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The Muni Debate: Kicking Sass & Taking Names

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After congressional testimony yesterday before the House Oversight Committee, we ended the day pretty much where we began it.

John McDermott has a handy wrap up of events in the Financial Times Alphaville.

Here are his summaries of key testimony:

1. David Skeel, University of Pennsylvania: a bankruptcy law for states is feasible and desirable. (Testimony.)

2. Iris Lav, CBPP: don't confuse short-term budget problems with longer-term issues; both are fixable. (Testimony.)

3. Eileen Norcross, Mercatus Center: states are in big trouble and need to reduce spending (especially on medicaid) and pensions obligations. Pity Illinois. (Testimony.)

4. Nicole Gelinas, Manhattan Institute: a bankruptcy law is more trouble than it is worth—states need to cut spending and renegotiate deals with unions. (Testimony.)

One of the things, it seems, that makes this debate so intractable is how entrenched each side's the position appears to be.

The world seems split into two divergent camps:

First, those who think the sky is falling—or at least those who hew close to Meredith Whitney's position, where defaults will run into "the hundreds of billions of dollars."

The flip side of the coin is the Pollyanna position: Everything has (largely) been safe in Muni land before—and everything will be fine in perpetuity. After all, the states can tax their way out of just about any crisis. And even the worst offenders—like the state of Illinois—are really pikers when it comes to borrowing. At least by the standards of Greece.

What makes this argument interesting isn't the degree of polarization in the positions.

After all, Americans disagree vehemently about a lot of things.

(For example: The "hot button social issues", which are so positively radioactive that I will defer from mentioning them by name here.)

No, what makes this debate interesting is this: The question that hangs in the air will ultimately have an answer.

Borrowing costs on municipal debt either will or will not spike: There either will or will not be wave after wave of successive defaults.

And by then everyone in the financial world who is worth knowing will be on record.

One way or the other.

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