigger benefits, more regulation, corrupt pols - let them reap what they have sown.
End the BAB subsidy, its a nice start toward sanity.
Thanks Mr. Krastings for another round of solid analysis. Do you think BABs or some othe type of this subsidy that supports their objectives will survive?
Good question. We will find out soon. It still comes back to the fact that Blue states win at Red state expense. So Congress is conflicted.
There is one alternative that scares the hell out of me. The Fed steps in and makes the "apolitical" choice of just buying up State muni bonds.
In my view that would be the end of the world as we know it. But I still would not count that out.
be the "end of the world as you know it." not the end of mine. we are a "nation of states" and not a "state of nation." time for Wall Street to die.
The Fed will take stimulus wherever they can find it. Issa just got a plum seat on the oversight committee, he is from my district CA49, which is a red corner in a blue state. Talk about conflicted, government stimulus spending is all that keeps them from rolling up the sidewalks. I doubt he would contest the issue, being the most prominent Ca Republican. It just splits too many ways. And I imagine Issa complaining loud and hard about the Fed buying Muni bonds, and quietly voting Yea.
Could you go into why you think Fed buying muni's would be "the end of the world as we know it"? I mean I don't think it would be good but the Fed is buying up stuff now, won't those that are "ok" with Ben buying 600 billion+ of T-Bills also accept a few billion tossed at munis?
Because if Ben is buying, everyone is selling. Municipalities don't have a prayer of paying for their pensions, but they can sure play kick the can. To infinity and beyond.
Your point is will taken. This looks like pocket change compared to the rest of the fraud, but it's Hotel California. You can check out any time you like, but you can never leave.
That's my point, there is no way out, but no one seems to care. There is no doubt that the US will either default or hyper inflate, there is no other way out out of the obligations and debt. So what is the big deal if Zimbabwe Ben is the only buyer, it's just one of the two possible roads to travel down?
Yes but... No one knows, because no one has been crazy enough to even speculate on this shit before, but try this out.
The absolute size of the Ponzi matters little, for reasons no academic even considered. So many of the ill effects (inflation, moral hazard, bubbles) are being exported via the carry trade. Sheer madness on an epic scale, but fascinating, none the less.
Bailing out states, or cities sets up internecine warfare, political C4. Joe 6 Pac's eyes glaze over if you tell him about the IMF, Greece, deficits, but if his tax money is paying a cop's pension in San Fran, he will not be amused. Or maybe Obummer will declare free beer and pizza. Then, sabe dios.
Fine, don't tell the people. Have the Fed Reserve set up MuniLane in secret in the Caribbean. Give it 200 billion to manage and let it go to it. With no audit how hard would it be to set up a front and pass money to them to buy up the muni bonds? There is no transparency and odds are J6P would look at it even if there was so long as a few steps are placed in there to make it more then a direct connection.
When there is 0 reporting, 0 accoutnability, 0 oversight, and infinite money it's possible to pull off a lot of things.
200b?? that is chump change. The muni market is $3trillion.
If buyers go on strike in muni land there is little the Feds can do to stop it. The result will be higher cost of debt for all involved. That translates to state cut backs. and that translates to a slow economy.
My point is if there is to be a problem in munis (there is not yet) it will be the end game.
Good point. Maybe they are doing it already.
I have to believe someone would notice the cash flow in and piece it together, but that would clearly be rape in Sweden;)
Wouldn't matter. How many times have they boldly announced their misdeeds to no response? Or the fine journalism from independent sources such as ZH gone unnoticed? Hell look at Markopolos. The masses will not care until after they are penniless and shell shocked wondering how it all went wrong. By then the villains will be long gone with all the assets.
Until the masses stir there is no chance of saving anything from the pillage. The Masses have thus far stunned me with their passive acceptance of the rape. Perhaps they will wake up, but at this point I'm not optimistic. I'm just hoping to make it to the life boat when the ship is really going down.
They should be using the BABs for increasing the capacity of the morgues in Sacremento, Springfield and Albany. There should be a lot of new customers soon.
I operate under the assumption that the banksters own a majority of our politicians.
Therefore, I think that the FED will simply remind enough of our politicians where their money comes from and the FED will get what it wants.
The FED and Gooberment are in way more trouble than the 'calm markets' indicate....WAY bigger trouble!
Some argue that the breach of public trust is one of the more horrific crimes there is.
"Mission Accomplished."