And speaking of financial innovations, here is an example of a recent one — created by the government. David Wessel’s column in the Wall Street Journal (A Stimulus ’09 Success Story) explains how this innovation in state and local financing came about:
In 2009, the driving force wasn’t fairness or tax reform. It was an emergency. The bond market was closed to most cities and states. Many institutional investors weren’t buying, and firms that had been insuring shaky municipal borrowers were imploding. An urgent need to draw new investors to buy muni bonds gave birth to the taxable, federally subsidized “Build America Bonds.”
The experiment worked. It helped revive the muni-bond market, keeping local construction projects going. Last year, $64 billion in Build America Bonds were issued in 45 states, about 20% of all muni offerings; this year will be bigger.
Wall Street and U.S. Treasury estimates show that, after the federal subsidy, muni issuers of Build America Bonds save between one-quarter and one-half percentage point on borrowing costs versus issuing tax-exempts. That’s $1.25 million and $2.5 million annually on a $500 million bond issue. New York’s Metropolitan Transportation Authority figures it saved $46 million over the life of a $750 million Build America Bond issued last spring.
The result is not just a revitalization of the muni bond market but a shift in the market toward a type of financial product that everyone seems to think is a better way to finance state and local governments. As Wessel notes, “Sometimes, the system works.”
Amen to that.