Munis: The Next Systemic Financial Crisis

In recent history, the United States has survived at least three major financial debacles: the Savings & Loan crisis around 1990, the bursting of Internet bubble around 2000, the collapse of the real estate bubble that began in 2007. What’s next? When I was writing “Boomergeddon” earlier this year, I expected the next traumatic financial event to be the default by the United States and other sovereign nations on their debt. But I didn’t see the U.S. hitting the skids until the mid-2020s.

Meredith Whitney, the superstar financial analyst who first warned how the real estate crash would create a disaster for U.S. banks, now warns of a looming sovereign debt crisis — but the sovereigns she refers to are not Greece, Ireland or Portugal. They are California, New Jersey, Illinois and Ohio.

In a new 600-page report (which I am trying to lay hands on), she argues that the next systemic risk in U.S. finance is state and municipal government. In an interview with CNBC, she said she sees scary parallels between the fiscal condition of states/municipalities and the banks, including widespread off balance-sheet borrowing and a lack of transparency. Indeed, no one — including the bond-rating geniuses at Moody’s, Standard Poor’s and Fitch, I might add — had compiled all the information she believes is necessary to truly understand the risk. So, she set the staff of her boutique firm onto the job. “The Tragedy of the Commons” is the result.

Fortune magazine has the best coverage of the report. Whitney rates the condition of the nation’s largest 15 states (as measured by GDP) on four criteria: their economy, fiscal health, housing and taxes. Only two states — Texas and Virginia — get positive ratings. The states with the worst ratings are, in order of awfulness:

New Jersey, Illinois, Ohio (tie)
New York

The middling states are Washington, North Carolina, Pennsylvania, Maryland and Massachusetts.

There is a giant gap between the states’ spending and tax revenues, which she estimates at $192 billion, or 27% of their budgets, for fiscal 2010. That pressure will continue building, especially upon municipalities that rely upon property tax revenues, as real estate market continue to implode. Whitney expects the states to look after their own finances first, leaving many cities to fend for themselves. Accordingly, she expects municipalities could start defaulting on bonds in large numbers.

The worst-off jurisdictions are states and municipalities where housing prices grew the fastest, tax revenues and spending soared, and local governments borrowed heavily to finance the growth. The collapse of housing prices and property tax revenues leaves them the most exposed.

The Obama stimulus package gave states a reprieve in fiscal 2010 by making up roughly one-third of their budget shortfall. On CNBC, Whitney speculated that there will be intense political pressure in Congress for another bail-out, but that would simply transfer liabilities to the federal government, which has its own balance sheet issues, and create even more moral hazard.

The Old Dominion may be better off than most other big states, but that is no reason for Virginians to rest on our laurels. No one to my knowledge (other than Whitney, perhaps) has recently calculated how much debt Virginia’s cities, counties and independent authorities collectively have accumulated. And no one has carefully examined the consequences of still-falling real estate prices on the ability of Virginia municipalities to carry that debt. We may be OK. But, then, we might not be. It should be a top priority of Gov. Bob McDonnell’s commission on government reform and restructuring to find out

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49 responses to “Munis: The Next Systemic Financial Crisis”

  1. Darrell Avatar

    Munis are going to fail. Gee, who could have guessed that? I had 3 more neighbors move out in the past week. No surprise, the indicators were there months ago. Just waiting for the U-Hauls to show up. Three more houses ($23k)taken out of the annual local tax pool.

    Friday saw 2 bank failures costing FDIC another $160 million, and six more banks joined the death watch. Commercial real estate defaults are getting ready to go through the roof as their loan extensions expire. But everything must be ok because the Fed is keeping the stock market juiced, and all the government reports are just peachy until next week's revision downward when no one notices. And the MSM wouldn't lie to us. Nah, it's easier to just not report reality. Take the mortgage title story for instance.

    Why it's just a few little 'technical problems' the mortgage servicers are having with their foreclosure paperwork, reporters say. I told you about this last week. Here's the reality.

    If the courts start negating bad loans because of title issues then STF by for the ultimate moral hazard as Average Joe American simply stops paying. Most courts are already overwhelmed with foreclosures, draining local judicial budgets with no way to recoup the costs. Adding thousands more cases to the docket from Protest Defaults, well. That's why the state AG's are imposing foreclosure moratoriums.

    While Virginia has been spared somewhat due to their non-judicial process, you can best believe that will change as local homeowners begin legally challenging foreclosures, and lenders retaliate with recourse actions.

