Sen. Elizabeth Warren (D-MA) spoke out firmly at the recent hearing on Puerto Rico’s economic position, saying that the Treasury Department has more power in the situation than the administration has acknowledged:
I think Treasury needs to step up and show more leadership here. During the financial crisis, when the banks were in trouble, Treasury did a lot more than just bail them out. Treasury stretched the limits of its authority to make sure that the banks stay afloat. It helped broker deals between banks, it applied pressure to get parties to accept deals they may not have liked very much. It has done that in multiple other crises as well, and now the people of Puerto Rico are calling.
She went on to urge Treasury to be “just as creative” in supporting Puerto Rico as it was in support of the banks during the 2008 financial crisis.
Her comments follow a letter sent to Treasurey the day before by presidential candidate and Senator Bernie Sanders (D-VT). Citing Puerto Rico’s grim statistics on unemployment, poverty and income inequality, Sanders wrote that, “[i]n the midst of this massive human suffering, vulture funds and Wall Street investment banks have been calling for even more austerity.”
The New York Times followed this theme on Sunday, recognizing that “[t]here is no doubt that Puerto Rican leaders have mismanaged the island’s finances and economy,” but that “[w]hat investors must realize is that an orderly restructuring is a far better alternative than the long and complex legal battles that would inevitably follow a sudden default.” While the Times doesn’t refer to the funds as “vulture funds,” there is a recognition that investors are not immune from the fallout of federal legal and policy changes to resolve Puerto Rico’s current problems.
Many investors who have lent money to Puerto Rico and stand to lose under any debt restructuring are bitterly opposed to the Obama plan. They say Puerto Rico can repay all of its debt if it tightens its belt and privatizes utilities and other government-owned businesses. Changing the law now, they argue, is deeply unfair. But the record of what has happened in troubled countries like Greece is clear: Austerity policies have only worsened the crisis. As for the fairness argument, legislators change laws all the time to meet new circumstances.
This is a change in tone for major media. Until recently, there was a persistent narrative showing Puerto Rico as trying to get out from under the consequences of its spending spree at the expense of many small investors whose pension funds would shrink if Puerto Rico were allowed chapter 9 protection. The story is cast in terms of Puerto Rico’s moral obligation and the investors’ grave risks.
The financial blogesphere sometimes tells a different story. Articles on “How to Make Money from Puerto Rico’s Debt Crisis” can be found. “Over the last 45 days,” the linked article reports, “there have been 23,931 Puerto Rico bond purchases and 33,816 sales.” In other words, wealthy investors who can handle the risk are still buying and selling Puerto Rico’s bonds. The new buyers are speculating that they can buy low and sell high if Puerto Rico is forced to submit to extreme austerity measures.
This is the narrative that appears to be driving Sen. Warren and Sen. Sanders to push back.