Jersey Jazzman reviews the economic mess in Puerto Rico. The Commonwealth was burdened by billions of dollars in debt that it could not repay. Much of the debt was held by hedge funds that speculated on the chances of repayment. The government decided to default on its crushing debt.
Hedge funds offered advice. Close schools, fire teachers, cut university spending. What about the future? Not their problem.
JJ, also known as Mark Weber, does some cAlculations about school spending in P.R. He also discovers this fact:
“Here’s a quick-and-dirty graph showing the differences in school-aged poverty rates between the 50 states, DC, and Puerto Rico. Not even Mississippi or DC come close to matching Puerto Rico’s 55 percent student poverty rate. It’s extraordinary, and it’s probably underreported. The entire island’s child poverty rate is as high as Camden, NJ, America’s poorest city.
“But these guys want to cut funds to Puerto Rico’s schools. Think about that….
“I’m always hearing from reformy types that education is the pathway to the middle class (all others doing necessary work that doesn’t require college are left hanging, however). Why, then, would hedge-fundies, who subsidize charter schools on this very premise, think it was a good idea to slash education in Puerto Rico when it really does return higher wages for the island’s citizens? If you want to grow Puerto Rico out of its debt, why slash the one thing — education — that we know will grow the island’s wages?
“I know next to nothing about macroeconomics, but I understand that governments should not borrow with abandon without a clear plan for repayment, and without using their borrowings for investments that will generate economic growth. I actually don’t think it’s fair to shift the entire blame for Puerto Rico’s woes on Wall Street, although they certainly deserve some of it.
“It’s clear to me, however, that forcing Puerto Rico to fully repay the hedge funds while cutting school spending is both stupid and immoral. This is an island that desperately needs a high-quality education system as part of a program of social rebuilding. From all early indications, Puerto Rico has been inexcusably stingy in funding its schools and paying its teachers.”
Diane Ravitch's blog 
So, the hedge fund managers that bankroll the charter school movement in the US are calling in their bets on the Puerto Rican debt crisis, which they helped to create by “hedging their bets” on the odds that the loans would be defaulted—which they were.
And their solution?
Fire teachers, close schools, cut university budgets, scorched earth. (Sound familiar, Wisconsin?)
But we are supposed to believe that the Campbell Browns, Dan Senors and the rest of the charter school/hedge fund crowd of “cool kids” are really committed to improving education for poor children here in the US, and not reaping huge profits from the multi-billion dollar “education reform market”?
Please.
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Now it’s time to use its vulture tactics to pick their bones in true hedge fund form.
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Eva responded to all of this by saying that she was proud to accept donations from Paulson and the other predatory hedge funders. She has not the slightest bit of discomfort in taking their money.
I presume that SUCCESS ACADEMY board member and cheerleader Campbell Brown feels the same way.
If I were a Puerto Rican parent whose kid(s) attended SUCCESS ACADEMY, I would stage a walkout. Every single Puerto Rican parent at Eva’s schools should set a day, and a time, and then have their kids walk out of school…
Or instead of dropping them off, the Puerto Rican parents and the kids should not enter school that day, and state a march, and demand that Eva give back the money which she got from Paulson and the others. They’re in touch with relatives back in Puerto Rico, and they get the news of what’s happening to their kin.
And that’s not as hard as you would think. Just get on the phone and start talking amongst each other, and get it in gear.
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To quote (or paraphrase) Norm Scott;
“When will Arne Duncan start saying,
” ‘The debt-crisis-induced economic collapse was the best thing ever to happen to Puerto Rico.’ ” ?
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Investing is about risk, or so I am told. The Hedgies took a risk and lost. Suck it up just like the rest of us would have to do.
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This is exactly right. The hedge fund people are professionals and they lost. During the debates, Trump was asked about his 4 bankruptcies. He basically said, don’t cry for the big boys who lost. They know what the risks are. And I would point out that Trump is still able to borrow.
