Just what we need: A government agency to insure municipal bonds.

Because the government has done such a great job insuring every other form of debt. From Reason Magazine:

The National League of Cities has asked for a $5 billion Treasury Department loan in order to set up a municipal bond insurer that would dwarf other players in the private muni insurance market. Say hello to IMBAC, the Issuers Mutual Bond Assurance Co., which would aim to provide insurance against default for cities with poor bond ratings.

The main private players in the muni insurance market (née 1971) have mostly been laid low by the mortgage-backed-securities pox, and don’tcha know the League has discovered that profit was the word of their undoing: “Fifteen shareholder-owned municipal bond insurers have failed because of the intense pressure to produce 15 percent to 25 percent annual returns for their shareholders,” says the League’s preliminary business plan.

A while back, Rep. Barney Frank (D-Massachusetts) proposed a federal muni bond insurer along these lines, envisioning an entity that provides attractive premiums to at-risk municipalities while costing “zero” to the taxpayer. The Wall Street Journal noted that while it’s true they have had historically low rates of default, city governments are entering uncharted waters of debt — with ballast, in many cases, provided by growing and non-negotiable bills stemming from pensions and other obligations. Further increasing the risk of muni defaults is the existence of the insurance itself, which turns bond default from an apocalyptic to a merely regrettable scenario.

H/t: Patterico’s Pontifications

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