Bond Age

September 5, 2023 4:32 PM

So deep are American cities’ reliance on bonds that without access to them, most would simply be unable to provide even the most rudimentary social services. When lockdowns spread in the spring of 2020, slowing cities’ revenues from sales taxes and user fees to a trickle, the Federal Reserve stepped in almost immediately to offer $500 billion in short-term municipal debt financing. The measure, called the Municipal Liquidity Facility (MLF), backstopped the market as it “imploded in real time.” from Bond Villains
posted by chavenet (35 comments total)

I suppose there's a whole conversation to be had about debt and financing to be had.

I'm not sure I'm well enough informed in general to really have that conversation.

I do know, I don't buy things on credit, personally. I can either save up for it or I can't afford it.

I also know my personal finances aren't municipal or state finances.

I also also know I vote for nearly every bond measure on a ballot that isn't funding jail construction. I don't think any of them have been going toward the nefarious ends outlined in this article, but where I live has a lot of transparency.

And that's all I have to contribute to this conversation.
posted by hippybear at 4:44 PM on September 5, 2023 [3 favorites]

Funny, I was just introduced to the nefarious world of catastrophe bonds before coming here.
posted by criticalyeast at 5:16 PM on September 5, 2023 [4 favorites]

Huh, yeah, the bonds I'm most familiar with have always been tied to infrastructure improvements, and always seemed a sensible way to finance those with relatively low interest and without any danger of a loan being suddenly called in. I've never seen or voted on anything like paying off police brutality suits.

I guess the greater part of their point is about voters not passing bonds that would help minorities, but it seems like there's an unfortunately duality there: if you make bonds issuable by localities without having to get them past voters, it allows for a lot more nefarious shit.
posted by tavella at 5:17 PM on September 5, 2023 [7 favorites]

Funny, I was just introduced to the nefarious world of catastrophe bonds before coming here.


Sorry but what is so nefarious about Cat bonds? I work in insurance (and reinsurance specifically) and all this is doing is spreading the risk. This makes the financial world more stable. Spreadding the cost of catastrophies to more companies/investors means all those responsible pay a little bit less when an event happens. This is very similar to how insurance works in general (spreading the cost to a bigger pool of people).

Just calling this nefarious with no reasoning is like saying your life insurance company is evil for profiting off death

(Also, Cat bonds are a very different animal to the infrastructure/municipal bonds being discussed in the post. Cat bonds are more like insurance, and municipal bonds are what people generally think of as traditional bonds - pay a bit up front and get a steady return for a certain number of years)
posted by LizBoBiz at 5:44 PM on September 5, 2023 [10 favorites]

My wife and I are solely invested in a municipal bond fund. Only realized capital gains are taxable. The returns are modest. The market is stable compared to stocks. Municipal bonds have a far lower default rate than corporate bonds. The return rate is roughly equal to a standard annuity, only you retain the entire corpus. Most of the infrastructure in the US is financed by municipal bonds. We see it on balance as a positive investment...
posted by jim in austin at 6:12 PM on September 5, 2023 [4 favorites]

Indeed catastrophe bonds are hard to see as nefarious; specifically what happens is when a disaster strikes the debt is forgiven. Forgiving debt seems like a good thing? And setting aside money to pay out when disaster hits is also good?

Just calling this nefarious with no reasoning is like saying your life insurance company is evil for profiting off death

It's more like complaining about how unfair it is that your life insurance company keeps charging premiums even though you haven't died yet.
posted by pwnguin at 6:15 PM on September 5, 2023 [1 favorite]

I guess the greater part of their point is about voters not passing bonds that would help minorities, but it seems like there's an unfortunately duality there: if you make bonds issuable by localities without having to get them past voters, it allows for a lot more nefarious shit.

