Soon is the Winter of our Discontent.
46 States face major budget shortfalls in 2011 and the possibility of bankruptcy.
Tax revenue is falling as new jobs aren't being created and borrowing costs are increasing due to the end of Building America Bonds and investors fleeing the munis.
The FED is hamstrung as it can only buy very short term municiple obligations. Illinois is already paying about 2% above average for it's munis. Arizona is sold off it's buildings including the Capital building. Pension funds are exerting a huge strain on most State budgets.
The only thing missing at this point is a panic moment to send a contagion event through the country. (Why a state selling off it's capital building wasn't a panic moment, I do not know!)
Moodys recently reported that banks can not sustain a double dip. They still have unrealized losses on their books and the shock of a double dip will be too much for them. Real Estate definately can't handle a double dip at this point and double dip would be certain if contagion sets in.
So what happens? A double dip followed by a huge QE3 is what I think happens.
Does anyone else have a different take on the munis or on the Fed response?
Please post here as I have been thinking about it a lot lately.