    There are some pretty wise wizards in Internet land who saw all this coming over a year ago. Meredith simply confirmed the muni data. Some are now advocating some sort of principal reduction process or even across the board mortgage forgiveness, with various tax increases to help pay off our collective debt. The now mortgage free citizens would gain instant discretionary income to boost the economy and also taxed to begin to solve this mess. Guess my screwball idea to credit all interest paid to principal reduction into a new loan when this crisis first started wasn't so wacky after all. Since the government now owns most mortgages through Fanny/Freddie, these new ideas could be implemented as national policy.

    Will it work? Who knows, but one thing is for sure. The alternative is a legal nigAhtmare that will continue to drain the American economy for decades. Or until our nation makes Somalia look rich.

  2. Larry G Avatar

    I found it interesting that some of the "candidate" states for financial Armageddon had AAA Bond Ratings.

    So ….. who would say that a State on Municipality/County/City with a AAA Bond Rating would be in the same fiscal boat as those with AA or A ratings?

    or… same question with different em-PHA-sis – what is it in particular about a AAA-rated muni that would make folks like this lady think they are potentially in trouble?

    Does it mean that the bond ratings are not relevant?

    What exactly does it mean if you have a AAA bond rating anyhow?

    So a question back at Bacon.

    Do the rating have anything to do with those that are seen as weak or vulnerable to "failure"?

  3. James A. Bacon Avatar
    James A. Bacon

    Larry, Whitney's group used a different methodology to compile her ratings than the rating agencies do. Does her methodology do a superior job of assessing risk? I don't know. I'm not an expert. But I would suggest that Whitney has more credibility at the moment than the rating agencies do.

  4. Larry G Avatar

    The interesting thing about municipalities is that they generally put every penny back int the local economy – as opposed to hoarding it or investing in overseas enterprises.

    So the money that government collects and spends is 100% recycled.

    When we cut taxes and give it back – it often gets spent on things like Big Screen TVs and fashion clothing not made in this country.

    so which is worse?

    I note, by the way, that the oft-slammed "Stimulus" has some substantial "made in America" provisions in it that almost none of the critics acknowledge.

    I'm all in favor of tax cuts to any company or any individual who can prove that the money did not go overseas.

    The idea that we spend the "stimulus" but it does not create jobs is patently foolish.

    If that money goes to buy goods and services – it produces jobs.

    If we spend stimulus money on Humvees it produces jobs.

    If we spend money on replacement school buses – it also creates jobs.

    the basic argument is really whether or not we need more humvees or more school buses if we can only afford one.

  5. Darrell Avatar

    "What exactly does it mean if you have a AAA bond rating anyhow?"

    What does it mean if you have a high FICO score?

    Suppose your FICO isn't all that great, but you want to buy a house. Could you? Wasn't it pretty easy to get a Ninja? Why?

    Now suppose you wanted a loan paid for with other peoples money without their approval. Could you personally get the loan? How about a city?

    What if the laws say you can shop around and pay a fee to have your FICO bumped up to qualify for the highest rating. What is the true credit quality of a loan based on payments from unwitting cosigners who are broke?

    When was the last time you voted on a bond referendum?

    If you didn't agree to cosign the city's loan, then how did they get so deep in debt?

  6. Larry G Avatar

    My knowledge of FICO scores is that you don't get one if you have "marks" on your credit.

    Having a bad FICO score or a sub AAA bond rating won't keep you from getting credit – in a normal economy – it just will cost you more.

    Even PayDay lenders and the Mafia will loan you money if the interest is right and high enough to cover their losses.

    Credit has not dried up. People are STILL buying homes and cars and govts are still floating bonds and yes.. some of us vote in referenda as I did two years ago to pay higher taxes for a specific set of roads.

    People in Fairfax and Prince William and Loudoun have also voted for higher taxes for specific things.

    Our county has actually stepped up some of their CIPs because interest rates for good bond ratings are good and the construction bids are coming in 20% less than originally estimated….

    But Virginia bet get ready. The free ride from Federal Dollars may start to decrease.

    And then Virginia will be more like Ohio and Pennsylvania and Missouri where our economy is a "real" economy and not some permanent Federal "stimulus" that it has been for decades.

  7. Groveton Avatar

    "When was the last time you voted on a bond referendum?".

    I can't remember the last state / local election where I didn't vote on a bond referendum in Fairfax County. Schools, parks … there always seems to be something.

    Municipals are certainly challenged. Unlike the federal government, states, cities and counties can't just print money when they are short.

