In early 2005, back when Eliot Spitzer was taking his first pot-shots at American International Group, Inc., I wrote this blog post explaining how even mighty AIG could suffer a fate similar to that of Enron Corporation.
Inasmuch as AIG had a net worth of about $80 billion at the time coming off a previous year of $11 billion in net income on almost $100 billion in revenues, no one (including me) thought there was much of a chance that what I was suggesting could happen to AIG would actually happen to the firm.
Less than four years later, AIG would have suffered the same fate as Enron but for a massive federal government bailout.
The lesson here is that if creditors trust the federal government, then the government’s credit standing will remain high regardless of what the New York analysts say. In reality, the market rates the government’s credit continuously each moment of every day. Just look at fluctuations in interest rates on government debt.
So remember, regardless of what the Washington pols suggest, this is not rocket science.
Quite simply, it’s mostly about trust.
This Reed Albergotti/Cameron McWhirter/WSJ article provides an absolutely devastating account of the way in which Hamilton County, Ohio political leaders pledged an enormous portion of the county’s resources to pay most of the cost of a new stadium for the NFL’s Cincinnati Bengals:
At its completion in 2000, Paul Brown Stadium had soared over its $280 million budget–and the fiscal finger-pointing had already begun.
The county says the final cost was $454 million. . . .
But according to research by Judith Grant Long, a Harvard University professor who studies stadium finance, the cost to the public was closer to $555 million once other expenditures, such as special elevated parking structures, are factored in. No other NFL stadium had ever received that much public financing. [. . .]
On top of paying for the stadium, Hamilton County granted the Bengals generous lease terms. It agreed to pick up nearly all operating and capital improvement costs–and to foot the bill for high-tech bells and whistles that have yet to be invented, like a "holographic replay machine." No team had snared such concessions in addition to huge sums of public money, Journal research shows.
To help finance its stadiums, Hamilton County assumed more than $1 billion in debt by issuing its own bonds without any help from the surrounding counties or the state. As debt service ratchets up, officials expect debt payments to create a $30 million budget deficit by 2012.
"The Cincinnati deal combined taking on a gargantuan responsibility with setting new records for optimistic forecasting," says Roger Noll, a professor of economics at Stanford University who has written about the deal. "It takes both to put you in a deep hole, and that’s a pretty deep hole."
The stadium’s annual tab continues to escalate, according to the county’s website. In 2008, the Bengals’ stadium cost to taxpayers was $29.9 million, an amount equivalent to 11% of the county’s general fund.
Last year, it rose to $34.6 million–a sum equal to 16.4% of the county budget. That’s a huge multiple compared to other football stadiums of the era that similarly relied on county bonds for financing. Those facilities have cost-to-budget ratios of less than 2%. [. . .]
The Bengals had said that with a new stadium, the team’s revenue would increase, allowing it to sign better players, win more games and attract more fans to the area. In 2000, the new stadium’s first year, the Bengals had the same record they’d had the previous year, 4-12. Since then, the team has managed just two winning seasons in the new facility. Its attendance levels have actually dropped.
Houstonians might be tempted to shake their collective heads at how badly Bengals management took Hamilton County to the cleaners in the stadium financing negotiations. But then we are forced to confront that Houston has more than its share of similar boondoggles, such as the financial black hole known as Metro Light Rail, the $100 million Bayport Cruise Ship Terminal (which has never docked a cruise ship since its completion in 2008), the continuing dither over what to do with the obsolescent Astrodome, the Harris County Sports Authority’s problems servicing the junk debt it issued in connection with financing the construction of Reliant Stadium for the Texans, and – most recently – the City of Houston and Harris County’s dubious decision to throw about $50 million or so into the construction of a minor-league soccer stadium.
The expenditure of a billion or two of public money on building a lightly-used light rail system and stadiums for privately-owned businesses has real consequences, such as leaving inadequate funds available to make the improvements to Houston’s flood control system, road infrastructure and other improvements that actually improve the safety and welfare of Houstonians.
As I’ve pointed out before, the relatively small interest groups that benefit from urban boondoggles have a vested interest in preventing citizens from ever examining those threshold issues. The primary economic benefit of such public projects is highly concentrated in a few interest groups, such as representatives of minority communities who tout the political accomplishment of shiny toy rail lines while ignoring their constituents need for more effective mass transit; environmental groups striving for political influence; engineering and construction-related firms that profit from the huge expenditure of public funds; and real-estate developers who profit from the value enhancement provided to their property from the public expenditures.
As Peter Gordon has wryly-noted: "It adds up to a winning coalition."
Unfortunately, once such coalitions are successful in establishing a governmental policy subsidizing such urban boondoggles, it is virtually impossible to end the public subsidy of the boondoggle and re-deploy the resources for more beneficial projects.
How do these interest groups get away with this? The costs of such boondoggles are widely dispersed among the local population of an area such as Houston, so the many who stand to lose will lose only a little while the few who stand to gain will gain a lot. As a result, these small interes
t groups recognize that it is usually not worth the relatively small cost per taxpayer for most citizens to spend any substantial amount of time or money lobbying or simply taking the time to vote against such boondoggles.
But would citizens react differently if their leaders advised them that their lack of action in the face of an urban boondoggle might prevent the funding of much more beneficial projects?
