I have been following the crisis in municipal bonds, primarily at the state level, for several months and have found it helpful to compare it with the crisis of 1841.
Eight states plus the territory of Florida actually defaulted on their debts. As expected, the interest rates they had to pay soared, up to 30% at one time. We can expect the same to happen this year for the states who default, most likely California.
A difference is the reason for the debt. In 1841, there had been a binge of infrastructure improvements, like railroads and canals. They borrowed too much to build too much. In 2011, there had been a binge of promises and entitlements. They borrowed to much to consume too much.
Another difference is the solution. Supply-side economics did not exist in 1841, and the states raised taxes to "honor their obligations," as they said at the time. In 2011, I suspect the state politicians care more about their ideology than honoring the states obligations.
Even though I am comfortable with Virginia bonds, they are being "slimed" by the troubles in the overall bond market for states and cities.
