The Municipal Bond Fiasco – Who Are The Lenders?

Robert Wenzel of linked to an interesting article about an underfunded city worker pension program in Oakland, California. While there has been much about the ongoing pension problems of various municipalities, what struck me about this situation was how Oakland planned to fix the funding shortfall. Instead of cutting spending and using current outlays to fund the pension, they decided to float $210 million in new pension bonds. What first came to mind is that this is another indication of the troubled nature the US economy now and for years to come. The answer to too much spending and borrowing is to double down by borrowing more money. Then it occurred to me that the important question is who are the lenders? Who would be dumb enough to lend money to an entity that is well on its way to bankruptcy? Do these investors really believe that they will collect the principal when the bonds mature?

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