Perhaps no issue Jenkins covers better exemplifies the racial politics of the municipal market than public school investment bonds. Funding the city’s public schools, despite its cross-racial, collective benefits, was pigeonholed as a “Black issue.” With that, two consecutive public-school bonds in 1969 and 1970 failed even as simultaneous, more expensive bonds passed through the voting threshold.

How are things like this funded in places that have a better track record on race?
posted by clawsoon at 6:15 PM on September 5, 2023 [3 favorites]

I always thought it was interesting that defaulting on debt was the only true failure mode for SimCity 2000.

(Also, speaking of bond villains...)
posted by Rhaomi at 6:27 PM on September 5, 2023 [1 favorite]

Like Canada?

Up until 1994, about 40 percent of total school funding in Canada came from local property taxes raised by school boards, but now only Manitoba has significant local property taxes for education.

But IMO it's important to distinguish between funded by and financed by. Finance is about structuring payments over time, funding is about where the money to make those payments comes from. I imagine a bond is still issued to build new schools, whether the money comes from local property taxes or provincial.
posted by pwnguin at 6:34 PM on September 5, 2023 [4 favorites]

The article is primarily about general obligation bonds - i.e., bonds that cities issue to pay for whatever they need to pay for; not bonds about a specific infrastructure project. Cities do not issue bonds that are earmarked to pay for police brutality lawsuits - they issue general obligation bonds to pay for whatever, good and bad.

I read the article pretty quickly - it's mainly a book review of The Bonds of Inequality: Debt and the Making of the American City (2021). It makes a bunch of points about bad policies that have been enacted that have some connection to debt financing, but it isn't clear to me at all that bonds are the reason for the bad policy decisions. Bonds are the way that cities pay for stuff, and cities do some stupid/bad stuff, but the bonds aren't really the cause of the bad policies, only a tool that can be used to finance good policies and bad policies alike.
posted by Mid at 6:52 PM on September 5, 2023 [9 favorites]

I couldn't read hippybear's link, (even though we subscribe to WaPost), but yes, Reinsurance is a thing. My dad was the head of a large reinsurance corporation. It's a weird concept, but so is any kind of insurance. If you are on the hook for an oil tanker, might be nice to get some insurance for your insurance.

Doing it through bonds is a bit odd, but...
posted by Windopaene at 7:00 PM on September 5, 2023 [1 favorite]

I didn't have a link in my comment. I hope you did find a link to read even though it couldn't possibly be mine.
posted by hippybear at 7:02 PM on September 5, 2023 [4 favorites]

Mid: Bonds are the way that cities pay for stuff, and cities do some stupid/bad stuff, but the bonds aren't really the cause of the bad policies, only a tool that can be used to finance good policies and bad policies alike.

Part of the point of the book appears to be to expand the spotlight from government actions to market actions. It wasn't just top-down government creating inequality, it was also groups of voters and networks of financiers.

The Color of Law amassed a tremendous wealth of evidence that governments, through actions like racial zoning, segregated public housing, subsidized whites-only suburbs, predatory municipal annexation, and urban renewal, played a massive role in our current landscape. The problem here is that Rothstein believes that the other side of the coin—de facto practices like the racism of citizens and the actions of non-government corporations—constitute only “a small part of the truth” as to why we are segregated. Government policy, he argues, was the primary culprit, and accordingly, judicial action to rein in the government should be the sole solution.

The Bonds of Inequality addresses the danger and inaccuracy of this argument early on. “When urban historians underscore the failure of the federal government,” writes Jenkins, “they chime with stories told by bond financiers and credit analysts threatened by federal power. Federal failure is also the bankers’ story.” Casting the federal government as the sole cause of urban racial inequality is a story that’s easily captured and redeployed by those pushing privatization, austerity, and state shrinkage.

posted by clawsoon at 7:09 PM on September 5, 2023 [3 favorites]

How are things like this funded in places that have a better track record on race?

