Home      Login

Abstract: 

This issue of the Municipal Finance Journal is dedicated to the late John E. Petersen, a highly regarded expert on municipal finance and the municipal bond market. The articles in this issue pay tribute to John by examining topics that were germane to his career and by discussing John’s significant contributions to the field of municipal finance. One choice that was not difficult was the opportunity to include an unpublished manuscript that John prepared and circulated in April 2011 on municipal bond defaults. The paper is a response to the controversial comments made by pundits such as Meredith Whitney in December 2010 predicting 50 to 100 defaults in municipal bonds amounting to “hundreds of billions of dollars.” “Municipal Defaults: Eighty Years Make a Big Difference” contains original ideas from John that must be shared with the municipal finance community. Recent dire predictions of municipal defaults often refer to the Great Depression and how thousands of state and local governments defaulted on their securities. These comments fail to give serious consideration to the history of public finance or to the ways in which things have changed since the 1930s. This paper examines what exactly happened during the Great Depression and contrasts the conditions of that period (and the period that preceded it) with the conditions during and following the Great Recession. It demonstrates that the wave of municipal defaults during the Depression, followed by rapid remediation, can be explained, not by municipal credit difficulties, but, rather, by the unraveling of the banking system and the widespread demolition of the payments system. These disruptions caused a great deal of the difficulty and delay in getting funds to bondholders. Buttressing the argument that comparisons of defaults then and now are not valid is the fact that state and local governments currently operate in an utterly different underlying economic structure than they did 80 years ago.

Keywords: Public finance, Great Recession, Municipal defaults, banking system, bondholders

Affiliations:  .