Echo Crisis in State and Local Government Financing

During the Summer of 2009, I made the following blog entry:

Echo Crisis - State and Local Budgets

Following up on this issue, the WSJ published an article today about an increased level of derivative activity targeted toward taking advantage of the declining financial fortunes of city and states.

This is the article:

Burne, Katy, 2010. Banks look to profit on muni-bond fears. The Wall Street Journal, Dec. 20.

I think the increased activity is related to ultra low interest rates and the notion by speculators that there is a great deal of profit to earn on the prospects for failure of public financing.

This quote from the article summarizes the rising tensions in the muni bond market:

"After 17 consecutive weeks of inflows into U.S. muni-bond funds, including exchange-traded funds, the last five weeks saw $9.1 billion of outflows, according to data from Lipper, a Thomson Reuters unit."

"Risk premiums on triple-A-rated corporate debt over risk-free government debt have declined by 1.22% over the past month, according to Bank of America Merrill Lynch index data, but risk premiums have climbed 14.3% in the case of triple-A muni debt."

I think that in general, state and local taxes will increase.