municipal bonds astound me in their lunacy

Economics Economics Questions
1

They are issued by state and local governments to pay for things like roads, jails, bridges, and schools. They are funded by taxes, but, best of all, they must be approved by the voters of that district or state.

This is so interesting to me…You use your money t buy one of these bonds and it is funded using your money (taxes), all so you can, in essense, pay yourself back.

But more astounding, the voters must decide if they want these bonds issued so as to build a road r a bridge, when the very implication of their vote proves there is a direct demand for it in the first place.

I know this really isn’t any different when performed on the federal level. But, I would think when viewed from the perspective of a small country, with say 2,000 people, it would become painfully obvious to the county citizens the sheer lack of a need for a middle man to build the bridge on behalf of the citizens when over half (?) have voted for it in the first place.

For example, let’s take this county with 2000 people. If 1001 of them directly vote to have a bridge built and this bridge will be funded out of the issuance of tax-funded bonds, then this proves a demand is there (albeit slightly higher in the voting scenario, since it is “free”), and the existence of the tax funds to back up the guaranteed maturity value of the bond also proves that there are dollars there to commit to achieving the end of that demand (the bridge).

Again, I know this is all obvious to us, but I just can’t help but think (smack in the face) “Why can’t people at least see the lunacy in this at such a local level?” That is what astounds me about municipal bonds.

2

Bump.

3

Does anyone know what a politically-connected person stands to gain, of he holds muni bonds and the city defaults? Could he become owner of public land, like a park?

4

No, don’t think that’s possible. Just they’d get paid back before city-workers, iirc. Bond holders in failed Euro states have taken ‘hair-cuts’ which means limited defaults where the state unilaterally changes the payment terms on bonds to something they can afford to pay as a way to avoid outright repudiation, because repudiation would mean no one will ever loan them money again :stuck_out_tongue:

Which would be a good thing.

We should push for repudiation of the US debt.

5

somehow I doubt thats the case. I share in your sentiments, however.

6

Yeah this seems doubtful. I would think that only poor investors, those whom don’t do their homework, and were still willing to buy a bond from a government that just unilaterally renegotiated its terms for the payment on previous bonds, you are also probably the kind of investor who would buy a bond from a government that had repudiated its debt in the past.

7

Theres also moral hazard, the people buying the bonds may not be using their own money, or they may have a plan that involves exchanging the bond for assets that are worth the price, or some type of bailout that limits their liability.