that I can live with. Not the Japan story. How bad could this get? It’s
difficult to put bounds on it. Nothing to do but wait for clarity. I hate waiting.
In the meantime I am trying to focus on the usual things. They don’t
seem to have much significance. In more normal times the following info
would be worth noting. I think it closes the door forever on the BABs
program. A bit of the history:
The Build America Bond program came out of the 2008 stimulus
legislation. It was a subsidy for Munis. Washington paid 35% of the
interest expense for new muni bonds. The program was very popular with
State Treasurers and Wall Street.
The program expired at the end of 2010. Obama, the Democrats and the big
Blue states (Cali, NY & Il) and every lobbying outfit in DC (paid
by Wall Street) pushed to get BABs extended with the rest of the tax
cuts. The Republicans nixed it.
In the President’s budget there is another request for a new BABs deal. The proposal is for a rebate of 28%.
A group of Democratic Congressmen has sponsored new BABs laws. H.R. 992 sets the rebate at 32% in 11’ and 31% in 12’.
I actually believe that BABs is a significant piece in the puzzle. The absence of BABs is not a crisis. But it is another chink in the muni armor.
Without it, states will not be able to issue as much debt. Interest
expense is likely to rise as a result. Projects will be shelved or
delayed. Economic growth will suffer. Jobs will be lost and
infrastructure will get more neglected. We know the formula, Debt=Growth.
I also find the BABs story fascinating as it is central to the
Republican effort to strangle Blue states. This is all about
presidential politics. The “Reds” think that if they make things even
tougher on the poor folks in Illinois they just might win the White
House.
Well here is the ammunition those Reds need:
The critical issue on BABs has always been the actual Federal tax
receipts from investors holding the BABs securities. In a perfect world
investors would be in a 32% tax bracket, therefore a 32% subsidy is
“Revenue Neutral”.
I (and many others) have maintained that the BABs bonds went to non-tax hands. My guess is that the IRS would be lucky if they got 15% back. So the true subsidy by federal taxpayers was 20% of the interest on muni debt. A very big deal for Cali, NY and Il.
I have been working to get the answer to the question, “What are the actual tax receipts for BABs?”
I asked the CBO. They are supposed to “score” H.R. 992. To value the bill they would have to come up with a number for tax income. They did not answer me.
I asked the OMB. This is the White House budget so I thought they would have a basis for their proposal. They did not answer either.
The IRS is where this data is. So I wrote them too. Guess what? I got an answer: (my emphasis)
In response to your request for the percentage of tax collections from bonds associated with Build America Bonds, we will not be able to answer your request. Unlike tax-exempt bonds build America bonds are taxable, but the IRS Tax-Exempt area collects no data on the tax obligations associated with them.
So there is no data. Period. After two years and ~$200b of bond issuance nobody really has a clue what it is costing us. And for that reason alone any talk of a BABs revival is D.O.A.
I’ll send this to the Republican leaders. The absence of information
needed to make an informed vote is a good place to hide behind. They might just need some cover on this one. I can’t think of a presidential election that was won without California and New York playing a role. Net-net the Reds are spiving the two biggest states.
The guys who wear the white spats on Wall Street play hardball for money. The guys in DC do it for power.
The US govt is a cash cow for a lot of people . I think it was back in the 80's when I read that 1 out of 3 jobs was due to Gov't spending . I think it was during Reagan . Today I imagine it would be 2 out of 3 . Anyway from local gov'ts to states to Federal it has become unsustainable there are just to many kittens and not enough tits to suck . Hopefully when this is all over , only a percentage of a worker in 3 will be relying on gov't for employment .
Do you know why this is happening? The private sector is driving this! The public sector services the private sector at taxpayers expense while the private sectors keeps all the profits for itself.
Aren't the munis mostly purchased by pension funds? I doubt that they pay taxes.
Bruce, here's something for you to think about. While the IRS is not much on book-keeping, they are focusing ever more on revenue collection. Guess what I'm seeing?
Now, I haven't had the ability to research this idea much, so it is merely conjecture at this point, but it looks to me like they are auditing govs who issued BABs in order to reduce their outlay. I first remember seeing stories about this last year, where the IRS would dispute taxes owed, and deduct the amount from the BAB payment.
Just last week, I discovered that a city near me is being audited (yet to be announced), and they are going after anything they know there is likely no records of, like allowances for uniform cleaning, etc.
