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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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Fantastic article, Bruce!
And it surely augments the contention of many that in the bizzarely perverse world of fractional reserve banking, money=debt, credit=crack cocaine, and economic growth is not possible without expanding the debt pool.
Deleveraging and use of non-fiat currencies are central banksters worst nightmares, and their Kryptonite!
Love him or hate him, you gotta give Ben credit for either a) sheer luck in floating all the turds he is floating or b) props for juggling while he balances on tip toe on a stool with his head in the noose.
Does anyone actually think the man enjoys that job?!? Somehow I doubt it.
How could he not? I would give my left nut to be Fed Chairman. Of course I would be a more debonair playboy central banker, add some style to it.
Kudos to Bruce and TD for posting this and losing MHFT and MegaLira
Wow; is that true ? No more vacuous verbiage from MHFT ? I feel better already.