The Fed’s New Prospect of Bailing Out Cities and States
Picture courtesy of CSpan.
Appearing before the Senate Budget Committee yesterday, Fed Chairman Ben Bernanke testified that there are no powers presently in place that would enable that body to underwrite or rescue states and municipalities should they fail economically. The financial community has benefited greatly by having its debts assumed by the Fed.
The Fed has stepped in and become the owner of record of much of the financial communities’ self-created toxic debt (quantitative easing) – by buying Treasury bonds that were issued to buy up those toxic assets. That measure gives the creators and owners of toxic assets, the financial houses, the ability to clear their books of bad debt and gain solvency on the surface.
Now with state and local governments in deep trouble across the country because of the disaster the financiers have brought on, no similar scrambling is underway to bail out its victims on any level. Fed Chairman Ben Bernanke was asked in Budget Committee hearings yesterday what, if any, measures the Fed might take to bail out those victims of irresponsible financial ‘creativity’, as their financial stability diminishes, and those governments default on their own debts. . . .
As he revealed in answers to committee questioning, no plans are in place for the Fed to help out – and like investors, that governmental body is holding onto hope that they will, like U.S. families, slip through somehow.
Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority.
The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won’t be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies.
Investors have generally felt comfortable with bonds issued by states and municipalities, as their record of paying back on loans is very sound. Increasingly, though, budgetary woes on the state and local level have increased. Recently, some local governments have defaulted on their commitments to employees and contractors. The threat that such measures might be taken up by large cities or even states has been a strain on those bond issuers. As a result, interest required on those loans has risen, making the bonds a greater debt to the issuing governments.
While investors have generally stayed away from risky offerings, their longtime record of stability has attracted funds into state and municipal bonds. Now as the shaky prospects for those governments’ finances becomes increasingly evident, that market is taking its share of the hit from financial industry finagling.