Meanwhile, the city, is due its first BAB refund this Fall to pay for an empty parking garage and a sewage plant.
From what I've googled, the audits are random. It would sure be interesting though to look at a list of BAB issuers and a list of municipalities under audit.
NA, The IRS may be on a scavenger hunt. In 2008 we had a lot of medical expense as well as a modest inheritance to my wife. The tax return was done by an accouantant and in order. In December the IRS sent a letter announcing an inquiry preparatory to an audit. We had to spend a lot of time sorting the bags of receipts)(to support estimates) and, of course, pay the accountant again. The submitted file (Medicare, Insurance contribution, Corporate (retired) contribution, personal out of pocket contribution,) was about an inch and a half thick and indicated that we had actually underreported. We got two postponement letters for the IRS decision on an audit before they sent a one line notice that no further information or action would be required.
Considering the obviously modest amount that they would have ever been able to recover relative to cost, it was nothing but a desperate fishing expedition.
Pressure to deliver revenue must be very great.
This was a slush fund. The loophole is closed.
Whether or not we'll have QE3 is really a political question. If the FED and banking cartel think they will get more from the existing president, they will continue to float the market and continue to print. If the banking cartel thinks they will benefit more from a new incoming president, they won't, interest rates will rise, money supply contracts, market declines, unemployment increases and bang, we have a new president.
No, it's not a political question. It is a math question. As in, if the Federal Reserve doesn't buy those bonds, how many days earlier does the government ponzi implode? If the answer is positive, QE will proceed.
The way things are going, there may not BE another presidential election in the USA.
And this horrific disaster in Japan may not be the last of its kind.
At any rate, it should be more than obvious to any regular readers of this site
that Bernanke & Co. are going to find this meltdown to be the perfect excuse for QE3.
I was in buying gold, nattie and oil on margin yesterday, with both hands.
I'm tempted to buy uranium too, because there are still a hundred new nuclear generators being built around the world and insufficient supply on line to feed them,
and there's not enough oil, natural gas, or coal to supply current electricity demands
(and please spare me from tliting at windmills....)
Tim Geithner's IRS involved in a cover up? Tax fraud? Say it isn't so..!
VOTE?
Politics is the distraction.
It is not "prudent" to vote because it means nothing.
Move your cash and assets, revolt with civility.
That is worth 10,000 chads and digital certs.
"Without it, states will not be able to issue as much debt. Interest expense is likely to rise as a result."
how come? less debt, more interest expense?
They will have to rely more on (gasp) private funds and the public is growing increasingly more aware of government debt.
Wasn't Bell the city with the salary scandals not too long ago? As I recall, the city manager was making like $800,000 a year and his team were all making big bucks, too. I thought there were criminal and civil charges filed, but I could be wrong. And I'm too lazy this early to google it.
Let it rest at the fact that if BABs were good, we'd know.
But, we don't hear good gubmint talk about it.
So, that means what? Obviously a debacle.
Just simple political logic.
I shoveled some Roth IRA money into some 8% BABs.
The IRS is not getting anything back on that deal. I figure it's my revenge for Bernokio's zero interest rate policy.
And Bernokio's revenge will be 20% inflation.
I find your posts useful.
The fact that we don't know who the owners are of the BABs irritates me. I'm big on instrumentation.
Yep. The muni bubble appears to be another Ponzi extend and pretend. Is anything real?
Btw: I'm moving into my North American Earth Ship this week. It won't wait.
Thanks BK!
BK is always informative. That means always valuable. Keep it up BK.
The saddest thing is that it isn't surprising that they don't have data. But I guess when you casually fudge numbers on employment and inflation what's the big deal about not bothering to get some data on bond? Our government at "work".
Oh please!!!!!! Is your name Bruce Krasting or Paul Krugman? You don't have a picture of him on your desk I hope.
Debt is only good if you can pay it back with interest. Unless these are revenue (project specific) bonds, then they are completely fungible with other state activities. Every dollar more of interest the state has to pay is a dollar more for my retirement and a dollar less for a $200K/annum firefighter to retire in California at 45. This situation exactly parallels Greece and Germany. Germany is now bailing out the profligate Greeks. Will the Wisconsin folks who are now eating from the bitter austerity salad bar going to want to watch the New York bankers get subsidized further.