    However, not all munis are created equal. Here's what I recall:

    1. Munis are either general obligation or revenue bonds. General obligation bonds are backed by "the full faith and credit" of the issuer. In other words, the underlying entity has to go bankrupt before the bond becomes worthless. Revenue bonds are based on the revenues of something – an airport, a water authority, etc. If the airports or water authorities go bankrupt the bonds are worthless.

    2. It is very debatable whether the federal government could legally allow a state to go bankrupt. Therefore, general obligation bonds issued by the state itself are in something of a better risk category than other municipal debt.

    3. States can certainly allows cities and counties to go bankrupt. Orange County, CA is a case in point. Therefore, the general obligation bonds of municipalities other than states need to be closely watched.

    4. Revenue bonds often fail. The the $2.3 billion Washington Public Power Supply System revenue bond default in the 1980’s is a case in point. All revenue bonds need to be carefully watched.

    5. Bankruptcy (and the threat of bankruptcy) can be potent political weapons. Sometimes non – state municipalities use the threat of bankruptcy to negotiate with public sector unions. The unionized employees have pensions which will be put at risk by a municipal bankruptcy. Obviously, widespread layoffs would also accompany a municipal bankruptcy.

    I would be very interested in hearing from anybody who believes that the points I have presented are in error. I have tried to build a very rudimentary understanding of public sector financing and the 5 points listed above are somewhat fundamental assumptions of mine.

    I think this whole matter brings to light two issues in Virginia. First, "balancing" the state budget by failing to make required payments into the state retirement fund seems like the essence of opaque and irresponsible financing. Second, the "discovery" of a billion dollars in VDOT is a very worrisome example of sloppy bookkeeping. If Virginia is one of the two best run states (financially speaking) I shudden to think about the finances of the other 48.

  8. Larry G Avatar

    there are different kinds of bonds… two are GO (general obligation) and enterprise (for water/sewer and other related kinds of "authorities" that have a nexus to government but weaker than direct taxation.

    There are Community Development Authorities and Transportation Districts – that also sell bonds.

    The problem with VDOT was basically that EVERY SINGLE ONE of their 9 separate regional districts was holding back funds starting in 2006-2007.

    Before that time they did not.

    What happened?

    Well.. Gov Kaine cut more than a 1000 positions from VDOT (how is that for a non-Republican fiscal conservatism?) and the people Kaine has put in charge of VDOT forced them to shed about 1/2 of the projects in their 6yr plan because they had no viable funding.

    So the District offices hunkered down because they were unsure what other cuts might be in the offing.

    It was wrong to do that but not near as wrong as spending itself into a deficit and put the state's finances at risk.

    Notice that Mr. McDonnell has NOT called for further downsizing of VDOT.

    Why NOT!

    Wasn't the basic premise that VDOT … MUST BE WASTING MONEY .. and the audit would PROVE IT?

    So.. the Gov creates this kerfuffle over the ABC … trying to slip in stealth taxes so the state can privatize but still keep the revenues (nice work for a no-tax guy, eh?)

    then.. instead of saying he will pay back the pension fund with the ABC money – he says he will give it to VDOT (when he's finished pillorying VDOT).

    I think Governors like McDonnell are how states like Va – get their fiscal reputations ruined – myself.

    Smoke & mirrors. He defers $600 in bills – creating debt – and has the cajoles to claim a surplus and the Republicans are doing the same thing they did with Bush – just zipping their lips.

    The bond rating folks are not pro-tax and anti-tax but they do judge you on how much debt you are carrying – and your unfunded liabilities – and your intentions to confront such issues.

    This is how states like New Jersey and California get fried by the rating agencies.

    I think if McDonnell does not get an attitude adjustment – and his own party doesn't get him straightened out – we will end up with Va. rating at risk.

    You cannot fund VDOT with smoke and mirrors.

    You either have to redefine it's mission – downsize that mission or you need to find a sustainable source of funding for them and what we are seeing is WORSE than Warner/Kaine because at least those guys were truthful about how they thought the VDOT issue should be resolved …and this guy (this Gov) is demonstrating a propensity to run away from the issue.

    and I forgive Groveton for voting for him. anyone can make a mistake.. you know…

  9. 23k taken out of the tax pool.

    That's not what they say when you want to build one….

  10. If we default on ourselves, so what?

  11. Larry G Avatar

    and I'm worried about the other shoe here.

    The VDOT money not spent is still needed for the intended purposes for which it was allocated – primary maintenance of roads that have deteriorated especially some sections of the interstates.

