Tuesday, March 20, 2012

Could this be the start of the next round?

California cities scramble to avert insolvency

When the city of Stockton, California announced last month it would skip some bond payments and enter talks with its creditors, the municipal debt world shuddered.

Posted by mark @ 10:09 AM (1213 views)
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8 thoughts on “Could this be the start of the next round?

  • Printy printy. We know how this game ends. Somebody gets bailed out by central bank printing. If it’s not the original debtor, then it’s the next party in the chain: the lender, the intermediary, the banks, the insurers (AIG). Of course small fry can always go to the wall; but the system is never fatally wounded.

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  • general congreve says:

    Yep, it boils down to the central banks printing to steal wealth from everyone else to hand to the bankers, and they’re ain’t a thing you can do to stop them. But you can take action to protect yourself. If you don’t, they’ll end up with everything and you’ll end up with nothing.

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  • Where California leads the world follows.

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  • There are some big strains in the union, but if and when it causes a major upset is a tricky call.

    The rural states are generally financially prudent, with balanced budgets and modest debts, while the urban states are the complete opposite.

    Somehow the national identity of America the all powerfull glues the union together, but will that still work when the world revolves around China?

    I don’t know..

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  • Uncle Tom,

    Markets can remain irrational a lot longer than you and I can remain solvent.

    Yes there are some imbalances within the US, but they are fairly minor compared to the tensions within the Eurozone. There are two possible solutions to the imbalances: either the union breaks up into its constituent parts, or the centre grabs more power and redistributes money around the states, thereby smoothing out the imbalances. In the US, individual states have been ceding power to the Federal government for decades; this trend will only continue. The states are weak, whereas the established government in D.C. is powerful enough to impose further centralisation. Looking at Europe, we have a similar situation but the scales are tilted towards nation states. The European states are strong and the centre is weak; constitutionally it’s much harder for the EU to wrest power and/or money from nation states.

    In short, America and the dollar will hold together just fine. The €uro seems unlikely to hold, unless Brussels gains a lot more power in a very short timeframe.

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  • Drewster,

    I agree that the eurozone will fail – it effectively has already.

    Because they have to go begging to them, the urban US states are relatively comfortable with a bigger fed government, but talk to people in the rural mid-west and you’ll find a huge antipathy towards federal interference – and in particular towards the various federal enforcement agencies.

    The farmers really don’t like being told what to do – at any level – by suits from Washington..

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  • why cant we have protests like this in britain, life would be so much more enjoyable

    do a google image search for Femen

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  • I don’t think any money is printed to finance state and local government deficits because they cannot run deficits. They cut services and sell off police helicopters instead.

    One of their biggest problems is interest rate swaps sold to them by the likes of Goldman Sucks-you-dry. These swaps are as missold and extractive as payday loans. States entered into these swaps in order to hedge against interest rate changes on their variable-rate bonds for infrastructure projects. The markets were pricing in serious falls in the prime interest rate (falls in interest rates meant the banks won on the deal), so these long-maturity swaps were not going to be a good deal for the states/local governments over the life of the contracts. (And interest rates later fell in order to help out the banks.) So far state/local govts have paid out $ tens of billions in excessive interest and fees on these swaps.

    But the governments entered into them out of necessity. They were desperate/naiive, they couldn’t get backing from the federal government, they needed the money, so they turned themselves over to the banks. What’s more, it’s likely that the big banks rigged/colluded in the (high) rates at which the swaps were set.

    Now states cannot exit these deals – or at least not without paying $ tens/hundreds of millions. Banks can get out of the deals if the govt’s credit rating falls (and they fall partly because of the bad deals they got on the swaps) – and can charge huge amounts for doing so.

    The banks wouldn’t have creamed all this off if they hadn’t crashed the economy and caused ZIRP and a credit crunch.

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