Local Governments Argue That Financial Markets are Highly Monopolistic

The Washington Post told readers that local government officials complained about the monopolistic nature of U.S. financial markets in an article on the Volcker Rule. The article reported that a number of local government officials complained that the Volcker Rule would force them to pay higher interest rates on their bond issues.

While the article never discussed the issue of monopolistic markets, this is what the complaints by these officials imply. If the markets were highly competitive, then it would make very little difference whether or not banks opted to buy the debt they issued. Even a small increase in interest rates would cause other investors to swoop in and grab up their debt.

Also, if the financial system were reasonably competitive, we would expect that independent investment banks -- which are not subject to the Volcker Rule -- would be created to take advantage of these high yielding bonds, bringing up their price and pulling interest rates down.

The article should have asked the question of why, if these local government officials are correct in what they claim, financial markets are not working as they are supposed to.

Build America bonds are less regressive
written by BillB, February 29, 2012 6:30

Tax-exempt municipal bonds are an inherently regressive subsidy to the wealthy. The higher your tax bracket, the higher the subsidy rate. The municipal bond market is relatively illiquid and inefficient because the universe of buyers is relatively small. Non-profit institutional investors and foreigners don't buy them because the tax-exemption is of no value to them. Because of this limited market, municipalities end up paying higher rates on their bonds than in a more efficient market.

A much more equitable system is the Build America bonds in which the Federal government pays the subsidy directly to the municipalities rather than to the bond holders. This allows the municipalities to issue taxable bonds in the much larger, more efficient, taxable bond market. The effect is that the Federal government pays the same subsidy as for tax-exempt bonds but the municipalities benefit from bonds issued at lower rates, after subsidy, because of the much larger and more efficient bond market from an expanded universe of lenders. The subsidy is less regressive because it does not go primarily to the wealthy.

The Oligopolization of America
written by FoonTheElder, March 05, 2012 12:09

The U.S. is a nation of oligopolies. Look in every industry. A small number of big corporations control the markets, including workers, suppliers and customers.

These corporations have no incentive to compete with their friendly competitors. Like Lucky Luciano said, why fight when there's more than enough money for all the criminals.

Local Governments Argue That Financial Markets are Highly Monopolistic

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