Despite passing a major reform to the Obama-era Dodd-Frank financial regulation, Congress has unfortunately added a few unnecessary, and even risky, clauses to the bill.
The one that worries me most classifies investment-grade muni bonds as “high quality liquid assets.” Some, repeat some, muni bonds are high quality assets. Many are not, even some of those that hold investment-grade ratings.
What’s worse is that few muni bonds are very liquid. They typically aren’t large enough to create the kind of investor pool necessary for high levels of liquidity. The editorial board at The Wall Street Journal summed up the clause like this:
The bill also reclassifies investment-grade municipal bonds as “high quality liquid assets” though they’re not. Muni debt isn’t actively traded, though its tax exemption makes it attractive for big banks to hold and reduces borrowing costs for state and local governments. Treating munis as liquid assets would expand demand for this debt. Do cities like New York need another spending subsidy?
Read more here.
Originally posted on Yoursurvivalguy.com.