Thursday, December 9, 2010

 

Yuval Levin:
State bonds—including those of the states confronting the very worst fiscal crises—are remarkably strong today because the market implicitly assumes that states will not default on them because Washington would step in if a default were near. Maybe that assumption is unreasonable, but it is certainly widespread. If a state in fact neared or reached default and Washington declined to help, the value not only of that state’s bonds but of all state bonds (and with them a lot of municipal bonds and probably the bond market more generally) would likely plummet, and the consequences would be grave. . . .

It seems to me that Republicans in Washington are not prepared for this scenario. If they want to make the case in the midst of such a panic that a bailout would be worse than a bond-market crisis, they need at least to be thinking through those arguments now, and getting ready for the intense pressure they will face if the worst does happen.