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Municipal bankrupcy vote

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May 07, 2008 – Comments (11)

Vallejo, California has voted to file for bankrupcy protection.  There's going to be a string of these things...  Again, it goes to my earlier post of downloading city fees onto developers.

11 Comments – Post Your Own

#1) On May 07, 2008 at 8:41 PM, joeykid13 wrote:

DWOT,

Same thing is gonna happen here in Florida.  Our governor has reduced residential real estate taxes, and has been universally acclaimed...except for the Municipal employees who are being laid off.  At least the 911 services are still working...for now. 

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#2) On May 07, 2008 at 11:08 PM, AnomaLee (28.72) wrote:

dwot, it's not much better in declining local ecnomies such as where I live, in Cleveland... I'd safely assume that much of the midwest that suffers from declining populations and economies will suffer the same fate despite being protected from the asset bubble. If it weren't for several federal subsidies that exist there would be no blanket to protect this city.

As much as the I like the posts about the real estate market the reality in the local economies similar to mine is very different fundamentally. The problems facing our economy isn't the result of inflated assets as much as it was the consumers in our area deflating. I don't think it will spread widescale because our economy is very resilient, but I truly hope that is not the fate for the rest of the country.

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#3) On May 08, 2008 at 12:44 AM, EScroogeJr (< 20) wrote:

I know such things happen all the time, but I never understood how a city or a county can go bankrupt. Don't they have the power to raise taxes? And if they could raise taxes but chose not to, doesn't it look like concealment of assets? I've been in California, and I can't believe that the people of Valejo are so poor they can't pay the debts they've made. And if a city is free to default on its debts whenever it feels like it, what is to prevent it from repeating that trick again and again, and why would anybody want to write an unsecured loan to the city under such terms?

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#4) On May 08, 2008 at 3:47 AM, camistocks (< 20) wrote:

This is the typical kind of news you can read everywhere in the media at market bottoms.

So does Valejo represent the entire US economy? Give me a break... 

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#5) On May 08, 2008 at 8:18 AM, DemonDoug (32.19) wrote:

cami, Vallejo is a middle-class type city near San Francisco, CA, which has had a booming economy for many years.  While it might not be representative of all US cities, it can be used as an example to back up some of dwot's theses, such as expanding debt will have to be met at some point, and also entitlements such as pensions and whatnot will put real strain and may eventually be cancelled due to the fact that pensioners add no productivity to the municipality.

Incidentally, no San Fransisco area municipalities went bankrupt in the tech bubble bursting 7 years ago.  So I have no idea what you are talking about with that market bottom crap.  Also, this isn't exactly front-page news in every newspaper.

Vallejo made a lot of the mistakes that many municipalities did, and it would not surprise me at all if they were a harbinger of things to come as opposed to marking a market bottom.  Hell, the freakin realtors and all these pundits have been calling real estate and credit market bottoms for over a year now.  Even Paulson is calling the credit markets fixed.  Do you believe everything is fine and rosy and it's up to the moon from here?  Such a pollyanna attitude is how many people lost 75% or more in tech stocks 7 years ago.  So I won't give you a break, and neither should dwot, because the fundamentals are there for further deterioration and downside with no short to medium term upside potential. 

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#6) On May 08, 2008 at 8:21 AM, FourthAxis (< 20) wrote:

EScroogeJr, This is what happens when govts. overpromise.  "And if a city is free to default on its debts whenever it feels like it, what is to prevent it from repeating that trick again and again"  Bond rates my friend.

camistocks, Does Valejo represent the entire US economy?  In a way...yes.  Overspend, overspend, overspend....the exception is that Valejo can't print more $$$$.

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#7) On May 08, 2008 at 8:42 AM, dwot (43.80) wrote:

AnomaLee, I suppose it depends on how fast the decline is happening.  I tend to think it is a more gradual thing then a housing bubble bursting.  It is an extremely good lesson about supply and demand value.  There was a town in BC that houses were going for $25-30k around 2000 due to all the local resource companies shutting down.  Now they are 5-10 times that.  The local mines shut down again those homes will plummet again.

EScroogeJr, read your depression history.  I think all municipalities are going to have to increase taxes.  I have decided that I no longer want to be paying for the degree of more than I get back any more.  You have to have entered adulthood after a leader like Bush to truly appreciate that.  We had Trudeau who took us from having practically no debt when he was first elected in the 60s to having the kind of debt that led to our grossly declining reproduction rate because you just couldn't get established and get the bills under control.  I keep on about all the people from probably about my age and younger who have kids, double incomes, and they are absolutely struggling.  The ones with one or two professional incomes are just keeping up, and the ones without further training don't seem to be keeping up.  We had taxes go very high when we still had an ability to save. 

Personal debt increased by 0.6% for March in the US.  People can take on some extra tax burden, but it can be at a point that people will move and then it just gets worse, or they choose to not be a homeowner, like I have.  I think there will be an increased tax burden on homeowners and owning more home then you need is going to be very, very expensive.

camistocks, I don't believe we are anywhere near a bottom.  The level of debt prevents it.  There are simply way too many people who have too much debt and an inability to stimulate the economy.  I think the US economy will be sluggish for years.  Add to that the aging population.

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#8) On May 08, 2008 at 1:37 PM, EScroogeJr (< 20) wrote:

"Bond rates my friend."

Ah, but herein lies the question. Which is better: to walk away from the old debt or to be able make new debt at a lower rate? When you're nearly debt-free, it's clearly better to get a better rating and borrow more. But after your old debt reaches a certain threshold, you clearly have more to gain than to lose by announcing default. Plus, you don't really care if your second bond will be at a higher rate than the first one if you intend to default on the second bond as well. That's why I don't understand why creditors (or bond insurers) feel so secure when the municipal bond market does not have the most elementary provisions to protect creditors from a cheating borrower.

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#9) On May 08, 2008 at 5:34 PM, AnomaLee (28.72) wrote:

"This is the typical kind of news you can read everywhere in the media at market bottoms."

There's barely enough news on it. THere's more news coverage on the following:

Is the commodity bubble over?
Should you be long the dollar?
Is now the time to buy stocks?

When I start seeing the following on the:

When will the price of commodities come down?
Will the dollar rebound?
Stock market and the Great Depression

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#10) On May 08, 2008 at 7:29 PM, dwot (43.80) wrote:

Interesting discussion... 

EscroogeJr, I am not at all sure how you think they could renew at a lower rate. 

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#11) On May 08, 2008 at 7:48 PM, EScroogeJr (< 20) wrote:

dwot, why dhould it be "at a lower rate"? If I can give my creditors a slip anytime I want, and the agreement did not provide for any collateral, why, of course I'll have no problem with 10% interest or 15% interest or whatever. Just refinance it at ever-higher rate, and then - "I forgive my creditors".

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