Sam Uretsky

Help Locals Get Their Own Projects Going

Michael Bloomberg, the self-made billionaire mayor of New York City suggested it and Warren Buffet, the self-made billionaire known as the greatest investor in the world decided to get in on the business, so why aren’t we reading about it as part of a government economic program? It would increase Federal revenues, reduce state and city expenses, and do a lot to get the economy started, all with minimal expense to the government, so why aren’t we reading about it on the business pages?

The idea is simply to have the government guarantee revenue bonds of states and cities with an A rating or above. Given the track record of these bonds, the risk of default is low, and there’s no money up front. Last year, Berkshire Hathaway opened a new subsidiary, BH Assurance Corp, insuring only municipal bonds, and business has been skyrocketing.

Municipal bonds are usually issued for public works, infrastructure rebuilding and repair. These are the types of projects that President-elect Obama singled out in his discussion of the jobs program which he hopes to implement as soon as he takes office. In fact, according to the Washington Post, these are exactly the same projects that will probably get first approval from the government once the new administration takes over—not because they deserve the highest priority, but because they’re ready to begin, and can create new jobs quickly. These projects have, in some cases, been waiting for years. The Post reported: “Oklahoma wants to repave stretches of Interstates 35 and 40 and build ‘cable barriers’ to keep wayward cars from crossing medians. New Jersey wants to repaint 88 bridges and restore Route 35 from Toms River to Mantoloking. Scottsdale, Ariz., wants to widen 1.5 miles of Scottsdale Road.” While these projects aren’t the stuff that history is made of, they’re useful programs that will offer new jobs, with enough security to let the workers spend the money, whether it’s on a new pair of shoes or a washing machine, or a new car. New projects can come later. Somebody with a steady job now is less likely to default on his credit card or mortgage, and is less likely to draw down her savings so that the college and retirement funds will have to be replaced.

These projects were never intended for Federal funding, but the municipal bond markets have been hit by the same fears as every other investment. Even Virginia, the most financially secure state, has had to offer its bonds at elevated interest rates, and some states can’t find a market at all. The market for bonds already issued has dropped, and new issues have dropped dramatically since 2007. Part of the reason for this is the decline in confidence, not in the states and cities issuing the bonds, but in the insurance companies backing the bonds. Federal backing of these bonds would improve their chances of sale, and give the construction projects an earlier start. Earlier is better.

The government would profit in two ways. First, there could be a competitive fee for the guarantee, perhaps even slightly higher than the fees charged by commercial insurers. While Berkshire Hathaway has seen its return from its investment in Geico decline, the Berkshire Hathaway Assurance Co. has done well, in part because of BH’s AAA rating. The government should be able to charge more than a private company. Secondly, because interest on these bonds is tax exempt, lower rates on tax exempt bonds might drive more money into taxable investments. Most of all, putting people to work on steady jobs will restore confidence in the economy, and help revitalize the consumer economy.

In testimony before the House Financial Services Committee, Ajit Jain, who heads the insurance and reinsurance activities of Berkshire Hathaway, credited that company’s entry into the market to a telephone call from Eric Dinallo, New York State’s superintendent of insurance. Evidently, Mr. Dinallo asked if BH would be interested in setting up a bond insurance business in New York state, and that was all the lead the company needed to consider and implement the program.

In the case of Mayor Bloomberg’s proposal, according to a Dec. 2 report, he, along with California Gov. Arnold Schwarzenegger and Pennsylvania Gov. Ed Rendell, met in November, so the idea has been floating around for a while, but it’s not getting much attention.

One more thing: Unlike the automobile bail-out, where senators from areas with auto plants from other nations had a local interest in bashing GM, Chrysler and Ford, every politician has a local interest in construction and repair. Every state has a project it would like to have funded, so the political opposition to the plan should be minimal.

Sam Uretzky is a pharmacist living on Long Island, NY.

From The Progressive Populist, Feb. 1, 2009

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