The Wall Street Journal is sounding the alert over the threat Stockton poses to bond markets. We Stocktonians are understandably parochial about this issue. Here administrators hold that city employees have suffered such deep cuts that if the city cuts pensions, too, so many will leave that city government will break down.
That’s a valid concern. But Stockton is part of a $3.7 trillion municipal bond market. Subordinating our bonds to public employee pensions could create what the WSJ calls ”systemic risk.” The WSJ gets quite blunt about that risk: “Investors who fail to impose discipline on deadbeats are likely to find the deadbeats playing them for suckers.”
That’s Wall Street’s perspective on Stockton’s bankruptcy: it needs to “impose discipline” on this city or cities that overpaid their employees will transfer the consequences of their poor management onto the bond insurers.
The WSJ does not menton that staggering lack of discipline on Wall Street that precipitated the recession.