U.S. Federal Reserve Chairman Ben Bernanke and Obama’s White House are sticking it to the states with their misguided policies.
Bernanke is doing the twist, Operation Twist, by selling short-term and buying long-term bonds. His hope is to push mortgage rates lower to help the sluggish real-estate market recovery. But the problem isn’t that interest rates are too high; they’re already near historic lows. The problem, for most, is getting the truckload of cash to the closing for a new house or a refinancing.
Long-term Treasury yields have fallen off of a cliff, thanks to the Fed intervention. This is going to stick it to the states with unfunded pension liabilities—like Rhode Island, for example. The proper way to account for the funding of a pension liability for a state in such dire financial straits as Rhode Island’s is to match up the pension liability with a discount rate like a zero-coupon bond. This is similar to what the lottery does to guarantee that winners receive their payments over a set time period. Now that the Fed has intervened, the 30-year zero-coupon is yielding only 3.31%. The lower the yield, the higher the unfunded liability, and as rates drop, the unfunded liability based on realistic returns will continue to blow up exponentially.
Then you have Obama’s jobs scam plan, where he taxes the successful among us who make $250,000 or more—“the millionaires and billionaires.” For this group, he wants to remove the tax-free benefit of municipal bonds. He and his Harvard boys don’t get that muni holders will simply sell their bonds or hold them until maturity. The last thing they’ll do is buy more—unless, of course, the yield is high enough. So states will be forced to offer higher yields, in effect increasing their borrowing costs. This is not the time to be increasing costs for states, especially those hanging on by a string, such as Rhode Island. A first grader could figure this stuff out, never mind Harvard grads.
The Fed and White House are a clear example of the left hand not knowing what the right hand is doing. The Fed intervenes to keep rates lower for housing, while the White House scares off mortgage bond investors. The market sells off 300 points on the Fed’s plan and is trading off 400 points as I write. The yields on the bonds that the states should be investing in, like zeros, continue to plummet from the Fed intervention. And then the White House goes after the “rich” and increases the financing costs for states issuing muni bonds. I’d say all in all it’s a complete nightmare.
E.J. Smith - Your Survival Guy
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