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Liquidity crunch spreads to muni bonds

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KAI RYSSDAL: We mentioned yesterday on the broadcast a speech Fed Vice Chairman Donald Kohn had given. It was the one that sent Wall Street spiking on hopes of a rate cut. One of the other things Kohn said was that the Fed’s worried the credit crisis might spread beyond Wall Street.

Which brings us to Florida today. The state has shut off withdrawals from a fund school districts and local governments tap into. Officials say the liquidity squeeze means there’s no way to value what’s in the fund. On top of that, state and local governments elsewhere say they’re having trouble finding investors for their low-interest municipal bonds. Which could lead to taxpayers paying higher interest rates on loans used to build and maintain local infrastructure.

Marketplace’s John Dimsdale reports from Washington.

JOHN DIMSDALE: We won’t know for sure, until overall statistics come out in a couple weeks, but anecdotally, November is shaping up as a bad month for tax-exempt municipal bonds long considered safe investments. Both Miami and Chicago have canceled bond offerings totaling $1.5 billion. And Washington DC is looking warily at plans for a $350 million bond for school and bridge renovations next week.

LASANA MACK: It has been a cause of some degree of concern.

DC’s Treasurer, Lasana Mack, says he’s not yet ready to postpone the bond issue.

MACK: We’ve been advised that we should be able to get our bond deal done and done successfully. So we’re moving forward accordingly. However, you know, we are somewhat cautious given the dynamics going on in the marketplace.

What’s happening is bond insurance companies, hit by subprime mortgage losses, can no longer backstop bond offerings from local governments. Also, banks are reining in their loans, especially this time of year as they try to cleanup mortgage losses for their end-of-the-year accounting. Thomson Financial’s Bob Nelson expects the current crunch to be short-lived.

BOB NELSON: We’ve never had an extended period of extreme duress in the municipal market. These types of situations tend to work themselves out. In the sense that buyers eventually find the market so cheap that they come in, return the market to a more normal state. Then the deals begin to flow again as buyers return. Et cetera, et cetera.

If not, cities and local governments will have to offer investors higher returns to attract loans, which means more expensive borrowing for taxpayers.

In Washington, I’m John Dimsdale for Marketplace.

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