Hemingway said bankruptcy happens “Two ways. Gradually, then suddenly.” The same could be said for fiscal crises – a lesson that Mayor Zohran Mamdani appears to have missed while immersed in Africana Studies in college, bond experts tell On The Money.
Our socialist boy mayor is woefully ignorant of the basics of municipal governance, they tell me, and further proof was provided in a remarkably bizarre interview he recently gave to the New York Times. Despite the softball questions, Mandani stepped on more than a few landmines — he’s unaware that he can’t arrest Benjamin Netanyahu for “war crimes” that exist only in the tiny brains of his fellow travelers on the far left because of something known as diplomatic immunity. He struggled to define what constitutes “working class”.
He’s also clueless about the nature of something known as “capital flight,” including how it goes down before it’s too late to stop. He thinks business leaders love his socialism and as proof, they haven’t all bolted for the proverbial door.
Yet talk to anyone who has studied the various fiscal crises of cities, including our own back in the 1970s. They will tell you that capital flight and the fiscal calamities it produces starts slowly – and “then suddenly,” just like bankruptcies. That’s because over time, if you tax and spend into oblivion, not enough people are left to pay the bills of all those on the dole.
The “slowly” part is something we’ve been chronicling on these pages, with taxpayers and businesses leaving the city while private sector employment remains moribund. And it can be seen now in the recent declines in New York City municipal bond prices. As we reported last week, investors are worried that Mamdani’s budget math isn’t working, and they’re selling debt.
This week’s latest numbers (through July 17) show another round of price declines, with the “yield” or interest rates needed to convince people to buy city general obligation debt spiking to 3.46% from 3.34%.
“I think there is concern over stagnant private-sector employment in NYC and growing welfare rolls during a period of relatively strong economic growth nationally,” said Richard Farley, author of “Drop Dead: How a Coterie of Corrupt Politicians, Bankers, Lawyers, Spinmeisters, and Mobsters Bankrupted New York, Got Bailed Out, Blamed the President, and Went Back to Business as Usual (And It Might Be Happening Again)”, a book that chronicles the 1970s meltdown.
“The bond market obviously pays very close attention to all these data points-and they’re pointing in the direction of increased credit risk and therefore higher yields,” Farley told me.
And yet Mamdani seems oblivious to it all. As he told the Times: “When I was running for this office, I would hear time and again what a catastrophe it would be if I were to win, when it came to capital flight, when it came to crime. And what we’ve seen is so much of what is fearmongered around has very little relationship to reality.”
True, Mr. Mayor, there is still a bid for NYC debt, though if you understood the way the municipal-bond market works, particularly here in New York City, that bid should be a hell of a lot stronger. In other words, the fiscal cliff is gradually approaching.
Here’s how you know it. First with all the taxes he’s proposing, NYC muni’s should be a safe haven since their returns are triple-tax-free. Since the financial crisis of the 1970s, when the city flirted with bankruptcy, the state placed safeguards on NYC debt with bond holders getting first dibs on taxes before they are used for other purposes.
And yet, NYC muni’s are getting “yippy” as they say in the bond market, with prices starting to crater as investors ask whether Mamdani’s socialist spending and budgeting – riddled with gimmicks and propped up by state aid – means the city’s fiscal trajectory is heading toward crisis.
The last time this happened in the 1970s, there was a slow burn toward insolvency when in 1975 the big municipal bond investors just stopped buying our debt. Then what was happening gradually, happened suddenly: A full fiscal meltdown.
There were massive layoffs of the people who make the city work (everyone from garbage men to cops), little spending on infrastructure (roads and bridges decaying) until a coalition of Wall Street types and state officials (think Lazard Freres’ Felix Rohatyn and former governor Hugh Carey) put together a bailout package combined with plenty of austerity. This, mind you, was only after many painful years.
Just to be on the safe side, I asked the city’s alleged fiscal watchdog, comptroller Mark Levine, who is directly in charge of the bond sales, if maybe the mayor is having just a few bad weeks in the markets. His flack tells me: “The recent movement in the City’s bond yields does not indicate an eroding tax base, which is at record levels, or the expectation of a rating downgrade. Over the same period, the 10-year municipal benchmark rose a comparable amount, suggesting that the change reflects broader market conditions. The City’s credit remains strong.”
If that’s the case, why are so many taxpayers moving out?
