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Legal Aggregate

Getting More Bang for the Fed’s Buck

The following excerpt is from The New York Times opinion piece published on Oct 24: Instead of a third round of so-called “quantitative easing,” known in the financial markets as QE3, maybe it’s time for a QE-Muni. Here’s why.

State and municipal bonds help finance new infrastructure projects like roads and bridges, as well as pay for some government salaries and services, by borrowing against future tax receipts. With about $3.7 trillion in debt outstanding, it’s a big and sprawling marketplace for bonds. But even at that size, it’s less than half as large as the securitized mortgage market.

So every Fed dollar spent in the muni market would absorb a larger percentage of outstanding debt and is likely to have a greater effect on reducing the bonds’ interest rates than the same expenditure in the mortgage market. The greater the effect in reducing borrowing costs in either market, the more powerful the impact on employment is likely to be.

In addition, while the current Fed program helps keep mortgage rates low, its effect on the economy isn’t direct. Rock-bottom rates, naturally, will prompt some to buy homes or spend more on renovations — both of which spur job creation. But some homeowners will simply refinance to increase their savings, which has a less immediate stimulus effect. In contrast, lowering the borrowing costs for states, cities and counties should not only forestall tax increases (which dampen individual spending), but also make it easier for local governments to pay for police officers, firefighters, teachers and infrastructure improvements.

Finally, while the private sector is hiring (with a net gain of 4.7 million jobs since February 2010), the public sector continues to lay off workers. We’ve lost a million government jobs since 2010. Republicans and Democrats alike have been decrying the failure to stimulate the economy through the infrastructure improvements that are necessary to keep our economy competitive. But shrinking tax revenues and limited debt service capacity have tied the hands of state and local governments.

To be sure, our proposal raises pragmatic, political and legal challenges. For starters, the muni bond market is highly fragmented, and many bond issues are illiquid. Having the Fed train billions of dollars of buying firepower on this market could roil the pricing of individual bond offerings. To read the full piece, go to: http://www.nytimes.com/2012/10/24/opinion/why-the-fed-should-buy-munis-not-mortgages.html

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