The financial wizards who brought us the mortgage debacle now want to do the same for municipal bonds:
What he wouldn't know, wouldn't have any idea about, is what the proper interest rate premiums are for municipal debt. If Mr. Frank thinks that municipal debt is a bargain, he's always free to buy some. Why doesn't he just suggest securitizing such debt and chartering companies to buy the securities?
There are already companies that insure municipal debt, so there are two, mutually-reinforcing markets already at work here. If he really thinks that these companies are under-capitalized, there are plenty of regulatory remedies already available.
In fact, there's excellent reason to think that what's really going on here is an attempt to bail out California without having to tell people that's what you're doing. Because they might not like that.
One piece of legislation would provide the Federal Reserve with the authority to fund new liquidity facilities for some municipal securities. Another would provide federal re-insurance for municipal bonds, which seeks to make it easier to for municipalities to issue municipal debt to raise money.Well, he'd know about market failures, having helped create the last one.
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House Financial Services Committee Chairman Barney Frank, D-Mass., defended legislation to create a federal re-insurer, arguing that the marketplace imposes unfairly high interest rates on municipal bonds, which typically have a lower rate of default than corporate bonds
"We need to have the safety of municipal bonds reflected in the interest payments on those bonds," Frank said. "The market plays a very important role but market failure is also a factor."
What he wouldn't know, wouldn't have any idea about, is what the proper interest rate premiums are for municipal debt. If Mr. Frank thinks that municipal debt is a bargain, he's always free to buy some. Why doesn't he just suggest securitizing such debt and chartering companies to buy the securities?
There are already companies that insure municipal debt, so there are two, mutually-reinforcing markets already at work here. If he really thinks that these companies are under-capitalized, there are plenty of regulatory remedies already available.
In fact, there's excellent reason to think that what's really going on here is an attempt to bail out California without having to tell people that's what you're doing. Because they might not like that.