I won't say my country has a better track record on race, quite the opposite IMO in a lot of ways, but Australia does have a different one that doesn't conform to the American pattern of race-based municipality, so here goes: Since the 1980s, roughly, and the liberalisation of financial markets here, the States, which are few and large, issue bonds, and infrastructure is built, and social services provided, on a similar pattern of borrowing. It's not the cities, which by and large completely lack the kind of governance American cities do: by contrast municipalities/councils, which are numerous and very small, are funded mainly through rates on landowners and by the GST, a Commonwealth consumption tax. All the relevant comparable services, transport, health, schools, police, are provided by the States.

State Governments are extraordinarily jealous of their bond ratings (given by ratings agencies), and because also being so large and so permanent, they're able to borrow at a far better rate than any private borrower, and are in a position to dictate some terms to the financial market. So the pattern for infrastructure is set at the State level, which because it completely covers the cities, suburbs, regions, and outback, is more or less agnostic about the racial/ethnic makeup of specific geographic areas, except that the Parties tend, as much as they can, to favour either the city (Labor) or the country (Liberal-National).

In practice the bond market in its relationship with the State here works as a tool of general austerity (with all the general race-based effects that come with that), rather than geographically specific racism in the American tradition. It's the US habit of putting technocratic measures like infrastructure borrowing on the ballot paper, and directly hypothecating bonds to geographically specific projects, which is odd and unusual, and that seems to obviously lead to voters/officials using the tools for exclusion/inclusion, not the infrastructure borrowing itself. And as the article says:

No single node of power—not the politicians, private interests, nor the public—holds the key to understanding our segregated urban landscapes. On many issues they act in concert. On others they are at odds. Our analysis must be diffuse enough to grapple with the colliding, contradictory interests of city governments, municipal bondholders, and voters.

posted by Fiasco da Gama at 7:23 PM on September 5, 2023 [8 favorites]

pwnguin: Like Canada?

Up until 1994, about 40 percent of total school funding in Canada came from local property taxes raised by school boards, but now only Manitoba has significant local property taxes for education.

But IMO it's important to distinguish between funded by and financed by. Finance is about structuring payments over time, funding is about where the money to make those payments comes from. I imagine a bond is still issued to build new schools, whether the money comes from local property taxes or provincial.

In the absence of any experts chiming in, imma google a bit.

“The explanation for why there is not as much depth in the Canadian municipal bond market as there is in the U.S. is that Canadian municipalities are averse to debt. Their global peers, including those in the U.S., borrow much more.”

As well, he notes, in contrast to the U.S. bond market, in which municipal bonds are immune to certain income taxes, Canadian munis’ interest is taxed as straight income, just like for any other bond. And there is no special tax regime to create a special, tax-free market for munis in Canada.

So, as you say, not locally funded.

In countries like Canada, a central government authority oversees school facilities needs at the provincial level. Working with local school districts, they create a master plan for the province, and fund it through tax revenue collected at the national and provincial level.

This is making it sound like Canadian schools aren't financed on a-bond-for-a-school basis, either, but rather out of general revenue. Obviously there are bonds involved in keeping the engine of general revenue going, but (unlike the American case) there seems to be a complete disconnect between "should we provide money to build this specific school?" and "will financing this specific school make us a profit?"
posted by clawsoon at 7:30 PM on September 5, 2023 [2 favorites]

(...and any discussion of Canada being "better on race" goes only up to the line of First Nations, at which point it gets horrible, and IIRC education for First Nations has been (horribly) funded entirely by the federal government.)
posted by clawsoon at 7:33 PM on September 5, 2023 [1 favorite]

Sorry hippybear. Thought you has made the main post...
posted by Windopaene at 7:35 PM on September 5, 2023 [1 favorite]

Sorry hippybear. Thought you has made the main post...

