Barney Frank Wants In on Muni Bond Insurance

The WSJ explains that Barney Frank, the financial wizard in Congress, wants the government to get into the municipal bond insurance business (think the risks of MBIA and Ambac, but with the efficiency of the DMV).

Barney Frank's track record as a financial analyst is, shall we say, mixed. The House Financial Services Chairman said for years that a collapse of Fannie Mae and Freddie Mac would pose zero risk to taxpayers. For most people, a mistake of that magnitude would trigger introspection, if not humility. But not the sage of Massachusetts. He's cooking up another fantastic subsidy -- and like the last one, he swears taxpayers won't feel a thing.

...Mr. Frank believes state and local governments are paying too much when they issue debt because rating agencies don't give them the ratings Mr. Frank feels they deserve...

If Mr. Frank really believes that state and local governments have been forced to overpay for this insurance, one has to assume his federal program would charge lower premiums and so undercut its private-sector competitors. The government can charge low premiums without putting taxpayers on the hook, he argues, because the risk of default is so low.

This is a terrible idea. Once local municipalities get into trouble, as the WSJ notes, they are much more likely to default on bondholders than make the difficult decision of raising taxes or cutting spending. After all, the federal government is going to bail out bondholders anyway.

The federal government probably overpays for everything from sinks to uniforms (or at least pays a higher price than it costs the manufacturer to make), but it's not a good idea for the government to get into the business of making these goods either.