Muni-Bond Debt Bomb

I left my wallet (and entire bank account) in San Francisco...

Inquiring minds are studying a City Journal article about the history of Muni debt. You have to love any article that has the tag line “. . . and how to dismantle it“:

Though the early muni-bond market helped the young country grow, the borrowing could be risky. Some of the toll roads, railroads, and other endeavors were highly speculative and failed to generate enough income to pay back investors. The five-year downturn that followed the 1837 bank panic left eight states, including Pennsylvania, unable to pay off their bonds, prompting William Wordsworth to pen “To the Pennsylvanians,” an ode that castigated those in the state who had “ruthlessly betrayed” the legacy of prudent founder William Penn. Realizing that the defaults would interfere with their ability to borrow in the future, some states imposed debt restrictions on themselves, and eventually inserted requirements into their constitutions that voters approve future bond offerings.

What baby boomers don’t seem to realize is that it is natural to fail. Success is the non-norm. “Failure” is what we learn from. It is okay. In fact, it is the most American of activities. That is how this country has become the dominant power of the world. The competition of ideas:

Those moves made the market more secure, but they didn’t protect investors from occasional bouts of irrational exuberance. After a flurry of municipal offerings in the 1920s, for instance, total outstanding municipal debt in America reached some $16 billion ($250 billion in today’s dollars). Then the Great Depression arrived, drying up tax revenues and leaving governments unable to meet their debts. The 1930s would see 4,500 defaults by state and local governments. It wasn’t until the 1950s that the muni market bounced back and debt outstanding surpassed pre-Depression levels.

There is so much more. Please take the time to read this fascinating history of US finance.


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