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I found this on Google Books: “Report of The Governor of Porto Rico” by Puerto Rico’s Governor
Quote:
“The hope of the island is in the public schools. If these people are to share more and more in the large life of a pure democracy, they must be fitted for such enlarged participation by education.” — page 538
https://books.google.com/books?id=rzAbAQAAIAAJ&pg=PA538&lpg=PA538&dq=Puerto+Rico%27s+public+education+budget+compared+to+the+rest+of+the+island%27s+budget&source=bl&ots=KtTM-IWLQB&sig=T7vXuU6uV7DfPlQSRj1xdOKPRVQ&hl=en&sa=X&ved=0CDgQ6AEwBGoVChMIorrbgs-wxwIVg5iICh14SQ0g#v=onepage&q=Puerto%20Rico's%20public%20education%20budget%20compared%20to%20the%20rest%20of%20the%20island's%20budget&f=false
If the Hedge Funders have their way, they will gut any chance of a democracy from Puerto Rico’s people. I think what they want is to own Puerto Rico and turn it into a for-profit corporate state they own and control. No more democracy for that island.
How much are we talking about?
According to the following source, the General Fund Budget for 2015 is divided into two categories and the Department of Education shares 42% of $4.884 billion for the 2nd part of the budget. The first part of the budget is titled Special Appropriations = $4.756 billion
That means the education budget is $2 billion out of a total of $9.64 billion.
Click to access FY2015BudgetHighlights-Final.pdf
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“‘“I know next to nothing about macroeconomics, but I understand that governments should not borrow with abandon without a clear plan for repayment, and without using their borrowings for investments that will generate economic growth. I actually don’t think it’s fair to shift the entire blame for Puerto Rico’s woes on Wall Street, although they certainly deserve some of it.”
But then who should have to pay the non-Wall Street portion? The decision to borrow is made by a handful of politicians who are, for all practical purposes, unaccountable. Daley and now Rahm have borrowed Chicago into oblivion to pay for their own pet projects and yet they keep on getting re-elected because the machine and the media control elections. If Daley or Rahm could be personally held liable for their borrowing decisions, that would be one thing. But why should the city as a whole be held liable when there wasn’t a damn thing the average citizen could have done to prevent such borrowing.
(I’m using Chicago as an example because I’m familiar with it. I’ll admit I don’t know much about Puerto Rico, but I’m guessing the situation is similar.)
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Puerto Rico was borrowing long partly to pay for current, recurring expenditure. This has been going on for 20 or 30 years but got a lot worse in the last 10. Nevertheless the hedge funders knew what they were getting into, buying bonds of face value $100 for $50 or less on the market. Too bad for them if it was to go sour.
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Maybe buying those bonds had an objective to eventually take over all the public school and turn them into profitable corporate Charters helping explain the real reason the Hedge Fund Managers want Puerto Rico to pay them back by closing down the public schools.
A trade off. The Hedge Funds forgive the debt if they get the schools and the kids for decades to come.
I think the Hedge Funds see this bankruptcy as another hurricane Katrina opportunity to take advantage of a disaster to take over the schools just like the RheeFormers did in New Orleans. Nothing like a good disaster of any kind to bring out the fraud and crooks by the boat load.
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I’m sorry but it needs to be said…Devo was right..we are devolving. Instead to trying to make everyone’s life better…the few are trying to make everyone else’s quality of life worse. Where will the 1% be 20 years down the road, when anyone they want to hire to fix, build, make, and serve things to them can’t read the directions to do so? Where will they be then?
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This is a much more complicated story than a tale of hedge fund rapaciousness or unaccountable politicians. I don’t pretend to be able to tell the full story, much less propose its solution. But Joseph Stiglitz and Mark Medish had a thoughtful column about this in the WSJ last week. One big problem, which they touch on, is that because PR is a U.S. commonwealth, it can’t use the processes that have been set up in US bankruptcy law to protect the interests both of creditors and of Puerto Rico itself. Detroit’s bankruptcy was a terrible thing, but it wasn’t the Wild West. There was a presiding judge who sat not just in law, but also in equity, with the authority to enforced the principle that a restructuring is not “feasible” if it does not allow the debtor-state to provide the essential services its residents need.
By JOSEPH E. STIGLITZ And MARK MEDISH
Aug. 13, 2015 6:59 p.m. ET
German Finance Minister Wolfgang Schäuble recently quipped to his American counterpart, Treasury Secretary Jack Lew, that he would gladly trade Greece for Puerto Rico. He was referring to the debt crises in both places and indirectly chiding Mr. Lew for offering unsolicited advice. While there are important differences, the Puerto Rican and Greek situations are similar enough to warrant comparison for policy lessons, though perhaps not the ones intended by Mr. Schäuble.
