Last week, Chris Whalen appeared on Tech Ticker with Henry Blodget; he said, in the accurate if sensationalist words of the Business Insider headline, that CALIFORNIA WILL DEFAULT ON ITS DEBT.
The interview was actually pretty intelligent and informative, by the standards of financial TV. Whalen talked about the politics of federal-state relations; about prior cases where states defaulted; about California’s pension obligations; about the ability of a Republican-controlled House to pass any kind of bailout bill—all things which are decidedly germane to anybody looking at California’s credit.
But Brett Arends didn’t like what he was hearing, and decided to push back a bit. The results were much more illuminating than anything Whalen said on Tech Ticker.
When I e-mailed Whalen, asking him for specific calculations, none were forthcoming.
“My general comments have to do with my guess as to the impact of mounting foreclosures and flat to down GDP on state revenues,” Whalen replied.
Your guess? These are important problems, to be sure. But do you have any actual numbers?
“Revenues fall and mandates rise to the sky,” he wrote. “You do the math.”
Er, no, actually. It’s your assertion. You do the math.
Whalen blamed the matter on Blodget.
“I am a bank analyst,” he wrote. “I have not written anything on this. My comments have taken on a life all their own… This is all Henry’s fault.”
Henry’s fault? Not really: Henry wouldn’t have started asking Whalen questions about California if he didn’t already know pretty much what the answers were going to be. And Whalen was clearly prepared for Blodget’s questions.
In reality, what we’re seeing here is expertise mission creep, and a rare example of an expert admitting to it. Whalen’s company is highly regarded when it comes to analyzing banks’ balance sheets, and as a consequence of that regard, Whalen has gotten for himself a nice perch in the punditosphere, as well as a new book.
But Whalen, as he admitted to Arends, is no more an expert on municipal finance than Freeman Dyson is on global warming. And so the proper stance for Blodget to take was not to deferentially pose questions to Whalen and then passively receive his oracular words of wisdom, but rather to push back and have a proper debate about Whalen’s assertions, much as Arends might have done.
The California debate is an interesting one: the state has massive future liabilities, in the form not only of debt payments but also of public-sector pensions, but at the same time its legislature is incapable of raising taxes in order to ever pay for them. It’s a fundamentally unsustainable status quo—something has to give—but realistically no one knows what will give, or when, or how. It might be those debt payments, but a debt default wouldn’t really solve California’s problems, since California’s debt isn’t actually all that large, as a percentage of GDP.
More generally, the municipal bond market is a very complicated place, where expertise is hard-earned and voluble new entrants are inherently mistrusted, normally for good reasons. (See Bond Girl on Meredith Whitney; she doesn’t even mention the conflicts inherent in having a rating agency give investment advice.)
But complex doesn’t play well on TV; strongly (if briefly) held opinions do. So, as ever, expect more heat than light whenever you see an expert on TV talking about anything.
Felix Salmon is a financial writer, editor, and podcaster. A former finance blogger for Reuters and Condé Nast Portfolio, his work can be found at publications including Slate and Wired, as well as his own Substack newsletter.