Let Me Down Easy

There's been some serious tremors in the municipal bond world recently.  The uproar started when Merdith Whitney wrote a report stating there would be a spate of municipal bond defaults this year.  Fine, who cares-- nobody reads reports?  But then she had the temerity to go on CNN and 60 Minutes (about 3:30 minutes in) and make her case to a wider audience.   In October 2008 Ms Whitney was ranked as one of Fortune 500’s “50 Most Powerful Women in Business" and in 2008 she was named CNBC's "Power Player of the Year".  Bottom line-- she's been more often right than wrong concerning the financial markets.

Jake Zamansky notes the shoot the messenger cockroaches on Wall Street wasted no time coming out of the woodwork to belittle Ms Whitney.  Why was her prediction so shocking it got everyone in a tizzy?  Everyone knows Illinois hasn't been paying it's bills.  Everyone knows New York will need to borrow money to fund it's budget.  Everyone knows California's Governor Brown and before him the Guvernator have declared a state of fiscal emergency.  Bernanke has had to go on record saying the Fed will not prop up the states.  And yesterday we read a startling article floated in the NY Times analyzing the pros and cons of letting states declare bankruptcy. 

Here is the opening sentence from the Times article:

Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.  

Let's hold up a second here:  influential leaders are now discussing how to deal with states defaulting on their obligations.  Obligations to creditors, retired and active workers, and residents.  The next step will likely be the formation of a Statehood Default Commission co-chaired by Charles Rangel and Rod Bogoyavich.  Keep in mind a state bankruptcy will be tricky to finesse.  The politicians can't afford to short change the big banks and public employee unions because they're needed to fund the 2012 political campaigns.

The Times prints a story like this for a purpose.  My thought is we're being conditioned to expect and accept another aspect of the "new normal".  Events that seemed implausible a few years ago now appear to be just beyond the horizon.  So we thank Ms Whitney and the Times for preparing us-- it's good to be let down easy.