The Municipal Bond Bubble: "Tip of the Iceberg" or Safe Bet?

The Municipal Bond Bubble: "Tip of the Iceberg" or Safe Bet?

The municipal bond market is large at around 3.7 trillion dollars. It is also essential. Municipal bonds allow the decentralized system of American federalism to provide highly localized critical social services. Your new school, new firetruck, new water-treatment plant, renovations to the library, and that noisy sidewalk repair project were most likely financed using municipal bonds. Most of the time local governments do not have cash on hand to finance costly infrastructure development projects. Instead, they borrow. And investors lend to towns and cities expecting a healthy R.O.I. About.com reports that indexed municipal bond mutual funds offer "Attractive After Tax Yields" outperforming treasuries by a little more than a percent. 

Teachers, policeman, firefighters, town librarians, to quote Steve Miller "make a living on other peoples taxes." So do municipal bond investors. Cities make bond payments using receipts from current taxes. Most localities receive the majority of their income from property taxes (...and the rest from speeding tickets). The housing bubble burst. Property values plummeted. Tax receipts suffered as localities were hit hard by the financial crisis. 

Bond investors were banking on the upward trend in property values. In effect, the borrowing costs and habits of America's local governments rested implicitly on the assumption of continued increases in home prices. Around a year ago, investment analyst Meredith Whitney predicted a massive wave of default in the municipal bond market. The prediction roiled speculators, but her doomsday prophecy has yet to occur.

What Would Andrew Jackson Do?: Public Choice, Public Finance and the Federal Reserve

John J. Louis

What Would Andrew Jackson Do?:
Public Choice, Public Finance and the Federal Reserve

The Huffington Post reports, Trust in Government? Poll finds Nearly 80% of Americans Don't, and the Chicago Booth/Kellogg Finacial Trust Index shows fewer than 1 in 4 americans trust the financial system. American's have been wary of banks since the founding. We have been especially suspicious of big banks, and at times downright hostile to central banks. Occupy Wall Street demonstrators show little has changed. 

In 1832, Andrew Jackson's famous bank veto officially ended the Second Bank of the United States. Jackson admitted, "A bank of the United States is in many respects convenient for the Government and useful to the people," yet he understood the concomitant dangers.  Jackson proclaimed"The many millions.. bestow[ed] on the stockholders of the existing bank must come directly or indirectly out of the earnings of the American people." Jackson understood that national credit could be used to underwrite favored lenders at taxpayer expense.