Charlie Gasparino in today’s New York Post:
The municipal-bond market is in crisis, with prices fall ing and investors running for cover — and for good reason.
Munis — bonds sold by states, cities, counties and other localities to finance government operations — are in trouble because the Ponzi scheme of Big Government is coming unglued. The markets are merely reflecting this reality, as they always do.
The $3 trillion muni market was once regarded as the safest of all investments because the bonds are backed by government taxes. Now it’s showing all the earmarks of the 2007-08 meltdown.
That mess began with investors fleeing from bonds tied to the housing market — and ended with the collapse of the financial system. Mortgage-backed bonds were considered super safe because the housing market “always goes up,” and any remaining default risk was covered by “super-sophisticated” securities.
So banks held tons of those securities, earning huge returns on their “risk-free” investments. The feds used Fannie Mae and Freddie Mac to keep the market booming by buying up tons of mortgages, leaving the banks with more cash to initiate more mortgages — ensuring that even the riskiest borrowers could play.
As it turned out, the housing-bond market was a Ponzi scheme not all that different than what Bernie Madoff pulled off for so long. Eventually, the cash couldn’t flow in fast enough to keep inflating the bubble. Once the folks who couldn’t afford their mortgages could no longer flip out of the market, the whole thing burst.
The municipal-bond market’s assumption is that cities and states won’t default on their debt because they need to keep selling bonds to build roads and bridges. Investors will keep buying munis because they think the state will always make good on its obligations (and with the added incentive that these bonds are free of state, local and federal taxes).
But suppose taxes are so high that people leave cities or states in droves, depleting the pool of revenue need to pay bondholders? Suppose these states have so many other obligations — from federal mandates, massive “guaranteed” pensions to government workers and more — that they can’t or won’t make the vast cuts needed to keep paying on their bonds?
Read the whole thing here.
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