Will The Fed Bail Out The Muni Bond Market?


I very nearly missed this juicy little bit so hopefully Bernanke did too, don't let the guy know he's got this kind of power or it's really all over.

Check out this quietly suggested bombshell by David Blanchflower via Bloomberg:

The economic models are telling us that we need more stimulus. Lowering interest rates and more fiscal stimulus are out of the question. Quantitative easing remains the only economic show in town given that Congress and President Barack Obama have been cowed into inaction.

The major questions about quantitative easing aren’t so much if, but how much will the Fed buy and of what type? There is little point in moving slowly. So $100 billion a month for six months seems a reasonable amount.

What will they buy? They are limited to only federally insured paper, which includes Treasuries and mortgage-backed securities insured by Fannie Mae and Freddie Mac. But they are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing. Even if the Fed wanted to, it couldn’t buy other securities, such as corporate bonds, as it would require Congress’s approval, which won’t happen anytime soon.

[emphasis mine]

Did you read that? Read it again. "[T]hey are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing."

That means they can bail out munis to their heart's content and no one can say a thing. They don't even have to announce it if they don't want to (independence, you know) and what's to say they aren't actively engaged in it as we speak while the rest of us are sitting down to an overpriced turkey and awkwardly staring at our families tomorrow?

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.

1 comments:

Graybeard said...

I don't have the article, but a friend with a WSJOnline subscription sent me a pdf about a week ago, saying that this is already happening. The fed has already acted to bail out some cities.

I don't have a WSJ subscription or I'd give you the link here. You can probably find it, though.