Journey to the heart of a crisis

I’m just back from a few days in Austin, and I want to report on two conversations I had there.

On the way to the Texans for Obama slash Travis County Democratic Party debate watching party on Thursday night I had a few moments to frankly question an Austin city official who I know pretty well. I wanted to know how the financial crisis was affecting the city’s ability to borrow. Growing cities like Austin often need to issue bonds against future tax receipts to fund important investments. Access to that kind of credit is a critical driver of local economic growth, and Austin would be hard pressed to plan ahead without it. I asked him if he had noticed a change in the bond markets’ posture towards the city in recent weeks and months.

Mostly not, he said. The city isn’t in such bad shape with respect to long-term debt; the core confidence is there among investors that the municipal government is credit-worthy in the medium and long term, and probably more importantly in the immediate crisis, municipal bonds are comparatively safe. It’s easy to intuit that with Treasury yields being driven through the floor so that they essentially offer no return for the moment (in exchange for a safe harbor), only marginally less safe assets like municipal bonds might offer an attractive trade-off – a smidgen of risk for a smidgen of interest.

No, he said, the bond markets aren’t the problem. The problem is commercial paper. The city has to borrow relatively small amounts of cash for short periods all the time, just as a matter of cash flow management and continuing operations. That kind of financing is usually available at a paltry 2% annualized rate, but right now they are being charged 8%. Just the cost of doing business – little more meaningful than the financing and transaction costs, as I understand it – has shot up. This seems to me to be the heart of the immediate crisis; the thing for which everything else is triaged, and why we had to pass the bailout. If we can’t get credit moving – especially the kind of short-term inter-institutional credit that greases the cogs – the city’s tax dollars won’t go as far, spending will have to be restrained, and the gears of local government and local economies will grind.

One more thing, though, before I move on to the second conversation: this is the City of Austin. It’s the fastest growing city in the fastest growing state, and it’s a good bet for investors. It’s the only city in Texas with a AAA credit rating, according to this official. What if you aren’t Austin? What if you aren’t a city at all – what if you are a hospital and you need a short-term loan to pay nurses this month? He agreed that was the right question, and he didn’t have an answer other than to say that we need to get credit flowing again.

But if that’s the shape of the crisis, I had a conversation this morning that spoke more to the underlying ills that contributed to it. There’s no great revelation here, just a real-life example of how our economy has become less and less sustainable. My friend Matt teaches social studies at an Austin public high school, and he spends a lot of his time focusing on struggling or disadvantaged kids. For the last two years Matt has coached football and basketball, but those additional responsibilities took so much time away from teaching that he felt like he was skating on thin ice, too often under-prepared to teach each day. So this year he made the hard choice to give up coaching – and $450 per paycheck – so he could be a better teacher. The problem is that Matt has found that he didn’t really have a $450 cushion in his budget, so yesterday morning, at 8:30 AM on Saturday, he found himself driving up to Pflugerville for a training session on refereeing high school basketball games. Matt’s the last person I know who would complain about the impositions that life makes on us, but the moment clearly struck him as regrettable and increasingly universal. There he is, college-educated, single and no kids, doing one of the most important jobs you can do in our society (my editorializing, he is too modest), and he has to pick up a second job to make it work.

I guess you can fairly make the argument that the most fundamental thing about our economy is the American worker, but the American worker’s work-ethic and determination alone can not a fundamentally strong economy make, and to argue that it can is to throw the American worker under the bus.