Municipal bonds will no longer be part of the easily sellable assets that banks can use to show they are able to survive a credit crunch, Bloomberg reported, citing a person familiar with the matter.
The final liquidity rule will be approved by regulators, including the Federal Reserve, on Sept 3, the news service reported the person as saying.
The most recent draft does not list debt issued by states and municipalities as high-quality assets that could help sustain a bank through a 30-day squeeze, the report said, citing the person.
The regulations could affect the municipal bond market by giving banks less incentive to buy bonds that finance schools, roads and public works, Bloomberg said.
On the surface, this new rule make perfect sense–it is a natural response to the unprecedented explosion of municipal bankruptcies and the economic decision underpinning them (poor investment of public funds, unsustainable public worker benefits, overly generous subsidies to attract private sector jobs, etc.). “Easily sellable assets” are supposed to be liquid and stable in price, in order to assure banks can “wind down” their holdings in the event of a financial crisis.
But upon further consideration, the decision to not include municipal bonds as “easily sellable” assets is representative of a larger [artificial] divide between the “financial” and “real” economies. It is also incredibly shortsighted.
In the aftermath of the “Great Recession”, America realized two economic recoveries. One was a financial recovery which, buoyed by a financial sector bailout, happened very quickly. This recovery resulted in 95% of economic gains between 2009-2013 went to the top 1%–the people who own the vast majority of financial assets. This recovery continues to be marked by record high values for many popular stock indexes.
The second recovery, which 6 years later is only partially complete, is the recovery of the labor market. Unemployment is low (especially compared to levels in certain European countries), but wages remain depressed and many people are still forced to take jobs below their skill level.
In theory, the financial sector should act as a barometer of sorts for the strength of the real economy; when the real economy is doing well, the financial sector should boom. In reality, throughout the past few decades the financial sector has become synonymous with terms like “bubbles”, insider information / fraud, and offshore banking / tax inversion. Financiers, accountants and lawyers are employed to figure out illegal / quasi-legal loopholes to ensure the rich get richer regardless of their productivity or contributions to society as a whole.
In the aftermath of the Great Recession, the type and amount of “safe” assets banks must hold has to be reexamined. But pricing municipalities out of financial markets is not the answer to this problem.
In the long run, economies do well when we invest in everybody–when no person is left behind. This concept goes by many names; the two most common I have heard are “the human rights based approach to sustainable human development” and “progressive politics”. Regardless of what you call it, this concept is not only ethically and socially just, it is economically viable. Furthermore, we end up paying for those “left behind” in the form of higher police, prison, and welfare expenditures anyways.
The decision to not include municipal debt as “easily sellable” assets will drive up the price municipalities pay for providing essential public services. Of course municipalities must do their best to set economically sustainable policies, perhaps with the assistance / oversight of state and/or federal officials. But America cannot afford to let the current mishandling of municipal policies lead to a further deterioration in local service delivery–it is unfair to the people affected by these policies and the American economy as a whole.
Spending less money on education, social programs, and infrastructure, while perhaps “fiscally responsible” in the eyes of some people, is incredibly harmful to America’s economic prospects in the medium and long runs. Unless this liquidity decision is part of a larger plan for the Federal Reserve to act as a backstop / “lender of last resort” for municipal debt–an idea I have heard nothing about–then it will only further exacerbate the rift between the real and financial economies, setting America up for both future financial crises and a loss of global competitiveness.
During my time interning at the UNDP, there was an organizational slogan I took to heart; judge a society not by the strength of its strongest, but by the strength of its weakest. In America, those at the bottom of the socioeconomic ladder depend the most on municipal services to realize “the American Dream”. This slogan holds holds as true with regards to the sustainable human development of American’s as it is for people in less developed countries.
America should have the resources and political will to enable everybody to realize their full economic potential. This should be the new American dream.