That's fine. I make a lot of posts here, but I generally try to avoid making posts that are overtly political or can be argued about. Plenty of others make way too many of those, and I strive to be more "this is interesting" than "let's be outraged about this".
posted by hippybear at 7:36 PM on September 5, 2023 [3 favorites]

It's the US habit of putting technocratic measures like infrastructure borrowing on the ballot paper, and directly hypothecating bonds to geographically specific projects, which is odd and unusual
This is what struck me as odd and unusual too. It's the same concept that strikes me as odd when I see that positions like judges, school management (boards) and the heads of police agencies are not only decided by voting, but sometimes at an extremely local level, which magnifies and reinforces any disparity in power across different groups in the area.

As pointed out, local governments here in Australia has very limited power over infrastructure and are jokingly said to be limited to 'roads, rates and rubbish', which downplays their authority somewhat, but they have no role in infrastructure beyond things like local roads, parks and recreational facilities. Some local government candidates are endorsed by political parties, but most are at least nominally independent. In the city where I live, a candidate endorsed by any party historically has little chance of being elected.

I don't see how, barring revolution followed by wide-ranging and fundamental reorganisation of the whole fabric of society, the US can get itself out of the mess it's in where it seems binary politics with each side way over on opposite ends of a spectrum govern every single aspect of life.
posted by dg at 8:28 PM on September 5, 2023 [2 favorites]

The only problem I have with cat bonds is the same one I now have with insurance in general: They have gotten so good at the actuarial math that insurance companies are no longer a force for improving the safety of stuff because they no longer face the existential risk of unexpected catastrophe. They used to be a major driving force behind trying to avoid macro and micro disasters but now they've just modelled the existing status quo or the future status nightmares into their equations and adjust their liability through contraction or regulatory capture.
posted by srboisvert at 3:43 AM on September 6, 2023 [3 favorites]

Srboisvert: maybe this is obvious to people older than I am, but did insurance of various types formerly check in on you and have you make health/safety/security improvements as a condition of being insured?
posted by jellywerker at 4:12 AM on September 6, 2023 [1 favorite]

I don’t see how anyone on the internet could object to cat bonds! :P
posted by eviemath at 4:13 AM on September 6, 2023 [4 favorites]

I know a little bit about municipal bonds from the city side, and this article is much more interesting than "city borrowing = bad". No surprise the rating methods have been pretty racist, but good to see some of the details. And same with what gets chosen for bond issues and how.

Now I want to read more about this in the last paragraph :

"And in 2021 the New York Times covered the creation of “Fiscal Justice Ratings” by bond analyst Napoleon Wallace. Consider Wallace’s work at his firm Activest as the apparent opposite to that of Morris’s rating system based in racially coded “intangibles.” Wallace looks at factors such as a city’s dependence on oppressive forms of fines and fees, housing affordability factors, and, of course, money spent on police brutality settlements. All of these and more are aggregated to direct investors’ capital toward municipalities who have done the most work to reverse decades of injustice in city operations."
posted by sepviva at 5:08 AM on September 6, 2023 [7 favorites]

I find profiting from climate change induced disasters (or, in the case of cat bonds, narrow avoidance of the same) to be deeply cynical and morally reprehensible. It is a special kind of awful that cat bonds are made available to individuals whose net worth is north of $100 million. We are allowing the same people whose contributions to climate change are outsized to profit as much as 15% from its impacts. @srboisvert rightly points out that disaster avoidance is no part of the calculus. I'd add that allowing capital markets access to insured risk is a dangerous logic, the type of thing we have seen time and again in deregulation. Cat bonds, however utilitarian in today's insurance schemes, reek of subprime mortgage loans, but at a scale far beyond the individual homeowner. Like subprime mortgages, these bonds likely incentivize behavior that is unwise. Rebuilding in the floodplain, wildfire prone areas, etc., come to mind.

In the end, my complaint is more that cat bonds are indicative of how wholly we have turned over public welfare to financial mechanisms that benefit the wealthy.
posted by criticalyeast at 8:21 AM on September 6, 2023 [3 favorites]

Srboisvert: maybe this is obvious to people older than I am, but did insurance of various types formerly check in on you and have you make health/safety/security improvements as a condition of being insured?

