President Trump: The NEW one and only politics thread

This is how we get into trouble, in my opinion. Puerto Rico bankrupted itself by borrowing the equivalent of 70 percent of its annual economic production -- to put that in perspective, the typical state (several of which are near bankruptcy themselves) has a fifth of that debt relative to its economy. It was recklessness on an unthinkable scale before we went bonkers by rigging our debt markets to monetize more and more debt -- beyond where an actual market not being administered would allow.

If people had been worried while that recklessness was happening (and there were plenty of people pointing out the day of reckoning coming), Puerto Rico would be in much better shape to handle the unexpected devastation of a historic hurricane.

That borrowed money was turned into a cesspool of public corruption and waste (as it always is), with an implicit assumption that there would never be a price to pay; one day the Federal government would just bail out the fiscal irresponsibility. That mindset is fed by the "who worries about the banks" rhetoric. And of course, we are bankrupting our Federal government with each bailout (to go along with its fiscal recklessness).

Puerto Rico even put something in its constitution that prohibited it from defaulting on its debt, which is the ultimate example of government fantasy. This is not said cruelly. I am empathetic to the people who have lost a lot. At the same time, you have to acknowledge that those people kept their heads in the sand and let politicians run wild because they promised them free stuff. This is the price. You can't just hit a reset and pretend that you don't reap what you have sowed yourself.

When the ratings agencies downgraded Puerto Rico's debt to junk, it kicked off clauses that forced them to accelerate repayment. They couldn't even service their massive debt without that acceleration, let alone with it -- not with the reckless level of borrowing they had taken on. That triggered defaults -- whether they were ready to accept it or not. And it's not "banks" that lent that money to Puerto Rico, for what it is worth. The bulk of that debt was owned by large pension funds and muni-bond mutual funds owned by mom and pop retail investors (which took huge losses, because those funds were forced to dump the debt; they are not allowed to hold junk bonds). In the case of those pension funds, that was the money of autoworkers, firefighters, teachers in California, etc. ... And their pensions are that much more in jeopardy than they already were. Should we not worry about them because. ... well, "the banks"?

It shouldn't matter who lent the money, anyhow. If you lend money to someone who behaves ridiculously recklessly and blows it. ... and then the person has an unrelated tragedy in his life. ... does it mitigate your financial loss?

In the case of PREPA (their government run utility company), the lesson shouldn't be to hell with the banks, if you ask me. Puerto Rico screwed itself with reckless, populist "policy"; banks didn't do it . ... and there is a price, unfortunately. They ran up billions of dollars of debt on PREPA alone. They didn't update their power plants (which are anitiquated) or their grid -- things they could have done with a ton less borrowing than they even did. Instead, they provided free power to more than 70 municipalities (to buy votes), corrupt government endeavors and various for-profit businesses that had bought off politicians. Free stuff!

I am with you. Donald Trump is a douche. But the "we're really worried about banks" comments at times like this always kind of piss me off. WHOEVER lent Puerto Rico money (and it's not amorphous "banks" -- which becomes a catchall for populist sentiment), has taken huge losses. When a pension fund won't be able to meet its promises (and this is going to happen on a massive scale in the coming years; there is more to how they have gotten destroyed than just Puerto Rico), should we worry then?

One other thing. ... For a good 5, 6 year period, everyone knew that Puerto Rico was a mess. Yet, every bond offering was way oversubscribed. Lenders were lining up to give them money -- seriously, it was the most popular muni bond offering there was. The reason? A central bank that has now spent decades fucking savers sideways by suppressing interest rates in insane ways (and sowing the seeds for credit crises) that most people don't understand. This is the price. Pensions, savers, retirees and conservative investors have been forced to turn to riskier and riskier investments to try to make up the yield they were being robbed of. That has made it so that entities like Puerto Rico, which would never have been able to borrow easily in an actual free, unmanipulated market, and certainly not at a relatively low rates of interest, could keep borrowing and borrowing and create billions of dollars of mess that it was going to default on when the game ran out. That is the kind of misallocation of capital I have mentioned in other posts. You hurt savers by robbing them to enable more and more debt (and you force them to take risk, which means they get stuck holding the bag when a place like Puerto Rico defaults). ... but you also hurt Puerto Rico (and the others racking up that debt). By monetizing more and more debt for them, you allowed Puerto Rico to dig their hole so deep that they hurt themselves badly and will have to suffer now. There was no room for anything, let alone a hurricane of that kind of devastation.

A few months ago, Argentina (a country that has defaulted on its debt 7 times, including twice since 2000) issued a 100 year bond that was 3X oversubscribed. It has been only a year since Argentina last defaulted on its debt! It not only wouldn't be able to borrow again so soon at ANY rate of interest, but nobody in their right mind would lend them money for 100 years. ... not without the distortions we have created to keep trying to live a fantasy that you can just rack up debt to live over your head. ... and there isn't a consequence. But we create that kind of misallocation of capital, which has huge consequences down the line. You have places in the developed world, where central banks have made it so that lenders have to pay borrowers to take their money. So they end up looking at crap like a 100 year Argentinian bond to make back the yield that kind of insanity robbed them of. When the consequences of that come, please don't do, "Well who cares about the banks?" First, the losses hit in places you aren't considering. And second, the thing we should be taking from it was what we did to create the situation in the first place.