    My concern is that McDonnell will claim that this is "found" money… undesignated ..and therefore "free" to be used for other things.

    In other words – he's going to substitute his own (likely political) priorities for the institutional priorities that were used – including … taking the money back from the districts offices …and reallocating the money – not by the Formula in the State Code but by McDonnell's own personal "formula".

    Now some folks might think this is "good" government but I see it as merely substituting an even more obscure and less transparent process for another.

    It just seems like every Gov that comes into office has to mess with VDOT. some of them do not bad – like when Warner had Mr. Shucet have them build the "Dashboard" that gave folks an up front status of every project in terms of it being on time and on budget.

    And Mr. Kaine did downsize VDOT and did require them to cut the 6yr plan in half because it had more than 12 years worth of projects on it.

    I had hoped that McDonnell would either realign VDOT's mission to be more aligned with the modern day funding realities or to – admit – that you cannot fund VDOT out of thin air and nor can you fund them out of pie-in-sky ideas about offshore drilling in the future.

    This Gov has substantial opportunity – a wide playing field and so far – to date – he's picking razzle-dazzle plays rather than moving the ball down the field.

    I was skeptical that he could do much for VDOT without dealing with funding but I was prepared to hear some ideas different from taxes ….

    but now I'm disheartened because of his performance with the pension fund issue and the ABC issue.

  12. Darrell Avatar

    "I can't remember the last state / local election where I didn't vote on a bond referendum"

    Interesting. I've been here 15 years and remember only one bond referendum in all that time. How do they get around going to the voters?

  13. primary maintenance of roads that have deteriorated especially some sections of the interstates.


    There are some local roads near my home that would be better off if they ripped them up and returned them to gravel, which probaably can't happen because of new Bay regulation on runoff….

    I have to say that Arizona, for all its other problems, seems to keep the roads in Excellent shape, and there are bike lanes everywhere. Not used much, but there they are, and I'm sure it makes for much safer roadways. Their lights seem to be well timed, and the left turn lanes are more than ample. Most boulevards seem to have four travel lanes, a bike lane, parking or breakdown space and a full length left turn lane down the middle which is shared in both directions.

    This is the equivalent of four lanes in both directions, and the pavement is mostly in good shape (granted, they have a benign climate).

  14. I've voted against plenty of bond referendums, all of them in fact, and almost always in vain.

  15. I still think you guys see way too much doom and gloom. Today I was in Flagstaff and watched a number of trains running both directions, laden with goods: truck bodies, pipe, plywood, and thousands of double stacked containers carrying god knows what, plus tank cars and bulk carriers.

    These were major trains, miles long with two or more pairs of locomotives, pulling, pushing, and embedded. I was at a gas station/truck stop watching all of this and the trucks were the same way, some going east and some going west, and with hailing ports all over the US. This truck stop was so busy you had to get a reservation to take a shower. These guys (and ladies) were stacked up to get fuel, and I dont think it was for their health.

    I watched one woman fill up a three quart thermos with coffee for her truck. How scary is that?

  16. Groveton Avatar

    Hyrda makes a good point. The recession seems to be easing. However, I have to day "seems". The first two quarters of the year were economically turbo-charged by inventory re-stocking and some stimulus spending (around the world). Therefore, the first two quarters were strong.

    Unfortunately, the inventories are now back to normal levels and the stimulus (world-wide) is ebbing. That means the second two quarters of 2010 may well see slower GDP growth than the first two quarters. While I believe there will be growth (i.e. positive GDP) I think it will be pretty enemic.

    2011 will be more of the same. The only world economy likely to grow faster in 2011 than 2010 is Vietnam.

    At these growth rates there will insufficient job creation to make up for the job losses suffered in 2008 and 2009.

    It appears that we are headed for a world-wide Lost Decade of the type suffered by Japan in the 1990s.

    This is better than a Great Depression or a Long Recession. However, it will create great displacement – especially in the developed world. Already there are riots and general strikes in Europe as countries there attempt to take some of the sting out of Boomergeddon. Meanwhile, in the US, John Boehner (among others) is proposing to raise the retirement age which you must reach before qualifying for social security. Expect to see more of these peoposals over the next 2+ years as we move through two federal election cycles.

    The final shoe to drop will be protectionism – perhaps not in this federal election but certainly by the next. The Chinese manipulation of their exchange rates is a form of protectionism. The French work rules are a form of protectionism as global companies lay off employees in the US before employees in France in order to avoid the high costs of severance.