No. They acted at the government level influencing legislation and safety regulation. They were an integral part of why so many of the early automobile safety and building fire safety improvements were made. They still fund a lot of safety analysis work because of legacy arrangements but more recently they have shifted from improving their margins by increasing to safety to improving their margins by regulatory capture facilitating limiting their liability. It's part of why there is so little political energy behind things like pedestrian safety in American car design. It's now perversely in an insurers interest that cars, roads and speed limits be designed for maximum lethality because a death benefit is so much cheaper than a disability benefit. If you are in an accident and hit someone they actuarially want that person to die rather than be severely injured.
posted by srboisvert at 1:30 PM on September 6, 2023 [2 favorites]

I strive to be more "this is interesting" than "let's be outraged about this".

Me too, I guess I just like liking things
posted by LooseFilter at 1:47 PM on September 6, 2023 [1 favorite]

Like subprime mortgages, these bonds likely incentivize behavior that is unwise. Rebuilding in the floodplain, wildfire prone areas, etc., come to mind.

I'm not sure I agree. Everything has tradeoffs. Destroying the subprime mortgage market means that everyone who is poor is at the mercy of landlords in perpetuity because them owning property is basically impossible. Is that helping them? The thing we got out of it is near record lows of foreclosures, and rising income inequality, because like it or not, home ownership with a mortgage represents lots of stored income/value that people who rent don't get access to. Could they get access to equally as much money/safe retirement via the stock market or Social Security, or anything? Yes, but were any laws changes to make sure that happens? No.

Same with flood zones. Lots of places people around the world like to inhabit land in flood zones. Other countries learned to live with occasional water inundation. The US rejected that, and chose to put all the risk on individuals, vaguely spread via purchasing insurance. Which way is the best way? Depends, but outright rejection isn't necessarily the only option.

This may sound like I'm anti-regulation, but I'm not. I'm pro-regulation and pro-making sure that masses harmed by regulation are equally considered by legislation.

Cars is a great one. Cars get the money and the legislation - other forms of transport get crumbs.
posted by The_Vegetables at 1:49 PM on September 6, 2023 [1 favorite]

People have been trading risk with respect to disasters like shipwrecks and droughts and fires and all manner of other bad things for centuries. Insurance products are one instrument for that. Bonds are another. Futures are another. It's not clear to me why catastrophe bonds are ethically different from any of those things. Someone who bets that the soybean crop is going to fail (using commodities futures traded for more than 100 years) profits when the crop fails; they don't help avoid the drought.

The problem with subprime mortgages was that many of the people who took on the loans couldn't pay them - that's bad, but it isn't an indictment of mortgages or debt financing, it's an indictment of selling products to people who can't afford them.
posted by Mid at 2:04 PM on September 6, 2023 [1 favorite]

The problem with subprime mortgages was that many of the people who took on the loans couldn't pay them

"Subprime borrowers didn't cause the subprime crisis. Multiple groups of academics have come to the same conclusion: Borrowers in the middle and top of the distribution are the ones that contributed most significantly to the increase in mortgages in default after 2007. During the whole time period, even at the height of the housing boom, sub-prime was never more than 20% of the market. And while it’s true that these types of borrowers usually default at relatively higher rates, they didn’t after the 2007 housing collapse.

"It was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse."
posted by clawsoon at 2:13 PM on September 6, 2023 [5 favorites]

It's part of why there is so little political energy behind things like pedestrian safety in American car design. It's now perversely in an insurers interest that cars, roads and speed limits be designed for maximum lethality because a death benefit is so much cheaper than a disability benefit. If you are in an accident and hit someone they actuarially want that person to die rather than be severely injured.

