How to Tame Runaway Spending

02/01/2011 1:18 pm EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Making lawmakers buy their states’ long-term bonds would do wonders for self-restraint and fiscal responsibility, writes Marilyn Cohen, editor of Bond Smart Investor.

Sometimes radical solutions are the only way to create action. Obviously, the threat of not being re-elected isn’t threatening enough to our elected representatives.

I say we mandate by state constitutional amendment that every state legislator must own the equivalent of 15% of their net worth in municipal bonds issued by their own state. This would tie their personal fortunes to the way they vote.

Then, and only then, legislators will feel the effects of unbalanced budgets, overspending, and unfunded pension liabilities. They will suffer along with the rest of us for the decisions they make on our behalf. Perhaps seeing first hand how their votes affect their own pocketbooks, they will start voting in a fiscally responsible manner.

Take California (please!) We have a constitutional amendment to balance our budget. Yet, the Legislature’s smoke and mirrors and nonsensical budgeting has Californians on an LSD-induced fiscal trip. If our legislators owned California General Obligation bonds they would feel the monetary damage caused by their continuous overspending.

A Problem from Coast to Coast
Let’s not single out California. We can substitute New York, Illinois, New Jersey, Nevada, Arizona, Maine, the list goes on.

Too radical? Well, directors of publicly held companies have ownership via stock shares in the companies they govern. Skin in the game—that’s what I’m talking about.

Why shouldn’t there be consequences for overspending? Not getting re-elected simply doesn’t carry sufficient sting.

When our elected officials don’t honor voters’ wishes, they should face consequences. Nail the individuals responsible in their own wallets. Make them own intermediate and long-term bonds. They don’t seem to care about our wallets; maybe they’ll demonstrate more care for their own.

The theoretical question is: What’s it going to take to shake financial sense into these self-serving scoundrels? If we can’t force them to own the municipal bonds they keep issuing and issuing and issuing, then we are really the dummies for keeping them in office.

Don’t Buy the Dip in Munis
Are the worst offending states really that much different than Greece? Or Ireland? Or Portugal? I think not.

As we go to press, traders are annihilating the long end of the municipal bond market. Selling will bleed into the intermediate end as well. This is NOT the buying opportunity of the decade as several of the television talking heads are spewing. This is just another selling wave with more to follow.

[The iShares S&P National AMT-Free Muni Bond ETF (NYSEArca:MUB) has rebounded 3% from its Jan. 14 low, though it remains down 6% in the last three months. Gary Shilling recently tied the muni market’s struggles, in part, to the demise of Bear Stearns and Lehman Brothers—Editor.]

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