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house Bill H.R. 2209

Should Municipal Bonds be Considered High Quality Assets to Encourage Investment?

Argument in favor

Many vital community program and infrastructure projects are funded by municipal bonds, and changing this regulation will ensure that financial institutions aren’t deterred from investing in them.

Shaun's Opinion
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02/17/2016
If done correctly, such investments could create a dynamic change in communities on a local level. Depending on the interest rate, the investor could also generate a return by strengthening a certain area. I understand the long term risk of default, but believe the federal government could back the bonds to a certain extent. Thereby keeping the interest rates at a normal rate, yet one which is still high enough to encourage investment.
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01/31/2016
Municipal bonds have done relatively well in the past, and allowing this to pass will make it easier for cities to finance infrastructure, something we sorely need to fix.
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Jake's Opinion
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02/01/2016
What municipalities need is a tax base and ending of corporate loopholes, but this will help in the meantime.
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Argument opposed

The FDIC is right to exclude municipal bonds from being considered a high quality liquid asset, as municipal bonds can be at higher risk of default than other types of bonds.

Chief's Opinion
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01/31/2016
Arbitrary designation of value or quality by the govt just screws up the free market. If the bonds perform well and give good returns, then they will legitimately be high quality.
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Richard's Opinion
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01/31/2016
These bonds should be rated based on their probability of yielding their promised return and the risk of default not some arbitrary mandate. Politicians are notoriously bad at fiscal policy matters. Until the Congress can tell us where every dollar of our economy breaking $19 trillion was spent and an objective evaluation of what has or has not been accomplished with that money, Congress should stop trying to force bad fiscal policies on us.
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operaman's Opinion
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01/30/2016
Would have answered yes before Detroit or Stockton. Now, not so much. Always liked the idea of tax-free bonds. But then, allowing big government to use it's magic spoon will screw up anything.
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What is House Bill H.R. 2209?

This bill would direct federal banking agencies to treat any municipal bond that is liquid, readily marketable, and investment grade as of the calculation date as a high-quality level 2A liquid asset. It seeks to mitigate the impact of a regulation that could prevent financial institutions from investing in municipal bonds, which would negatively impact funding for community infrastructure projects.

The Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, and the Comptroller of the Currency are directed to amend an existing liquidity risk measurement rule to comply with this legislation.

Municipal bonds can be issued by states, counties, or municipalities such as cities and towns to finance government spending. They are exempt from federal taxes for investors, and often from state and local taxes as well.

Impact

Municipal governments that offer bonds to fund community projects, financial institutions, the FDIC, the Federal Reserve Board of Governors, and the Comptroller of the Currency.

Cost of House Bill H.R. 2209

$0.00
The CBO estimates that implementing this bill could affect direct spending and revenues, but that the net effects would be negligible for each year.

More Information

In-Depth: Sponsoring Rep. Luke Messer (R-IN) introduced this bill to prevent the federal government’s liquidity risk measurement rule from having a negative impact on the ability of municipalities to fund vital projects and programs:

“A lot of times it seems like bank regulations have very little impact on our day-to-day lives. But, that’s just not the case here. This arbitrary decision by Federal regulators could have a real-world impact on cash-strapped school districts and local governments by raising the cost of critical infrastructure projects. We shouldn’t allow Federal bureaucrats to promote policies that disincentivize investment in our local communities.”

This bill was passed by the House Financial Services Committee on a vote of 56-1 and currently has 28 cosponsors in the House, divided equally between Democrats and Republicans.


Of Note: In 2011, the total value of municipal bonds issued in the U.S. was estimated to be $3.7 trillion in tradeable securities.


