The NYT reports on proposals to support the municipal bond market. At one point the article refers to a proposal by Representative Barney Frank, chairman of the House Financial Services Committee, to reinsure $50 billion of municipal bonds. The article then asserts about this other proposals: "All of the proposals are meant to help struggling state and local governments that are facing a cash-flow squeeze." Actually, Mr. Frank's intention in this proposal is not clear. Guarantees for newly issued bonds will reduce the interest rates that state and local governments must pay. However, once these bonds are issued, state and local governments are not directly affected by the price of these bonds. Reinsuring bonds that have already been issued will increase the value of these bonds, thereby helping bondholders, but will provide no obvious benefit for struggling state and local governments that are facing a cash-flow squeeze.
--Dean Baker
