James Grant in his new book, Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken, documents the evolution of American credit. His book's subtext is the federal government's destruction of banking.
First, he says, the government encouraged banks to abandon what had been their franchise: the safety, prudence, and conservatism epitomized in the architecture of the grand old bank buildings which yet dot the landscape. Then it regulated them into irrelevance.
Mr. Grant traces that evolution, noting, "central banking, federal subsidies, paper money, deposit insurance, and full disclosure have each fallen short of the claims of their respective promoters." But it is important to remember that each of those changes was heralded, discussed, and debated. Some rear-guard actions were fought, and some voices managed to be heard, even if they were as jeremaiads in the wilderness.
I commend Mr. Grant's book highly, and have treated it at length in the past. It carries a serious lesson for the municipal market. Because right now, the government is trying its damnedest to wreck the municipal market by the same means it used to wreck banking and make it irrelevant.
The similarities are uncanny. But there is one difference: The attack this time is coming unheralded and almost undebated. And by the time we discover what happened, it may be too late.
The fire this time is coming not from congressional tax writers, or from the Treasury, or from the Internal Revenue Service. It is coming from government-sponsored enterprises, or the creations of government-sponsored enterprises. In the past few weeks, we have carried a number of stories on these behemoths: "Charter Proposal for Connie Lee: A-Rated Credits Are Fair Game." And: "Meet Dottie Fae: New Guarantor is Discussed for Transport Bonds." And again: "Sallie Mae Mulls Enhancing the Nation's Ivory Towers."
That none of these enterprises may get beyond the discussion stage, or the invariable sausage making of Congress, is not an issue. That they are being talked about at all is. Because, as Mr. Grant has written, "The law of entropy in corporate finance holds that every good idea must be taken to an extreme." The same may be said of the federal government and its creations.
Think of Dottie and Sallie and Connie and Freddie and Farmer Mac and Fannie and the rest of the dotty federal government family as enormously fat and very unwelcome guests. Where they go, there is no room left for private enterprise. The Wall Street Journal reminded us of what it called the "federalization" of the mortgage market last week: "Now Fannie and Freddie dominate the Remic market, leaving investment banking firms with less than 10% of the business."
Right now, this fat family is just nosing around the municipal bond insurers. But how far can they be from the actual market itself? Now it's insurance and guarantees. Next, it will be agencies that will claim to "supplement" the municipal market with federal loans. From supplementing the market, it is a very short step to supplanting the market.
This is really a variation on a very old theme for municipal market participants. Having been shooed away from the front door time and again during the past century, the fat fed family is now trying the kitchen, and finding to their delight that the door is open and the refrigerator left unguarded. And once they get in, the industry will find that there is not much room left for the underwriters, financial advisers, traders, and salesmen plying their trade today, let alone any goodies. These fatties devour everything in their path.
They will do so as a matter of good public policy, of course, -- that is what they will claim. In the guise of independent entities of its own creation, the federal government can work better, smarter, and more efficiently. That is what they will contend. We all know how efficient and responsive enormous and impersonal bureaucracies are.
The municipal market, with all its many quirks and odd features, works very well. Given a chance. But it had better beware of government-sponsored enterprises. When they sit down to the table, there won't be much left for anyone else.