Wall Street Quakes as Trump Calls for Wiping Out Debt of Puerto Rico

by Harley Schlanger, via Rogue Money:

In June 2016, the Congress refused to address the real debt crisis, instead passing the PROMESA bill, with support from the leadership of both parties, and signed by President Obama.  PROMESA established a financial oversight board with full authority over the budget and debt restructuring of the island territory, modeled on the late 1970s BIG MAC financial dictatorship imposed by the banks on New York City, for debt collection.  

In signing the bill, Obama said that with PROMESA, “Puerto Rico will now have time to work out an orderly financial path forward.”  Implicit in this is that the debt, or at least most of it, would have to be paid.  To realize this, the oversight board, with Obama’s full backing, imposed an even more crippling austerity plan than what had been in place, prioritizing debt payments over health care and pensions.  By further weakening the fragile economy, the austerity plan drove the poverty rate up to 45%, and triggered a large-scale emigration from the island.

As Trump has noted, Puerto Rico had been in terrible shape before the two hurricanes hit.  In the FOX interview, Trump told Rivera, “They owe a lot of money to your friends on Wall Street.  We will have to wipe that out…I don’t know if it’s Goldman Sachs, but whoever it is, you can wave goodbye to that.”

PANIC ON WALL STREET

Even raising the issue of cancelling Puerto Rico’s debt set off panic attacks on Wall Street.  The New York Times said that investors “were taken aback” by Trump’s comments, as this would mean “major losses for investors”.  The article identified that among the largest holders of Puerto Rico’s bonds are Wall Street giants BlackRock, Inc., Franklin Templeton Investments, and Goldman Sachs’ asset-management unit.  In its coverage, Bloomberg wrote that the idea that over $70 billion in debt could be written off “would shake investors faith.”  The news triggered a downward plunge of Puerto Rico’s bonds, which hit a record low at 37 cents to the dollar.

Almost immediately after Trump’s comments, his Office of Management and Budget (OMB) Director Mick Mulvaney was asked to explain what Trump meant.  Trying to calm the potential uproar, Mulvaney said he “would not take it [Trump's comment] word for word.”  He added that the administration “is not going to deal with the fundamental difficulties Puerto Rico had before the storm.”  This contradicts what Trump has been saying, as he hascalled for making the commitment to upgrade the island’s infrastructure.  But then Mulvaney contradicted himself, acknowledging that the federal government is committed to “rebuilding the island.” 

Adding further to the confusion, Mulvaney, who was formerly a leader of the pro-austerity “deficit hawk” faction in the Congress, told CBS News that Trump will “absolutely not” bail out Puerto Rico.  This could not have been comforting to Wall Street, as he seemed to be admitting that the policy would be to “wipe out” the debt, as the the federal government will not pay off the bond holders.  One irate Wall Streeter, Larry McDonald, the head of macro strategies at ACG Analytics, attacked Trump, saying, “This is not a dictatorship.  We have bankruptcy judges and the rule of law.”  He admitted, however, that this discussion “is scaring the bond market.”

HAMILTONIAN CREDIT TO BUILD INFRASTRUCTURE

It is not the prospect of writing off $74 billion in Puerto Rico’s bonds which is panicking Wall Street.  Compared to the tens of trillions of dollars in insolvent debt currently on the books of corporations and financial institutions, and the hundreds of trillions of dollars of derivative obligations they are carrying, it is a drop in the bucket.  What frightens them is the possibility that Trump may now be moving to fulfill his campaign promises to put the interests of the people ahead of the banks and multi-national corporate cartels.  With the end of “easy money” looming for financial institutions, which had allowed them to cover their bad debts and bloated leverage with a zero interest flood of liquidity from the Federal Reserve, there is a high probability that a major credit default will trigger a blowout far bigger than that of 2008.  When the 2008 crash happened, George W. Bush and Obama pushed through bailouts and the easy money policy to protect the swindlers of the Too Big to Fail banks and related institutions, allowing them to continue to create speculative bubbles, to greatly exceed the levels of debt they had created in the housing bubble which crashed.  

Trump’s comments on the Puerto Rico debt came simultaneously with a shift in his approach to infrastructure spending.  Previously, his commitment spend $1 trillion for infrastructure had been tied, by the Wall Street neoliberals in his cabinet and Congress, to either spending cuts in other areas, to “free up” funds, or to investment from Public-Private Partnerships, the notorious PPPs, which would limit funding only to programs which could return an immediate profit on every dollar spent.  Had this been the requirement at the time of the founding of the United States, it would still be a poor nation dependent primarily on subsistence farming for income.

Instead, under the leadership of the first Treasury Secretary, Alexander Hamilton, the Founding Fathers dealt with their debt problem by generating credit, through a National Bank, which provided funds for major infrastructure projects and manufacturing.  Hamilton argued that, by turning the debt into productive credit, the improvement in overall productivity, due to advances in infrastructure, manufacturing, and technology through scientific discovery, would increase the overall real productive wealth of the nation, eliminating the problem of debt as a constraint altogether.  Hamilton’s policies worked, as the Revolutionary War debt was turned into an asset, as he argued it would be in his “Report on Public Credit” delivered in 1790, and this allowed that debt to be paid off. 

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