A few days ago, Michigan Radio’s Sarah Cwiek reported a story worth thinking about. The market for municipal bonds has nosedived since Detroit announced its intention to file for bankruptcy in July.
Now, if you would like a clear and concise explanation of how the bond market works … good luck with that. But essentially, communities sell bonds to raise money, bonds they pay off gradually with interest over time. They are a traditional and time-honored way of raising money for civic improvements.
There’s also been an understanding, at least since the Great Depression, that money owed to bond holders -- especially the holders of general obligation bonds -- was sacrosanct. No matter how hard things were, the bond holders had to be paid. Well, that’s not happening in Detroit, which, as all the world knows, has filed for bankruptcy.
Emergency Manager Kevyn Orr isn’t honoring Detroit’s general obligation bonds. And that has investors across the state spooked. Battle Creek and Genesee County have pulled back from plans to sell new bonds. So has affluent Oakland County. In fact, the value of all the municipal bonds sold in the state last month was the lowest in ten years. Something is clearly going on.