Saturday, May 27, 2017

Price entry and exit

Andrews at Real Clear policy is discussing the bankruptcies in Connecticut. Note the boldface, mine. He says the point of free entry and exit is theoretical, what theory? Bounded variation, bankruptcy has a relative cost, it is determined by occasionally testing it.  
In theory, municipal bondholders play a crucial role in promoting the fiscal health of states and municipalities by adjusting the interest rates they demand for lending their money. But for decades, affluent investors across the U.S. have largely ignored mounting civil debt, underfunded pensions liabilities, and other telltale signs of local government distress on the assumption that Washington would, if necessary, bail them out.

Such magical thinking is perhaps understandable in Mississippi, Wyoming, or some other state with no major financial industry. But Connecticut is the third largest hedge fund capitol in the world after New York City and London. A good portion of its most affluent and influential citizens make their livings at banks, brokerage houses, and trust companies headquartered in Manhattan. Any blindness in Connecticut to the frailty of its finances is as close as one can get to a state version of the 2009 subprime real estate crisis.

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