    As the Lost Decade rolls on, some US politicians will point at globalization as the major evil facing the US economy. While much will be hyperbole, there is enough truth in the accusation to get some politicians elected. This will be enough to change the trajectory of the global economy. I have always qualitatively believed that globalization has widened the wealth gap in the United States and heightened the peak of mass overconsumption.

    As a side note – turning a blind eye to illegal immigration is simply another form og globalization. Instead of exporting low and mid wage jobs overseas we import low and mid wage workers into the US. The net effect is identical – systematically lower wages in production cause systematically lower prices. This benefits those best able to participate in the production process widening the wealth gap. It also incents accelerated consumer purchasing causing increased debt (or decreased savings) thus furthering the wealth gap even more.

    Summary – a prolonged period of low growth will put new focus on nationalism / protectionism. This new focus will have substantial implications both inside the United States and around the world. Systematic unemployment will remain a reality for the next 3 – 5 years in the US.

  17. Larry G Avatar

    re: roads in the soutwest

    last much longer… without winter cycles….

    re: Arizona – Ray, can you say what you are doing in Az?

  18. James A. Bacon Avatar
    James A. Bacon

    Yes, the recession is easing and the country has entered a recovery. Hydra's eyes do not deceive him — economic activity is picking back up. Big whoop. What else do you expect? That's what happens after recessions. The question is not if the economy is recovering but *how strong* is the recovery?

    The evidence is accumulating that we are entering a very weak recovery. I predicted as much a half year ago when I was writing the relevant chapters of "Boomergeddon" based on fundamental economic trends that transcended politics and policy and should have been obvious to anyone with a brain. But only six months ago, there was widespread sentiment that the U.S. would enter a "V" shaped recovery.

    I personally believe that Obama's policies have made a bad situation worse by piling on new regulations, taxes, fees and uncertainty. But you don't have to believe that in order to conclude that the current recovery will be a weak one.

    Groveton is right about the "worldwide lost decade" we face. The problem is bigger than Barack Obama or even George W. Bush. It is a crisis faced by all democratic welfare states, which are habitually inclined to promise more to their people than they can afford to pay. Europe at least is trying to deal with the problem by means of extensive budget cuts. Here in the U.S., thanks to people like Peter, Larry and others who are in total denial about fiscal reality and are obsessed with defending Obama from slights both real and imagined, we are still in tax-and-spend mode.

    The political calculus will change after next month's elections. But there is little evidence that the Republicans understand the size and scope of the problem or are prepared to deal with it — as I have written in a recent post. (See "A Pledge for Wimps".)

    The idea that I am partisan in my criticism of Obama is so ludicrous as to be laughable. I mock those who make the claim. Indeed, I would reverse the charge: Those who doggedly defend every single economic decision that Obama ever made and blame all the nation's economic policies on his predecessor, George W., are the ones blinded by partisan fervor.

  19. Larry G Avatar

    re: the economy & the stimulus (and TARP)…

    so what is the verdict from those who were (or remain) opposed to one or both?

    would the economy have recovered to this point anyhow without the stim/tarp?

  20. Larry G Avatar

    re: "… piling on new regulations, taxes, fees"

    I need to see some proof of this statement – in the here and now – not the future…

    what CURRENT regs, taxes and fees right now have HINDERED this economic recovery?

    are those same phantom regulations, fees and taxes done on a worldwide scale and similarly responsible for the "weak" worldwide recovery?

    Did the worldwide "welfare state" lead to this particular recession?

    The problem with the critics is that their accusations are not substantiated and function more like random spaghetti thrown on a wall.

    that's … IDEALOGICAL … not substantiative….

    let see some evidence of CURRENT regs, taxes and fees and their IMPACTS on THIS ECONOMY right now…

    provide the evidence or fess up and take it back…

  21. Larry G Avatar

    re: illegal immigration –

    I AGREE that it is no different than outsourcing jobs but we have to agree on who is causing the problem.

    The logic that some are using in this country would be to blame the folks in India who received the outsourced jobs rather than the businesses that outsource them.

    It's the same in this country.

    When a business does not require iron-clad proof of immigration status – why do we blame the worker?

    Canada does not have this problem and they have hundreds of thousands of harvest workers every year – and after harvest they return to their home country and the reason why is that they have to because they no longer can be employed.

    and that is because if the govt finds them employed – that the employer gets whacked with a big fine…

    that is all we would have to do in this country if we were serious about reducing immigration and I think it is just downright disengenous to blame the workers and not the employers who, BY LAW, must verify their status including their SS status.

