How To Stop The Fiscal Emergency Facing U.S. Cities And States

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, do you remember you said on a recent episode, something akin to, oh, we finally covered all of the different aspects of this crisis?

Tracy Alloway (0:28)

I knew you were jotting that down in your memory, and it was going to come back to haunt me. I stand by it. I think we've hit the really big ones, but I know you're gonna pull another one out of your pocket right now.

Joe Weisenthal (0:41)

I think I have like 20 more to pull out.

Tracy Alloway (0:44)

No, come on. I said the major strains in the financial system. I caveated it. You can't say that there are 40 major financial strains, but you're going to.

Joe Weisenthal (0:57)

I think there might literally be 40 more major ones, but nonetheless, we definitely have not hit all the major ones. And so I think that today's episode will be one that I think sort of unquestionably counts as major, even if the number of remaining ones are still TBD.

Tracy Alloway (1:17)

All right, fair enough.

And I think I know which one it is. It has to be the muni market, right?

Joe Weisenthal (1:23)

Yeah, so absolutely. So due to the nature of the crisis that we're seeing, we have a situation in which a lot of the costs, particularly on the public health side, are falling on state and local authorities. At the same time, their tax revenue is rapidly drying up because there's so little economic activity going on within these state and local taxing authorities.

And so what is a major employer of many people and a major source of economic stability, they're all simultaneously running into rapid budget problems. And we've already seen just in the early days, a major wave of cuts, layoffs and so forth from cities, towns and states around the country.

Tracy Alloway (2:08)

Yeah, and I think from a market's perspective, I remember seeing a couple of headlines that basically said we didn't have any new issuance, new muni bond issuance in March.

And we had a bunch of outflows, I think the most outflows on record from muni bond funds. So really we have this big investor exodus. And as you point out, if tax receipts are expected to fall and at the same time states can't issue as easily as they once could in the muni bond market, then that all adds up to a pretty big financing crunch at exactly the time where you wouldn't want to get that.

Joe Weisenthal (2:44)

Right, is a financing crunch. And then that leads to an economic crunch because we saw during 2008, 2009, financing constrained municipal authorities.

They had to cut a lot of spending for the same reasons as now. And it took them years and years to recover that loss spending. And so, when we think about the sort of longer term ramifications of this and the damage that these last several weeks will do to the economy potentially for years to come, state and local finances is a huge problem that we're facing.

Tracy Alloway (3:19)

Yeah, and I have to say, the only thing I really remember from the muni market is Meredith Whitney making that big call many, many years ago. Do you remember that? Where she predicted a bunch of defaults, I think hundreds of defaults across the muni space. And of course, that didn't come to pass.

So I'm really interested in returning to this topic. It's been a while.

Joe Weisenthal (3:41)

Yeah, the default didn't happen. It was more just played out on the real economic side and a slow return to hiring. So anyway, on today's episode, we're going to dive into the state of state and local municipal finance, how much strain they're on, what are the ramifications of that strain, and what can possibly be done to alleviate that pressure. And today we have three guests.

This is a first time we've ever had this on the podcast, where we've had three guests at once. So it could get a little crazy, but all three of them have been doing a lot of writing about this crisis and how it can be addressed from the sort of Federal Reserve side, what the Fed can do to help ease the problem and what the Treasury can do. So I'm going to introduce our three guests today are Skanda Amarnath, Director of Research and Analysis at Employ America, Alex Williams, he's a grad student at the Levy Institute, and Yakov Feygin, he's an Associate Director of the Future of Capitalism Program at the Berggruen Institute.