The Obama-Buffet Muni-Bond Rule – Another Bubble Here We Come!

Perhaps, you have heard about the “Buffet Rule” which is basically a tax for millionaires or those in the top 1%. This is the culmination of class warfare political pressure and rhetoric coming from the executive branch of the federal government. Unfortunately, what we find is that the Buffet Rule is not all that it seems. In fact there is an exemption for money invested in Muni-Bonds.

Although, many are not surprised by the trickery, tactic, or this exemption for the wealthy, we should all be concerned that it could cause a tremendous flow of money into the municipal bond market blowing up yet another bubble of unintended consequences. Indeed I’d like to speak on this for a moment if I might.

The reality is that we shouldn’t have a millionaire’s tax, rather all citizens should be taxed equally by percentage, rather than over-taxing a minority group such as millionaires in the 1%, who are by definition a minority segment of our population. But, if we are going to have such a tax, which I highly advise against, we shouldn’t have loop-holes causing money to all flow into one type of investment or asset class. Let me explain why I am concerned.

We have been forewarned in the past by many Wall Street analysts including the now infamous (for shaking up the status quo) Meredith Whitney about how the Muni-Bond market previously had grown inherently unstable and unsustainable. Many decried her warnings, but perhaps they were good as they were a fair assessment of things to come if we stayed on that once current trajectory. Her warnings did chill out and calm down the unrealistic inflows into that market for a time being. However, now with this new Buffet Rule and this exemption we could be headed for the exact crisis that she had pre-forewarned.

Propping up the Muni-Bond market due to bad fiscal policy, and poor economic decision blunders is just more of the same, causing a problem then putting out the fire, rather than good solid strategies. Yes, we are in an election year, I get that, but at some point we need to stop playing politics and do what we need to do, and stop playing with nonsensical socialist card shuffling. It hasn’t worked in the EU and it certainly won’t work here.

Indeed, it’s unfortunate that the housing bubble and crash was blamed on capitalism, because it was just this sort of finagling an intervention in the free market which caused that bubble to grow substantially to an unsustainable rate. There were plenty of people who warned previously, but their warnings were not heeded. One thing that concerns me, and nothing against Warren Buffett, because I do agree with him on many points of contention in corporate America, and if you don’t, I would suggest that you read the book and collection of all his essays on corporate governance – however, much of Warren Buffet’s money just happens to be in Muni-bonds, again exempt?

So, millionaires will have to pay more, unless they are Warren Buffet. Further if these investments are exempt, then there will be a rush to Muni-bonds, there is no doubt that Warren Buffett will get out at the top of the bubble, and that unsustainable bubble will burst just as all bubbles eventually come to an end. Some might say it is wise to capture the money fleeing Europe right now due to their financial crisis, and why not have that money park itself in municipal bonds here at home.

Yes, I can understand that global strategy for capturing assets, but once that money is flowing into the United States at a high rate, we can expect that easy money to cause municipalities to borrow more money than they should. We’ve already seen a few cases of what happens when they do; Birmingham AL, Stockton CA, and Harrisburg PA – imagine if that was wide spread, with 10s of cities or even 100s of cities in every state or in the larger states that have a large number of cities. Do you think it can’t happen? Don’t be na├»ve.

Perhaps you will recall that China also got into trouble with “easy money” after their stimulus from the last global economic crisis, and all the money flowing through municipal vehicles. It’s unfortunate that humans can’t learn their lessons, or that the executive branch of our own government wishes to repeat the past and doom our financial markets to the similar unintended consequences we just experienced and a recovering from. Does anyone remember the junk bond era of easy money? Well, that’s enough for now. Indeed I hope you will please consider all this and think on it.

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