Those prohibitions are in place for a reason: By avoiding deficits during healthy periods, the budgetary strain won't be nearly as severe when tax receipts and other revenue drops off during a downturn. All the states - with the sole exception of Vermont - have prohibitions against running budget deficits. Theoretically, state governments should not have this problem. However, the rating agencies got it wrong on subprime mortgage instruments, and it seems pretty clear that they are getting it wrong on states and municipalities. Broken Rules, Broken Budgetsīrokers will tell you that particular state and municipal bond issues are "safe," meaning that they are rated highly by the rating agencies. In fact, thanks to continued fallout from the worst financial crisis since the Great Depression, some munis may be more akin to bombs than bonds - ticking away and just waiting to blow up your portfolio. The bottom line: At the present time, "munis" may not be the benign - or even alluring - investment that they've been in the past. They're now stuck with a bigger-than-warranted debt load - which can't be covered by the property tax stream that's been reduced by record-level housing defaults. Even worse, that beating came after the easy money available during this stretch encouraged those same governments to venture well beyond any reasonable limits in terms of their borrowing. State-and-local-government finances have taken a bigger beating during this economic downturn than during any other recession since World War II. That makes them a very tangible investment. There's also an allure because of their local nature: Investors can invest in specific bond issues that provided the money for projects such as schools, highways, bridges, hospitals or housing that actually affects the community in which the investor lives.
Municipal bonds - usually referred to as "munis" - are very popular portfolio plays because of tax advantages that, in effect, enhance their rates of return. Of the speculative excesses that misguided monetary policy and a prolonged recession has caused, the one that poses the most danger to investor wealth is the financial bubble in state and local municipal bonds. Leave a Reply Click here to cancel reply.
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