Cities in Bankruptcy, Buffett

I am on my way home Monday night on an overnight flight out of Los Angeles, but in the half hour or so before we board I thought I would share an article that will be of interest to our readers.

One of the basic premises of Strong Towns is that most of our growth and development costs more to service and maintain than it generates in revenue to provide said service and maintenance. Our towns and neighborhoods have on their hands an immense amount of infrastructure to take care of and proportionally not enough return to show for it. The mechanisms of growth that have enabled this to come about are financially suspect and, even if they were not, are coming to an end. Something is going to change, whether we welcome that change or not.

We have suggested on occasion that we can envision a number of American cities declaring bankruptcy and/or simply defaulting on their debt payments. For this we have received some criticism for being alarmist, purveyors of gloom or clueless.

Enter stage right someone who has more clout on this matter, Warren Buffett.

In the Motley Fool, Buffett is quoted as saying that the next financial crisis will be in the municipal bond market. 

And so it was that Financial Crisis Inquiry Commission chairman Phil Angelides asked: Where's the next big risk to our economy? Buffett's reply:

"If you are looking now at something where you could look back later on and say, "These ratings were crazy," [municipal bonds] would be the area. I don't think [Moody's or S&P] or I can come up with anything terribly insightful about the question of the state and municipal finance five or 10 years from now except for the fact there will be a terrible problem and then the question becomes: will the federal government bail them out?"

Buffett's conglomorate, Berkshire Hathaway, has dramatically reduced the amount of insurance it provides for the muni bond market. You can interpret that however you want, but I interpret it that he sees more risk there than he can either a) tolerate, b) quantify or c) both.

I'm going to share two short videos that espouse a related philosophical view of the world, albeit from a different perspective. The first is of Nassim Taleb, author of The Black Swan, who explains how evolution has rewarded redundancy and resiliency more than simply size or growth. The same thinking applies to our cities, most of which are over obligated, with little cushion or healthy fall back position, all in the name of growth.

The second video of of Andres Duany, who describes his view of how the world is now changing and how we will look back on 2007/2008 as a defining year. His view of history and how we seemingly forget that events change the world is insightful. So many are waiting for the return of 2005, as if that were in any way real economics and not an aberration in and of itself.

I'm going to be back in Minnesota likely before you read this. I'll try to give some insights on Vegas in an upcoming post.

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