It’s a template that has worked multiple times in the past two decades to predict the fate of business models built on the false notion that high growth can overcome bad economics. (See: Enron, Countrywide, Washington Mutual and AIG.)
Those who were early to grasp the single most important business dynamic of our era -- the Ponzification of America -- turned what is an unfurling disaster for our country into a money-maker for investors. Eisman taught Whitney, and they were both early.
Whitney’s latest call on municipal defaults is the logical extension of this theme. Her point is that, until now, investors were getting paid too little for the risk they were taking by investing in local municipal bonds. She isn’t the first to note troubles in the muni market, just the most aggressive and unequivocal in her point of view. That willingness to be gutsy, along with the work that went into the 600-page report, “Tragedy of the Commons,” is what finally put this issue in the news.
Whitney has been tripped up over unfortunate arguments about whether defaults will number fewer than 50 or more than 100, what is meant by the term default, and whether hundreds of billions of dollars in defaulted debt is a lot or a little.
Her critics have argued that the federal government will wave its wand and do another bailout, or some legal abracadabra may let municipalities avoid technical bankruptcy. These are beside the point of what Whitney’s trying to say: that the risk premium for local municipal bonds was seriously out of whack.
The question isn’t how much municipal bond investors will get back in interest payments and principal, but how much the securities were overpriced compared with safer assets. All Whitney has to do is endure the flak until we find out. She is one tough lady, and I suspect can handle that.
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