No one knows for sure. But I’d sure like to see local political leaders engage in some truth-in-advertising before the financing of such boondoggles is placed before the voters.
We all might just be surprised.
Jeffrey Miron and Robert DuPont, M.D. debate at the Cato Institute whether the governmental policy of drug prohibition should be continued or ended.
Sounds as if Vermont Senator Bernie Sanders and Connecticut Senator Richard Blumenthal missed Energy Economics 101 in school. But that doesn’t stop them from publicizing their utter ignorance (H/T Byron Hood) of basic energy economics:
Sen. Bernie Sanders, I-Vt. introduced legislation today that would require the Commodity Futures Trading Commission to impose strict regulations on oil speculators, who some blame for rising gasoline prices.
Sanders said if the agency failed to meet the two-week deadline outlined in his legislation, he would call for the resignation of commission chair Gary Gensler.
The legislation, if passed, would cap the amount of oil that speculators are allowed to buy and sell annually to 20 million barrels, increase the amount of money investors would have to back bets with from 6 to 12 percent and redefine investment banks as speculators rather than hedgers – investors who use the product they are buying for business.
The bill would limit speculators’ influence over the energy futures market. [. . .]
“There is mounting evidence that the increased price of gasoline has nothing to do with supply and demand and everything to do with Wall Street speculators jacking up oil and gas prices in the energy futures market,” Sanders said. [. . .]
Sen. Richard Blumenthal, D-Conn., a co-sponsor of the bill, said: “These price increases have been absolutely crushing. We need to attack these increasing prices that are the result of gaming and gambling. The CFTC should have acted five months ago.” [. . .]
The instinct of most politicians and much of the mainstream media is to embrace simple “villain and victim” morality plays when attempting to explain price increases in markets or investment loss.
The more nuanced story about the financial decisions that underlie the market fluctuations doesn’t garner enough votes or sell enough newspapers to generate much interest from the politicians or muckrakers.
That’s why we are again enduring demagoguery regarding speculators. Thus, it’s important that citizens who are not familiar with the function of speculation in markets take a moment to learn about its beneficial nature.
For example, check out Mark Perry’s excellent primer on futures trading here, here and here.
Or read University of Houston finance professor Craig Pirrong’s fine overview of how speculation in oil and gas markets actually helps all of us in dealing with rising energy prices.
Or peruse this Matthew Lynn/Bloomberg piece on how bubbles in oil markets are a reason to celebrate.
In Texas, one has to look no farther than Southwest Airlines’ success to understand the beneficial nature of speculation. Over most of the past decade, Southwest has taken advantage of futures markets to hedge its fuel costs (previous posts on Southwest’s hedging program are here). That hedging program has been one of the major factors in allowing Southwest to become the most (and one of the only) profitable U.S. airlines.
So, what Sanders and Blumenthal are really trying to do is restrict the very markets that provided Southwest and many other businesses with the platform on which they hedged fuel-cost and other business risk. The wealth and lower prices that is generated from those hedges is not inconsequential.
Stay informed fellow citizens. Demagogues such as Sanders and Blumenthal can inflict real damage on all of us.
Another lucid presentation from Jeff Miron, this time on the inevitable insolvency that will result from current levels of entitlement spending:
Don Boudreaux sums up perfectly why the budget compromise that was reached late last week is a joke:
Suppose that in a mere three years your family’s spending – spending, mind you, not income – jumps from $80,000 to $101,600. You’re now understandably worried about the debt you’re piling up as a result of this 27 percent hike in spending.
So mom and dad, with much drama and angst and finger-pointing about each other’s irresponsibility and insensitivity, stage marathon sessions of dinner-table talks to solve the problem. They finally agree to reduce the family’s annual spending from $101,600 to $100,584.
For this 1 percent cut in their spending, mom and dad congratulate each other. And to emphasize that this spending cut shows that they are responsible stewards of the family’s assets, they approvingly quote Sen. Harry Reid, who was party to similar negotiations that concluded last night on Capitol Hill – negotiations in which Congress agreed to cut 1 percent from a budget that rose 27 percent in just the past three years. Said Sen. Reid: “Both sides have had to make tough choices. But tough choices is what this job’s all about.”
What a joke.
Which reminds me of what H.L. Mencken observed about the primary talent of successful politicians:
“Their power to impress and enchant the intellectually underprivileged.”
With high levels of municipal debt reverberating around the country, Alex Pollack provides this timely post on the what happened when New York City couldn’t find any buyers for its municipal bonds back in 1975.
As Pollack explains, despite dire warnings of disaster from the financial pundits of the day, the Ford Administration declined to have the federal government bail-out New York City from its bond default. After NYC defaulted, disaster did not occur and the world financial system did not collapse.
Does that fear-mongering remind you of anything that occurred more recently?
Remember, this really is not rocket science.
his NY Times article from over this past weekend is among the most important that I have read recently on the dynamics that are materially changing the fractured U.S. health care system.
That’s not to suggest that the direction of medicine described in the article is a good thing. In fact, my late father is rolling over in his grave over what is described in the article. Patients as commodities. Doctors minimizing responsibilities so that they can get to their yoga class. Patients are supposed to trust such treatment? This is progress?
This is the reason why I pay a premium so that I have a doctor who knows me and my medical history if I am hospitalized for illness or injury.
Do most patients realize that they will not have such a resource when they need one?