Frank: Federal Bond Insurance Could be the Ticket to State & Local Economic Recovery

January 19, 2009 9:19 a.m.

Yes, the term is enough to put most people to sleep. But federal bond insurance has the potential to play a key role in lifting the economy out of recession, as House Financial Services Committee Chairman Barney Frank (D-MA) explained to us today.

I wanted to flag this portion of Frank’s comments precisely because they sound inaccessible at first. When he says that municipal bonds are going to be a great buy for the government as it invests the second half of the $700 billion bailout, Frank isn’t just predicting what can make a profit for taxpayers (and Wall Street). Buying municipal bonds — which hardly ever default, as Frank points out — is also a perfect way to expedite an economic recovery.

State and local governments issue “muni bonds,” as they’re known, to pay for building and repairing schools, sewers, roads, and other elements of the infrastructure. These are exactly the same projects that Barack Obama is now hoping to kickstart in his effort to save or create 3 million jobs. But as CNN explained earlier this year, the financial risks taken on by adventuresome bond insurers have left municipalities saddled with higher risk premiums for their ol’ reliable bonds.

Not only is that unfair, it’s a possible roadblock to state and local rebuilding. Frank told us he wants to look at creating a federal bond insurance program that would guarantee states and cities a low risk premium, one that reflects the steady and worthwhile nature of their projects. Amen, congressman.

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