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Wednesday, May 27, 2009
6:28 PM EDT
Ryan Ellis

Next Up on the Bailout Train:
State and Local Government Muni Bonds

There have been no shortage of people with their hands out to the federal government over the past year.  State and local governments are no exception.

Now they're back for more.

The National League of Cities recently asked the Treasury Department for an interest-free loan for $5 billion (try that at your local bank).  What will these big-city mayors do with this cash?  They would like to create a insurance policy for all the debt that cities have been racking up.

Let's put aside for one moment that these cities have consistently failed to reign in costs, which has led to their unfunded liabilities and exorbitant debt levels.  Let's even put aside the chutzpah they have to ask for an interest free loan from taxpayers.  Let's instead focus on the idea of insuring municipal bond debt.

It might surprise these mayors to learn that there is a private sector already out there, ready to back this debt.  Now, they've taken a hit like any other industry in the past year, and are far more inclined to purchase high-quality debt.  But rather than clean up their acts, cities with subprime debt are looking to set up a government-owned competitor to this thriving private-sector market.

The principle is simple--the government should never directly compete with private sector companies.  There is a thriving private sector in municipal bond insurance.  Bailout money shouldn't be used to set up artificial government competition--period.

Posted by Ryan Ellis on Wednesday, May 27, 2009 6:28 PM EDT
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