    How did Meg Ryan pay the FICA taxes for her "illegal" for 9 years?

    Does the Social Security agency give out ss numbers to "illegals"? (that's an honest question I don't yet know the answer to).

  22. James A. Bacon Avatar
    James A. Bacon

    Larry, I've already used this blog to document some of the counter-productive "regulations, taxes and fees" stemming from Obamacare. If you cannot remember the details, I have no intention of reciting the litany again. There is another host of regulations stemming from the re-regulation of the financial "reform." So much has been written about it that I have no intention of surfing the Internet and gathering the information on your behalf. If you want to choose to believe that the massive bill imposes no regulations — even though its stated purpose is to rein in the excesses of the financial sector — then go ahead and believe whatever you want.

  23. Gooze Views Avatar
    Gooze Views


    You may chastise about peopel supposedly not "surfing the Net" to find out about more regulationf or finance, but you have this habit of dismissing reforms as simply vehicles to create more regulations, as if that in itself is inherently evil.
    The fact is that financial services very much needed MORE regulation. They could do whatever they wanted — load up on debt to equity, create mysterious CDOs and CDSs and repeatedly screw over customers at whim. They should never have been allowed to trash their investors money for get-rich-quick subprime schemes. The government and Congress let them get away with all of this.
    So what is YOUR point? What regulations do you think are bad ones? ALL of them?

    Peter Galuszka

  24. Larry G Avatar

    Jim – NONE of your cites affect the CURRENT Economy nor have they been the cause of the problems.

    You're CLAIMING that FUTURE impacts will be adverse and using it to implicate the CURRENT problems and that's not kosher even though many of your cohorts are also engaging in it.

    Right NOW .. THIS MINUTE – taxes are the lowest they have been in decades.

    Govt is smaller now that it has been in decades….

    you have cited no CURRENT Regulations, taxes, fees, etc as direct contributing causes of the current economic distress.

    you are saying that things in the future will be adverse and it's more conjecture (and wishful thinking) than any current reality.

    I'm trying to keep you straight.

    The ONLY THINGs that Obama has done that do affect the here and now – are the TARP (which Bush co-owned and will be mostly paid back)

    .. and the Stimulus which Obama does own….

    other than that what is your evidence for the here and now?

  25. James A. Bacon Avatar
    James A. Bacon

    Peter, I have never said that regulations are "evil." I acknowledge that they are usually designed to fix some perceived problem or inequity. My point is that there is usually a *cost* associated with the regulations, a cost that is rarely acknowledged by those who promulgate them. And given the enactment of Obamacare in the health care sector, the Dodd/Frank bill in the financial sector, the EPA carbon emissions regulations imposed by bureaucratic decree, the failure of Congress to decide what it wants to do with taxes, and the rotating demonization of industries from oil to banks to health insurance, the private sector is not feeling the love right now. That has real-word economic consequences!

  26. Larry G Avatar

    I'd like to see the evidence for the regulations created since Obama became president – and the adverse impacts that they've had.

    The PREMISE is that pre-Obama regulation was BAD and that NOW, Obama has created even more regs for the future ….

    and it is those additional regulations that have harmed our economy…

    which is grade A bull snot.

    All I'm asking is for some honestly here…

    I do not believe that everything that Obama is doing is net good… necessarily but I object to what appears to be blatant partisan misrepresentations that seems to be common practice now days.

    Where is the evidence for these assertions?

    What you're essentially blaming Obama for is regulations that have not taken effect yet – and you're even blaming him for regulations that he has not even proposed because you THINK HE WILL PROPOSE them.


  27. Gooze Views Avatar
    Gooze Views

    Ho hum. We've heard the whine about regulatory costs before — notably with Sarbanes-Oxley, which did a lot of good. For years biz types howled about the extra ccounting costs. But what else happened? Their legal costs actually went down because they had to defend far fewer shareholders lawsuits for cooking their books.
    Biz ALWAYS howls about regulatory costs. Take it with a grain of salt.

    Peter Galuszka

  28. James A. Bacon Avatar
    James A. Bacon

    Larry, markets are FORWARD looking. Business base capital investment based on what the FUTURE holds. There is an extraordinary amount of uncertainty right now, some based on the imposition of regulations, and some based upon the massive deficits, debt accumulation and unknowns regarding deflation, inflation and the dollar. You can pretend that these things don't enter into the calculations of business executives when they make investments, but they do.

