The American news program, 60 minutes had a very interesting piece last night. Featuring the new governor of the State of New Jersey, Chris Christie and Meridith Whitney whose fame and fortune rose as a result of her prediction of the dire straits in which the American banking system found itself, the subject was state and municipal debt. The message? In short, the jig's up.
Well, golly-gosh. Now the governor, who recently took office was in no real position to speak on this subject before, but one wonders why, all the geniuses on the street, including Ms Whitney who I guess is pretty smart, almost blond and almost pretty didn't cotton on to what's been hanging' out there for a couple of years now. Too busy pointing out the obvious in other area of immolation? Not to be put out, both the Times and the WSJ had major articles on the same subject today pointing out that spreads had greatly widened on muni debt over the past month and that there was "concern" on the street as to issues of credit surrounding the market. The best one was CNBC on which two of their respected analysts told people to get the hell out of the muni market or stay as short as possible.
You might remember your humble scribe's response to that market genius Little Paulie Krugman some months back when he proclaimed to the world that the U.S. was nothing like Greece. Right, said I at the time, but California and Illinois are exactly like Greece: they have liabilities in a currency not their own and they can't pay them off. Welcome to the banndwagon, Meridith; you can sit were Paulie used to be. He fell off some time ago.
Ok, I know. It's easy to sit out here in the fly-over zone and sound smug, but there is a very real problem that I think is going to come to a head in the not too distant future--like the next six months--where we are going to have to face the default of a borrower or a series of borrowers in the state and muni market. This is not going to be a one-off like WAMU a few years back; this is going to look very much like a Euro sovereign debt melt-down or perhaps it would be more accurate to say the Latin American debt crisis of the eighties where the domino effect is very real. As far as I am concerned the only question is who will be the first obligor to collapse.
I remember sitting in a meeting of the American banker's Association just about this time of year was back in 1982. Mexico had just announced back in August that they were short of the ready and concern was mounting as to the rest of the neighborhood. In an attempt to calm the troubled waters a Vice Chairman of the then Chase Manhattan Bank gave a speech in which he proclaimed that the only problem with Mexico and perhaps a few of its neighbors was, "A perceived inability to service debt." I thought to myself, "We're doomed." Mark me. You are going to hear much of the same nonsense in the coming months and what scares me is that if people merely listen to this sort of nonsense and don't act, then we may well be doomed because the markets may not be able to absorb the shock of the default of a major municipality and may well seize up in regard to state and local debt. This is a ticking time bomb. This is real trouble. I hope the commentators out there will stay on top of this one. I will.
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Speaking of Krugman, he was at it again in the Times taking on Economists on the right (out of context of course) in an amusing little piece indicating the Toady of the Toad Economics Hall of the Democratic Party really understands little as to what is going on around him. Really can't we expect better? For example, he quotes George Osborne from 2006 on Ireland as having said, "Ireland stands as a shining example...in the art of long term economic policymaking," and concludes with, "Whoops." He moves on to Alan Reynolds from Cato who said in June, "The Irish approach worked in 1987-89--and its working now." "Whoops again," says our boy.
That there were a few interesting events that might have had some impact as to the Irish situation doesn't really mean much to Paulie, so I thought I might return the favor by taking a gem from him...out of context to be sure...from back in 2002. Here's Krugman at his brightest:
"To fight this recession, the Fed needs more than a snap-back; it needs soaring household
spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco
put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."
How'd that work out for ya, Paulie?
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