Kudos for flushing out the IRS numbers and exposing their incompetence. I have to gig you a little for raising the issue in the first place. It is not the business of the federal government to run a program if it is successful. The federal government is not constituted to finance the states. Once that cancer is established, it is hard to expunge. Just look at MediCare and Social Security.
Will not QEIII be devoted to munis? Why not just cut the BABs BS and get it in the open. What metric tells us that QEI or QEII have been successful?
You have read about Bastiat and the broken windows I am sure. Please tell me that you aren't in the vanguard with Krugman proclaiming that theJapanese reactor meltdowns are a good thing because they will need to be rebuilt.
Social Security is a cancer? When you make a statement like that, you pretty much betray yourself as a parasitical creature that lives of others and contributes absolutely nothing to society--the very definition what it means to be a useless eater. The top does not feed the bottom, the bottom feeds the useless eaters at the top.
I blast Krugman whenever I can. I have been against BABs from before it was a topic of discussion. I'm not for this. I just find it amusing that we are throwing around big bucks and have no clue why we are broke. This is just a good example. Plus I love politics.
If we have a meltdown in Japan it will be very deflationary. It could easily tip the scales. I'm worried...
very deflationary with respect to gold, not to usd.
usd is not acting strong safe haven this time around. japan will be forced to sell ust's forcing qe3. hyperinflation 2013 here we come baby
09, after that post it is now clear to all that you just pwned yourself!
------------------------------------------
Bruce, excellent post as usual. It seems I always catch you when you are on the phone.
I do think this matters for reds up high. It will make it into the right hands.
Thank you for everything.
Bruce is a stereotypical new york keynsenian. He does occasionally provide interesting data on SS, but his econ analysis is halfass
Pton,
Get a life dude. You don't like Bruce. We get it. Now fuck off.
So you guys actually expect Bruce or anyone else to tell you what to do, consistently, to make money, in some of the most manipulated shams of markets in human history?
Really now.
Sure, a few potholes and your all worried about infrastructure :)
BK looks under the rocks the MSM trips over. I enjoy his work immensely.
come on sangell, bruce isn't that great of an analyst. Seems like a wannabe with a periodic decent post. he has underestimated gold and silver throughout this rally
Pton you are such a fucking nitwit asshole.I don't see YOU being a contributor to ZH.
The criticism is justified. I puked on gold at 1365 back in October. I missed all the upside action. But today it is 1398. I think it is headed lower. It is not trading as good store of wealth of late.
I was better with silver.I got the timing pretty good with this??
http://www.zerohedge.com/article/backward-silver-forward-weather
The junker is getting junked....
Hey Bruce!
Is it safe to assume that Treasury and IRS are using the TurbTax Timmah edition with respect to the lack of knowledge of taxes associated with the BAB program?
Just curious what your take is.
I hereby forgive everyone for any errors on silver and gold. When these two investments are measured as a percentage of all investments everywhere they are miniscule, with lots more media hype in both directions than they deserve. hence, a true opportunity for manipulation. And sinec the manipulation is easy to do, since the overall value of all gold and all silve is so tiny, price predictions are dicey.
+1
so much ad hominem. so little.... thanks bruce for your efforts.
+1
"It is not trading as a good store of wealth of late."
So big deal, silver and gold weakened a bit when some got scared and the dollar/treasuries firmed a little. This is a temporary condition that will see the $ down while the Fed tries to push stocks up. Gold and silver already up a little tonight.
I love the artwork BK. Keep up the stellar work.
Very late on silver, you haven't been a huge PM bull like a rogers or schiff who stuck their neck out much earlier and were much more firm
Bitch, shut the fuck up and just admit you got PWNT
I've been bullish on silver far longer than bruce k so not pawned but good try idiot
BTW, "PWNT" means owned, not pawned.
Please document which regular contributors have, in public statements, made more accurate predictions on PM prices.
Bruce is a terrific contributor, someone who brings actual industry experience without being here to sell something or steer you to their paid-subscription newsletter, and as a bonus he doesn't even make wildly optimistic predictions for certain stocks, like a certain other real-name contributor who also has real experience and isn't selling something.
Sure, compared to Leo's solar calls I suppose Bruce is ok. Not nearly as good as Peter Schiff, Jim Rogers, Faber
You probably underestimate yourself Bruce. My guess is your post will be on Boehner's desk tomorrow morning without you having to send it to him.
The bottom line, however, is that subsidies to States and Munis, BABs included, merely encourage more out of control spending. They have no redeeming value.