Posts Tagged ‘Municipal Bonds’

The Municipal Bond Problem

April 6, 2010 1 comment

All of the sudden, a lot of attention is being paid to the municipal bond market. Rick Bookstaber writes:

Well, guess where we have a market that is (1) leveraged and opaque, that is (2) very big and tied to the credit markets; and is (3) viewed by investors as being diversifiable by holding a geographically broad-based portfolio; with (4) huge portfolios where assets and liabilities are apparently matched; and with (5) questionable analysis by rating agencies; and where (6) there are many entities, entities that may not approach default with business-like dispatch, and that have already mortgaged sources of revenue that are thought to support their liabilities?

Answer: The municipal market.

The problem, as always, is goverments spending more money than they take in. Except, unlike the US government, the nation’s municipalities can’t print money because they’re not sovereign entities with their own currency, and their ability to sell more debt is constrained by people’s willingness to believe that they will pay their existing debts.

David Merkel notes the similarities between ineptly run municipal governments and corporate crooks:

Governments that scam the asset markets (and their citizens) take all manner of half measures to defend failed policies before undertaking structural reform. (This includes defending the currency, some asset sales, anything that avoids true shrinkage of the role of government.)

The question I would pose to those who inveigh ceaselessly about corporations and capitalism is this: when do we, the citizens, become taxed enough by governments that can’t spend within their means? All the attention paid to fraud on Wall Street is for naught if it allows government to escape unscathed.