Would you invest in this sort of promise?

“Once upon a time, the mortgage market was a safe and staid place where widows and orphans could lend to responsible borrowers paying reasonable prices for sensible housing. But a combination of lax regulation, political opportunism, Wall Street (and Fannie Mae) greed, credulous investors and speculative borrowers turned the mortgage market into a horrible mess that cost this country as much money as a foreign war. Let’s try not to do the same thing with our municipal finance system, shall we?”

WR Mead worries about California: Already Stoking the Next Big Financial Crash?. The state has authorized municipal bonds that run interest only for decades.

“It is starting out innocently enough. Looking to expand a number of aging school facilities but loath to raise the taxes necessary to pay for it, California cities have opted to fund school construction projects with capital appreciation bonds, which allow school districts to borrow money now while putting off payments for decades. It sounds like a great deal, but it has one major drawback: The interest rates involved push the eventual price tag to many times the original amount—sometimes as much as ten times more.”

This is basically what happened in the real estate market. Inflation in housing values became considered a given and money was loaned on that basis. The Government pushed loans that were otherwise unsound and impractical. That bubble burst to horrific effect but the desire for ‘free money’ continues. There is concern about student loans and the fact that they don’t provide a real return on investment when it comes to money loaned to a student compared to occupational advantage. Now we see local governments hurting for funding for all the frills and fancies that so many have come to see as a necessary part of government services. The funding for those desires is being pushed off to the children. That has been ongoing as the pension funding problem is already bankrupting cities.

Perhaps this is a way to distribute income? It is the rich after all who are the only ones that can invest money. So when the investments go belly-up, it is essentially just re-distributing their money to the poor and needy depending upon government services. The fact that this sort of thing tends to bankrupt countries doesn’t seem to register with many.

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