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Muni Bonds as AAA Bank Capital

Written by Gary North on April 25, 2015

The Federal Reserve System is planning to issue new rules that will allow banks to buy municipal bonds as credit reserves for banks.

Follow the logic: banks will supply capital to cities, which will serve as credit for banks. This is modern banking 101.

This new arrangement will help provide a floor for cities’ debt. Meanwhile, municipal labor unions’ retirement deals are bankrupting more cities.

Of course, this is all being done in the name of helping solvent banks to subsidize solvent cities.

No one at the FED defines solvency as being debt-free. That is because the FED exists in order to counterfeit money in order to be used to subsidize governments that are going more deeply in debt. The subsidy of counterfeit money lets governments become more indebted by keeping short-term interest rates low. Solvency is defined today as being sufficiently in debt so as to preclude bankruptcy. It’s called “too big to fail.” It means “too much in debt to be allowed to fail.”

The U.S. Federal Reserve may allow big banks to use some municipal bonds to meet new liquidity rules that ensure they have enough cash during a credit crunch, the Wall Street Journal reported, citing people familiar with the matter.

The Fed had excluded debt issued by cities and states when it approved liquidity rules for large banks in September, part of a global effort to make banks such as JPMorgan Chase and Citigroup more resilient in a financial crisis.

Fed officials had at that time said they did not think the rule would have significant implications for the $3.7 trillion municipal bond market. The Fed had also said it planned to propose allowing certain high-liquid municipal securities to count as a sellable asset at a later date, after further review.

U.S. cities and states have been urging the Fed, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) to classify muni bonds as highly liquid if they are investment grade and have demonstrated reliable liquidity during times of economic stress.

(For the rest of the story, click the link.)

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