    Peter, Sarbox may well have reduced the expenses associated with shareholder litigation — a valid point — but the costs associated with compliance have discouraged a lot of companies from going public. Sarbox has not been an unmitigated disaster, as some supposed it would be. It has been a mixed bag.

    Contrary to your repeated statements that I oppose *all* regulation, I recognize the legitimate role of government as setting the rules by which the capitalist game is played. (I do get tired of having to say this over and over: I do not propound anarchy as a form of social, political and economic organization!) Some regulation is needed. Buried in the garbage pile of Obama's legislation are some worthwhile rules. But there's a lot of junk, too…

  29. Larry G Avatar

    Jim – the markets TANKED… BEFORE regulations were proposed.


    Remember that Bush and the Republicans spent 8 years reducing regs and the markets TANKED … BEFFORE Obama took office and before he proposed any legislation.

    Were the markets looking forward when they tanked?

    What is it about what you are saying Jim – that has not been the case in terms of Republican philosophy since the time of Ronald Reagan?

    What is different now that makes the "fear" of regulation more justified and potent?

    I see nothing.

    I see an economy that dang near went into depression BEFORE one word was uttered about future regulation.

    Was that not the case?

  30. James A. Bacon Avatar
    James A. Bacon

    Larry, let me make it simple for you.

    1. The economy is coming out of recession.

    2. But the recovery is much weaker than in previous business cycles.

    3. One reason the economy is weak now (NOT the only one, as I have explained many times) is that businesses are suffering from a high degree of uncertainty. That uncertainty affects their willingness to invest and hire now, thus impacting FUTURE economic performance.

    4. Among the factors creating uncertainty are (1) the passage of expansive new laws, for which important regulations have yet to be written,(2) a deteriorating deficit-and-debt situation, and (3) the expectation that tax rates will increase.

    Please, someone else weigh in here. Is this unclear in any way?

  31. Larry G Avatar

    I understand your future angle but it ignores why we crashed in the first place if we went through 8 years of less regulation and lower taxes.

    The recovery – guy – is WEAK – WORLDWIDE …not just in the US.

    Is the rest of the world ALSO worried about future regulation?

    you need to get your story – to sound reasonable……

  32. Larry G Avatar

    Conservatives have – since the time of Ronald Reagan – made the case that regulation hurts the economy but just like their tax-cut advocacy – they rarely provide the data to back up what they are saying.

    and for Jim to assert that the PROPOSED regulations is hurting the economic recovery ..without hardly one shred of evidence to back it up…

    makes it sound just like more of the same standard Republican mantra about regs… general.

    they are always BAD and they always HURT BUSINESS and they always keep business from expanding….


    It don't matter if we are at the top of the market ..or the very bottom – the anti-reg narrative.. just keeps on chugging along…

    it's an article of faith for the Conservatives.

    Whether it is actually true or not or actual evidence can be provided to substantiated is …. "irrelevant".. ie. "beside the point".

    Come on Jim.. provide some evidence here besides the fact that the right-wing blathers on about it….

    I need more than your "article of faith"….

  33. James A. Bacon Avatar
    James A. Bacon

    From an op-ed by Nicole V. Crain and Mark Crain, authors of "The Impact of Regulatory Costs on Small Firms," published last month by the Office of Advocacy, U.S. Small Business Administration:

    The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008, a 3% real increase over five years, to about 14% of U.S. national income. This cost is in addition to the federal tax burden of 21%, for a combined cost of 35% of national income. One out of every three dollars earned in the U.S. goes to pay for or comply with federal laws and regulations, and new policies enacted in 2010 for health care and financial services will increase this burden.

    Read more.

  34. Larry G Avatar

    That's a decent start (though not 100% convincing but I'll give you a pass).

    Now.. tell me how much MORE is anticipated from Obama .. in terms of dollars or percent and how that has become the reason why we are having a slower than normal recovery.

    Good Luck!

    maybe you should try for how many jobs tax cuts create, first as a practice problem?


  35. Larry G Avatar

    That's a decent start (though not 100% convincing but I'll give you a pass).

    Now.. tell me how much MORE is anticipated from Obama .. in terms of dollars or percent and how that has become the reason why we are having a slower than normal recovery.

    Good Luck!

    maybe you should try for how many jobs tax cuts create, first as a practice problem?


  36. I'm on temporary assignment in AZ, mostly training.

    Since the collapse was so steep the recovery would need to be miraculous to achieve a v shape. I see no reason to expect anything on the back side of the curve based on the shape of the front side. One set of events caused the fall and others will results in recovery.

