Feature

Muni bonds are the latest debacle

Municipal bonds have always benefited from the assumption that states and cities would never default on their bonds, said Charles Gasparino in the New York Post.

Charles GasparinoNew York Post

Head for the hills, said Charles Gasparino. The municipal-bond meltdown of 2011 is upon us. “Once regarded as the safest of all investments,” municipal bonds are turning toxic as “the Ponzi scheme of Big Government is coming unglued.”

Municipal bonds have always benefited from the assumption that states and cities would never default on their bonds. But that assumption doesn’t hold when cities or states can’t raise enough revenue to service their debt, which happens when people and businesses flee to escape rising taxes and pension obligations mount too high to fund through taxes or service cuts.

Analyst Meredith Whitney, “who accurately predicted the banking crisis in late 2007,” recently forecast 50 to 100 municipal bond defaults, encompassing more than $100 billion in debt, over the next year. States that “have grown mindlessly,” such as California, New Jersey, and New York, will produce the most defaults and the loudest cries of anguish on Wall Street. But if default forces government to slim down, “it should be celebrated on Main Street.”

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