I’ve written in the past that public debt will one day be banned in the reforms that come after the great collapse. I’m half joking about the great collapse stuff, but history says we are due for a Bronze Age Collapse. The reason I think the banning of public debt will be on the list of reforms is we keep seeing these stories about American cities being swallowed up by debt payments.

Among the many ideas the Chicago Teachers Union have come up with over the years to save big money or generate gobs of new revenue for our cash-strapped city, a favorite involves what they like to call “toxic” interest-rate swaps deals.

Here’s the perennial claim, which is making a comeback as CTU President Karen Lewis contemplates a run for mayor:

The city and the school system have thrown away hundreds of millions of dollars after being duped by big banks into signing deals that locked in excessive interest payments. If only the city would take legal action, CTU again argued in a letter to the mayor last month, the money could be recouped and spent on city services and in classrooms.

Cities went out and made deals with Wall Street that looked good in the moment. They freed up cash to buy votes and pay off cronies. States did similar things with synthetic debt instruments like tobacco bonds. All across the country we see examples of states and municipalities struggling with bad debts. That’s not bad debt owed to them but bad debts incurred by previous administrations.

The libertarians simply shrug and say they should suffer. The neocons produce 5,000 page plans to restructure the debt using more synthetic securities cooked up by their brethren on Wall Street. Liberals want ta debt jubilee. That’s merely a short term fix that destroys the bond markets for a generation. If the court ever did such a thing, the world financial system would collapse in a hour because of the trillions of derivatives that would be effected.

In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure in the worst case.

The men on Wall Street who broker these deals are super smart and know their business better than anyone, other than maybe the guys at the other banks doing the same deals. The folks running pension funds are either men and women lacking the smarts to work at the big banks or they are not sociopaths. They are usually beholden to the local pols and therefore share their short term motives. They are easy pickings for the sharpies on Wall Street.

There’s no fixing this. In fact, we used to know this. Pension fund managers used to spend their days reading the newspaper and banging their secretaries because all they had to do was buy T-Bills and high end corporate bonds. Then the economics professions lowered interest rates to zero and suddenly the guys with bad comb overs had to start playing the market and doing interest swap deals .

The solution is a simple one. Ban borrowing by municipal governments. This solves the temptation to play games with public money and public debt. If Chicago had to budget based solely on its tax base, you would have a different city. Karen Lewis would not be head of the teacher union, because there would  not be a teacher union. You can afford barnacles like Karen Lewis when someone else is paying her salary.