Both are cases of fiscal mismanagement and unsustainable external debt in the context of fixed exchange rates through a common currency, the U.S. dollar for Puerto Rico and the euro for Greece. Equally striking, both Puerto Rico and Greece represent quasi-colonial dependencies of distant powers in Washington and Berlin (via Brussels). Though there is an important distinction: Greece chose to join the eurozone; Puerto Rico never chose to become an unincorporated U.S. territory. The islands, more than a 1,000 miles south of Miami, were acquired from Spain in 1898 after the Spanish-American War.
Washington has since been content to play absentee landlord. The commonwealth of Puerto Rico is neither fish nor fowl in the constitutional order. It lacks both the privileges of a U.S. state and the powers of a sovereign. Indeed, its relationship to the U.S. gives the lie to the notion of a “commonwealth.” The U.S. wants the benefits of an offshore tax haven without the responsibilities to rescue it in time of need.
Washington treats Puerto Ricans as second-class citizens. The list of slights is long and depressing. The territory receives reduced Medicare and Medicaid coverage. Corporate tax holidays were granted and capriciously withdrawn by Congress. The North American Free Trade Agreement has beggared Puerto Rico through substantial trade diversion in favor of Mexico. And the 1920 Jones Act forces the U.S. territory to use high-cost American shipping carriers.
Excluding unfunded pensions, Puerto Rico has a debt burden of more than $70 billion, which it cannot service. Most of Puerto Rico’s private creditors—such as OppenheimerFunds and Franklin Templeton Investments, the latter also a large creditor of Ukraine—insist that Puerto Rico merely has a serious short-term liquidity problem but is not insolvent. Yet absent a comprehensive long-term growth strategy, this is a distinction without a difference. The territory can’t pay its debts today, and with short-term debt financing at the high interest rates demanded by creditors, it will be even less able to pay its debts tomorrow.
Private creditors are unwilling to admit they made foolish investments, lured by the triple tax break on Puerto Rico’s municipal bonds. And once again the investment funds and banks, rating agencies and insurers who failed to do due diligence on the debtor’s capacity to pay will attempt to shift the blame. Vulture funds swooped in late, looking for a killing.
At risk is not only Puerto Rico but the safety and soundness of the rest of the $4 trillion U.S. municipal-bond market. After Detroit’s bankruptcy, who knows what other jurisdictions have fiscal weaknesses that should be more closely scrutinized? Contagion from Puerto Rico could mean higher municipal borrowing costs across the U.S., especially with muni-bond insurers raising premiums, or even pulling back from providing insurance altogether.
What is to be done? Putting aside a change in sovereign status—a “Prexit” resulting in either independence or U.S. statehood—the practical options for Puerto Rico are limited. But action by Washington is imperative to prevent further social hardship.
First, the U.S. bankruptcy code, which currently excludes Puerto Rico, should be amended to include it and open the way for orderly debt relief. If the code is not amended, Puerto Rico should be allowed to promulgate its own bankruptcy law. Up until now, this common-sense reform has been blocked in the courts by private creditors fearing the haircuts that they richly deserve, and which would enable Puerto Rico to have a fresh start.
Second, if the U.S. is unwilling to provide assistance, Puerto Rico should be allowed to bring in the International Monetary Fund for official assistance. Washington currently rejects IMF involvement, but why exactly? If the IMF is good medicine for Greece, why is it not good medicine for Puerto Rico?
The IMF would certainly conduct a debt sustainability analysis concluding that most of Puerto Rico’s debt must be restructured or forgiven, as it has proposed for Greece. Much as the IMF has demanded key legislative changes in Greece to qualify for assistance, it would likely recommend that the U.S. Congress amend the U.S. bankruptcy code and the Jones Act, and adjust the minimum wage in Puerto Rico to make workers there more competitive. The reform in bankruptcy law is especially important: Allowing Puerto Rico to fall prey to the claws of vulture creditors is unjust and unacceptable.
Third, and most fundamentally, the U.S. must take responsibility for its imperialist past and neocolonial present. Washington owes Puerto Ricans a future based on democratic legitimacy and a financially and socially viable development strategy—a development strategy that is more than a set of tax breaks for profitable U.S. corporations.
Mr. Stiglitz, a Nobel laureate in economics, is a professor at Columbia and the author of “The Great Divide: Unequal Societies and What We Can Do About Them” (W.W. Norton, 2015). Mr. Medish was a senior Treasury official during the Clinton administration.
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Flerp, how did you get back in here?
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Donna, the answer to your question: by my sufferance.
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Suffer the little Flerps. . . .
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Unbelievable! Diane, thanks for bringing this up. So who in govt. and their offsprings are INTO hedge funds?
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