Rick Bookstaber: Want To Know Where The Next Crisis Is Brewing? Check Out The Muni Market

The financial/hedge fund/banking crisis is over!

So sayeth Rick Bookstaber, a critic of financial complexity-turned-fed (he works for the SEC now).

On his personal blog he lays out where to look next for a serious crisis, and his answer is the municipal debt market.

But first, he lays out six preconditions for a serious crisis:

  1. Problems occur where leverage and opacity occurs.
  2. Things get serious when the market is big.
  3. Investors hold a false-belief in diversity.
  4. Portfolios that are apparently hedged often aren’t.
  5. Ratings can’t be relied upon.
  6. Defaults are not easy to manage.

Does the muni debt market meet the conditions?

You bet.

OnĀ  leverage and opacity, he writes:

Leverage and Opacity. Leverage in the municipal market comes from making future obligations to employees in order to pay them less now. This is borrowing in the form of high pension benefits and post-retirement health care, but borrowing nonetheless. Put another way, in taking lower pay today, the employees have lent money to the municipality, with that money to be repaid via their retirement benefits. The opaqueness comes from the methods of reporting. For example, municipalities are not held to the same standards as corporations in their disclosure.

The next five are just as clear.

Of course this doesn’t tell you when there’s going to be a problem, so that part’s up to you. Good luck.

Read Bookstaber’s full post >

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