Gimme some muni
One of the historic things about the Fed’s pesach miracle was its entrance in muni markets: it committed to buying $500 billion of municipal bonds.
‘Munis’ (myooneys) as they’re affectionately called form a nearly $4 trillion market that’s super relevant to my own research in school funding. These bonds finance everything socialists want more of, at least in terms of government programs.
So I decided to take my anxiety down the muni market rabbit hole. (Get it? Muni me?)
Basics
Municipal markets are when state and local governments sell bonds to finance their budgets for all sorts of things. Apparently governments have been doing this since Renaissance Italy, and the first big municipal bond was issued by New York State in 1812 to finance a canal.
Because it’s a series of governments selling bonds, the muni market is a funny market: instead of firms, you have governments.
As a socialist I find this interesting because, as Joe Mysak writes in the Introduction to his Encyclopedia of Municipal Bonds, these entities aren’t in competition with one another. But they’re not cooperating either (except when you have revenue sharing authorities, like in Minnesota and Vermont).
(I highly recommend the Introduction to Mysak’s book, which has references to Thomas Wolfe and Saturday Night Live. He was a writer for Grant’s, which takes a wry and historical approach to business writing.)
Important also to mention that municipal bonds are graded like any other bond. ‘High-grade’ bonds are a good bet and ‘low-grade’ ones aren’t. ‘Junk’ municipal bonds are risky. But again, these are governments.
So a ‘junk municipal bond’ just means a government entity that’s having problems paying back it’s creditors. Instead of junk bonds in the private sector that are sleazy and weird (like the toxic mortgage-backed securities starring in the 2008 financial crisis and depicted in The Big Short), you should think of urban school districts.
Detroit Public Schools have a Ba3 rating, which is actually an upgrade from B2. This is considered ‘junk’ because it’s below the threshold for low-grade (which is Baa3).
For example, according to a recent BlackRock report on munis in the pandemic crisis, here’s a paragraph listing some of the vulnerable projects:
retirement communities, nursing homes, casinos, hotels, regional trains, shopping centers and resource recovery plants. Overleveraged local governments and small private universities are also likely to struggle, along with airports, toll roads, mass transit and rural/single-site hospitals. States and cities that rely heavily on tourism, narrow sales and personal income taxes, and oil prices will be strained, as well as those with poorly funded pension systems.
Yikes.
If you want to know anything about current municipal markets, the Electronic Municipal Market Access website has anything and everything you want to know. Here’s the Commonwealth of Pennsylvania’s bond portfolio and here’s the Philadelphia School District’s.
I can see that the last trade the District made was in December of 2019 for $2 million that matures in September 2023 (I think, I need to read more about this to understand).
What the hell just happened
So the Fed has never bought municipal bonds. Like a stern and rich father, it’s not in the habit of giving governments a credit card. But the production crisis is different.
In March, the municipal markets “imploded in real time” when investors pulled $12 billion from the market’s high-grade bonds. The buyers left the market all at the same time. Bloomberg called it a “record exodus.”
At that point, sellers in the market cried for papa. Things got bad enough that Pennsylvania even extended payment for corporate taxes. The Fed was willing to do it for the first time in history, buying $500 billion in short-term municipal debt through the newly established Municipal Liquidity Facility.
Precedent for people’s quantitative easing?
As a socialist, this move by the Fed is pretty interesting given what I said above. Local and state governments aren’t private firms. They’re public entities whose managers are accountable to voters and not shareholders. Their mission is public service and not profits. There’s also a higher union density in government jobs, which mean that workers in the sector have more protections.
I’ve been interested in Corbyn’s 2015 proposal for a people’s quantitative easing. And to some extent, the Fed’s new buying program is accomplishing a similar goal: using monetary policy to finance public entities that serve the working class. Socialists should note this move by the Fed as a precedent for future demands.