It's exceptionally rare I agree with what Bernanke has to say. This is one of those rare times. Please consider Bernanke Rejects Bailouts



"We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed."



The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won't be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies.



The Fed only has legal authority to buy muni debt with maturities of six months or less that is directly backed by tax or other assured revenue, which makes up less than 2% of the overall market. The Dodd-Frank financial-regulation law enacted last year further tied the Fed's hands, Mr. Bernanke noted, by barring the central bank from lending to insolvent borrowers or pursuing bailouts of individual borrowers.



Mr. Bernanke played down the risk of a major municipal-bond crisis, noting that muni markets have been functioning normally, with healthy trading volumes and lots of issuance. But he said that if municipal defaults did become a problem, it would be in Congress's hands, not his.



"This is really a political, fiscal issue," he said.



Lawmakers also are drawing a line in the sand. Senior House Republicans say they will oppose any state requests for money. "If we bail out one state, then all of the debt of all of the states is almost explicitly put on the books of the federal government," House Budget Committee Chairman Paul Ryan said Thursday.



At least three House committees are planning hearings on local budget woes. Rep. Devin Nunes (R., Calif.) plans to introduce a bill to require states to disclose the size of their public-pension obligations in order to keep their federal tax-exempt bonding authority.



The bill, the Public Employee Pension Transparency Act, will explicitly bar state and local governments from receiving help from the federal government to cover their pension obligations.



"There are 242 Republicans, and I can't imagine one that would be in favor of a bailout," Mr. Nunes said.



Many Democrats are wary as well. "We need to be prepared with a plan in case we are approached by one or more states," said Sen. Kent Conrad, (D., N.D.), chairman of the Budget Committee. Neither the House nor the Senate would be "very interested in bailouts to states," he added.



On a recent broadcast of CBS's "60 Minutes," Meredith Whitney, a banking analyst who recently turned to analyzing state and local finances, said the U.S. could see "50 to 100 sizable defaults," in 2011 amounting to "hundreds of billions of dollars."



Mr. Bernanke described that as a "pessimistic view" that he didn't entirely agree with.

Themes For 2011

1. US Municipal Bankruptcies Head to Center Stage



Look for Detroit and at least one other city in Michigan to go bankrupt. Also look for increasing discussions regarding bankruptcy from Los Angeles, Miami, Oakland, Houston, and San Diego. Those cities are definitely bankrupt, they just have not admitted it yet. The first major city to go bankrupt will cause a huge stir in the municipal bond market. Best to avoid Munis completely.



3. Cutbacks in US Cities and States



With Republican governors holding a majority of governorships, with Republicans holding a majority in the House, and with a far more conservative Senate, there is going to be little enthusiasm for increasing aid to states. There will be some aid to states of course, but nowhere near as much as needed to prevent cutbacks. Expect to see a huge number of layoffs and/or cutbacks in services. Cutbacks in cities and states will be a good thing, but that will counteract other gains in employment. The unemployment rate will stay stubbornly high.

Whitney Overstates and Incorrectly States the Problem

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Addendum:

We haven't seen the cutbacks in operations that would precede any bankruptcy.