I'm just recently realizing how perverse the insurance incentives are regarding non-occupant safety of cars. Many states allow car insurance policies with as low as $15K for bodily injury coverage. And in many states, auto and health insurers are paid first through subrogation, and the individual only gets something if there's anything left. It doesn't take much of an injury even with $100K coverage for hospital costs that your health insurance paid to eat it all up.
posted by misskaz at 4:17 PM on September 6, 2023 [1 favorite]

Subprime borrowers didn't cause the subprime crisis

This is sort of a word game and not really responsive to what I said. I said the problem with subprime loans was that many people couldn't pay them back. That's true and the cited articles don't say otherwise. What the articles say is that there were other factors that caused the broader financial crisis in 2008, including house-flipping and other bad decisions. That's true too. One point doesn't refute the other.

But in any event, my broader point was that most financial instruments - loans, options, insurance, etc. - are largely just tools that can be put to good or bad use. This was in response to the FPP's suggestion that municipal bonds are inherently bad or suspect.
posted by Mid at 8:01 PM on September 6, 2023 [1 favorite]

Mid: I said the problem with subprime loans was that many people couldn't pay them back. That's true and the cited articles don't say otherwise.

Sure the articles do, for any reasonable value of "many people". The vast majority of subprime borrowers could and did pay the loans. The people who didn't pay their loans in large numbers were prime borrowers.

What the articles say is that there were other factors that caused the broader financial crisis in 2008, including house-flipping and other bad decisions.

You've got it exactly backwards: The articles say that what caused the financial crisis in 2008 was fear of a large wave of subprime defaults, triggered by an initial bump in them. It was not triggered by fears of prime-loan investors and flippers. But the people who actually ended up defaulting in large numbers were prime-loan investors and flippers.

Fear of subprime borrowers triggered the crisis; in the long term, the money lost was actually lost on prime borrowers.
posted by clawsoon at 6:23 AM on September 7, 2023 [1 favorite]

Again, I am not arguing about "what the financial crisis in 2008." I observed that the problem with subprime loans was a higher rate of default (i.e., "many people could not pay them"). I think the main point made by the articles you are referencing is that subprime loans were a relatively small share of the overall mortgage market, so a lower level of default rate among prime loans produced a higher overall number (and value) of delinquencies among prime loans even though the default rate was worse with the subprimes. That's all very interesting with respect to the causes of the 2008 financial crisis, but, again, that's not what I was talking about. Subprime had a 25% default rate in the first 12 months of the loan in 2007 - that's a problem, even if the "vast majority" (75%) did not default in that time period. Was that the only problem leading to the 2008 crisis? Nobody said that here.
posted by Mid at 8:44 AM on September 7, 2023 [1 favorite]

*"What caused the financial crisis in 2008."
posted by Mid at 8:53 AM on September 7, 2023 [1 favorite]

I think the main point made by the articles you are referencing is that subprime loans were a relatively small share of the overall mortgage market, so a lower level of default rate among prime loans produced a higher overall number (and value) of delinquencies among prime loans even though the default rate was worse with the subprimes.

Fair point, although the main point of the most recent paper is that it was specifically prime loan borrowers who were buying investment properties with second mortgages who were foreclosed on at historically unprecedented rates, and that continued for at least four years after the peak of the crisis, while subprime foreclosures settled down more quickly. There simply weren't very many subprime borrowers who were given loans which were that psychologically easy to walk away from. (The graphs on page 38 show the effect of that most clearly: There's hardly any bump in the share of lowest-quartile foreclosures due to investment mortgages, simply because hardly any lowest-quartile borrowers were given investment mortgages.)

Subprime had a 25% default rate in the first 12 months of the loan in 2007 - that's a problem, even if the "vast majority" (75%) did not default in that time period.

That's the initial bump I mentioned. Yes, having 25% of the loans made in a single year to a single group be more than 60 days overdue (their definition of "default") might be scary for lenders, but in the context of 25 year mortgages and whether borrowers were actually foreclosed on in the end, that's a small fraction of the total.
posted by clawsoon at 5:51 AM on September 8, 2023