Friday, August 9, 2013

Insolvency has consequences

The events leading up to municipal insolvency are entirely predictable.  The consequences ultimately are swift, devastating and difficult to reverse.

Like college kid with student loans and a credit card, it's easy to incur debt and live the high life with new electronics, wild parties, and spring break in the Caribbean.  And while you are incurring that debt, you are surrounded by friends gleefully accepting your largess.

But someday the bills become due.  And your friends dry up, the exotic trips cease and cold hard reality sets in.  Because of your impaired credit rating, your credit score has soared and buying a home becomes a near impossibility.

Municipalities engaging in reckless conduct relating to their own credit are surrounded by a gaggle of vendors of shiny new municipal baubles like convention centers and streetcars, bankers, bond counsel, bond traders, and bond buyers.  In short, there is a cottage industry of people who make a handsome profit off of inducing more and more municipal debt.  They are the enablers that really condemn poor municipal taxpayers to the oppressive burden of municipal debt.

And it is all incurred -- recklessly -- under the same "too big to fail" theory that sunk the housing industry and nearly destroyed Wall Street, but for multiple taxpayer bailouts.

Thus, it is poetic justice that in the cases of Detroit, Stockton California and Jackson Mississippi the bondholders are left holding the bag and, the resulting consequence, that debt is more difficult and more expensive to obtain.

Read here in today's New York Times the dominos falling surrounding the Detroit bankruptcy. It is poetic justice for the predatory industry that induces municipal debt.    


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