  37. Larry G Avatar

    I love it. The Republicans when they get in office do as much as they can to gut the regulations then when things go to hell in a handbasket they say "see.. how incompetent the govt is at regulation?"

    The "regulation will kill the recovery" is how the Republicans make the case to throw out the Dems after the repair the damage.. and the get their guys back in to once again dismantle them.

    I admit it.

    The Republicans are much, much better at telling their story. It's almost like if you are a better deserve to win.

    all this brought to you by the clueless middle.. you know.. the folks that watch the infomercials and go for the $10 deal never paying much attention to the "just pay for the additional shipping and handling" …

    we are hostage…to the clueless middle…

    it's maddening….

  38. Darrell Avatar

    "Today I was in Flagstaff and watched a number of trains running both directions,"

    That's the main line running out of Long Beach. They build the trains in Barstow and run through Albuquerque and beyond.

    I-40 is the main road out of Calif. Lot of trucks with fresh produce on tight time schedules.

    Speaking of trains, they used to have a train to the Grand Canyon from Williams. I took a steamer there once. Not sure about now.

    I used to travel 40 quite often. I'd leave Fresno and spend the night in Flagstaff. Next stop after that was Ft. Smith, Ark. Once you've seen one rock, you've seen them all. Boring…

  39. The train from Williams still runs but the Verde canyon train is better.

    Rocks are a lot more interesting if you understand some geology, some Geochemistry, and some economics of mineral deposits.

    They have a lot of nice rocks in AZ.

  40. Reg or deregulation and you change the environment: some companies will do well in the new environment and some won't.

    Studies have shown that tax policies make little difference. The rich thrive either way and almost at the same rate.

    For the corps, some will succeed and some will fail, but when the dust settles the rich will still own the ones that succeed.

    The way to deal with uncertainty is diversification, not ossification.

    Even as a small investor, you can own a small piece of hundreds of companies. Then you care a lot less if some fail.

  41. Darrell Avatar

    "They have a lot of nice rocks in AZ."

    Monument Valley was alright. I have a friend that lives in Farmington, NM. Pretty long lonely drive from the Grand Canyon tho… Saw maybe ten cars the whole way.

  42. Gold is setting new record prices and yet conservative investors are still saying this is the time to buy gold. This seems strange to me, at a time when, for the price of 3 ounces of gold you can buy a share in every stock in the DOW industrials.

    When ratios get that low,it tells me that the DOW is cheap and gold is dear therefore, time to make the switch.


    "The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008, a 3% real increase over five years, to about 14% of U.S. national income."

    The Crains neglected to say anything about the BENEFIT of regulations to small busines.


    Larry is right, roads in Arizona don;t have winter, except in the mountains, but they do have blistering heat. however, I believe the main difference in the quality of their roads is that they have made more of a priority about them, and they spend more.

  43. Larry G Avatar

    well.. if not mistaken, Arizona does not build nor maintain subdivision roads.

    VDOT has 57,957 miles of road to maintain.

    AZDOT has 7,142.

    Az funds about 1.7 billion a year for transportation.

    Va funds about 3 billion.

    do the numbers…

  44. Your comment supports my statement that they spend more.

    The results show it.

    Is that miles or lane miles? I find the difference in miles hard to believe, especially considering the sprawl they have.

    Regardless of who pays for what the sum total is better than we have here.

  45. Larry G Avatar

    page 20 & 21

    on page 22 you can see capital disbursements per mile:

    Va – $23,384
    Az – $142,106

  46. Like I said, the results show it.

    I still have a hard time reconciling 7,000 miles against 57,000 miles, considering the relative area and population.

    It must be, as you say, that subdivisions don;t count in the Arizona miles, and are paid for out of other maoney. And maybe municipalities also pay for their own (with allocations from the state). But, if there is a lot of additional money being paid from other sources, then the disparity between what people are willing to spend in Arizona vs VA. is even LARGER then your figures indicate.

    What it says to me is that your argument that it is politcally impossible to raise the money, is not true.

  47. I wonder where the Arizona money comes from. You sure could not see it in the Gas prices. ($2.55/gal for regular).

    It does NOT come from tolls.

  48. Larry G Avatar

    their gas tax is within a penny of Virginia's.

    Arizona DOT does not do subdivision roads nor county roads.

    People do pay but they pay not at the state level but at the subdivision and county level and they have a choice and direct vote in that.

    Arizona does it pretty much the same way that 46 other states do.

    Virginia is the outlier.

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