Local Government Credit Crunch Compliments of the Federal Budget

According to Nicole Gelinas of City Journal, the size of federal spending is about to consume debt markets, crowding out municipal debt. In the third quarter of 2008, federal government debt increased 39 percent , “the largest quarterly growth rate recorded” according to the Federal Reserve.

This, in effect, shoves non-federal bonds off the table by oversaturating the market.

Gelinas also posits that if the stimulus stifles recovery, localities will face default – really bad news, because municipal debt doesn’t have a federal guarantee. If municipalities seek one, they might not get it. The federal government is deeply overcommitted.

The federal stimulus meant to bail out Main Street is moving more like a budgetary virus, robbing cities of their ability to maneuver and chart the best fiscal course during rough times.