Media:

Summary by Eric Revell
(Photo Credit: Flickr user Seattle Municipal Archives)

Official Title

To require the appropriate Federal banking agencies to treat certain municipal obligations as level 2A liquid assets, and for other purposes.

bill Progress


  • Not enacted
    The President has not signed this bill
  • The senate has not voted
      senate Committees
      Committee on Banking, Housing, and Urban Affairs
  • The house Passed February 1st, 2016
    Passed by Voice Vote
      house Committees
      Committee on Financial Services
      Consumer Protection and Financial Institutions
    IntroducedMay 1st, 2015

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    Arbitrary designation of value or quality by the govt just screws up the free market. If the bonds perform well and give good returns, then they will legitimately be high quality.
    Like (19)
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    These bonds should be rated based on their probability of yielding their promised return and the risk of default not some arbitrary mandate. Politicians are notoriously bad at fiscal policy matters. Until the Congress can tell us where every dollar of our economy breaking $19 trillion was spent and an objective evaluation of what has or has not been accomplished with that money, Congress should stop trying to force bad fiscal policies on us.
    Like (11)
    Follow
    Share
    Would have answered yes before Detroit or Stockton. Now, not so much. Always liked the idea of tax-free bonds. But then, allowing big government to use it's magic spoon will screw up anything.
    Like (9)
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    Do bankrupt cities like Detroit or several in California ring a bell? Too much corruption to be considered safe.
    Like (5)
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    This should be on a case by case basis, not arbitrarily decided. Too many cities are too far In the red to make blanket policy. Sorry government, fed, state, and local have proven time and again that they are not fiscally responsible. The market will decide. No city or bank or car manufacturer is too big to fail. The sooner they figure that out, the better off the people will be.
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    Government has no business deciding high quality or low quality. That's what the buyer decides. Just like interest rates, value is a market decision
    Like (3)
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    The government has a proven track record of screwing things up when they start to dabble in finances, since this is not their strongest area unless they're doing it to fund their own pockets. I would rather the market dictate policy rather the government make decisions and and especially mandates.
    Like (3)
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    If done correctly, such investments could create a dynamic change in communities on a local level. Depending on the interest rate, the investor could also generate a return by strengthening a certain area. I understand the long term risk of default, but believe the federal government could back the bonds to a certain extent. Thereby keeping the interest rates at a normal rate, yet one which is still high enough to encourage investment.
    Like (2)
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    Share
    Municipal bonds have done relatively well in the past, and allowing this to pass will make it easier for cities to finance infrastructure, something we sorely need to fix.
    Like (2)
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    We all know that Wall Street would happily crash the economy out of an entitled sense of greed given any opportunity. Municipal bonds may have once been a no-brainer good investment. I doubt they are now!
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    Classifying risks as less risky than they truly are sounds a lot like 2008...
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    Doesn't that really depend on the municipality issuing them?
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    Not the governments place to influence the financial market making one bond more preferable. Let the market regulate itself.
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    By allowing only "certain" municipalities, for which the qualifications are uncertain, to receive an exaggerated value and return on bonds is questionable. Let's define and set requirements for what makes a municipality eligible for that inflation of value, and then consider the long term, against the perceived short-term gain of the inflation of their bonds.
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    The idea or the premise that significantly large financial institutions have the ability to invest and engage in such a high level of risk, only furthers the detriment and crisis that is the American debt stemming from from our crumbling banking system, stock market, and poor regulation from the federal reserve
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    Bonds should be evaluated on
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    Again, BUTT OUT, D.C.! The federal government makes a mess of everything.
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    What municipalities need is a tax base and ending of corporate loopholes, but this will help in the meantime.
    Like (1)
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    I'm not financially savvy, I'm not even that good in math. However this seems stupid to me if I take it at face value. We have a product that is unpopular for whatever reason, so without any attempt to address the shortcomings of it, we just tell people hey this thing is great and you should get in on it. I'm sure that worked out great for the "Pet Rock". This issue may need to be fixed, I don't think this is the way to do it.
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    Living in a city that has deteriorating infrastructure it would be ideal to have at least some way to invest, especially considering the state legislature generally ignores us. Source: NYC contributes almost 50% of NY state revenue but gets back significantly less. For transportation projects we get glamour ones like the Laguardia terminal rather than the completion of the 2nd Avenue line or the modernization of the subway, which millions of people rely on everyday.
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