QE3?: The Fed Should Buy State and Local Government Bonds

Last Updated Aug 17, 2011 10:22 PM EDT

This story reminds me of something I've been meaning to talk about:
Downgrades Felt at Local Level, WSJ: ...Since June 2010, S&P, Moody's Investors Service and Fitch Ratings have made 196 so-called super-downgrades on municipal bonds, according to research firm Municipal Market Advisors.
Super-downgrades are defined as cuts of at least three notches on the letter-grade scales used by the firms. ... The super-downgrades pushed yields on the downgraded municipal bonds higher and could increase borrowing costs the next time affected cities, counties and other municipalities need to sell bonds....
This will make it harder for cash-strapped state and local governments to finance needed infrastructure projects -- much of our infrastructure is financed at this level.

Job loss at the state and local government level is a big problem in this recession, and this doesn't help at all. So what to do? If the Fed pursues QE3, and I think it should have done so already, instead of purchasing treasury bills/bonds or toxic housing assets, it could purchase state and local government bonds instead (or at least as part of its portfolio of purchases). The purchases would lower the interest rate on these bonds, and that would lower the cost of infrastructure investment. If this was combined with other federal incentives to pursue projects at the state and local level, it could provide a needed boost to state and local employment and add needed infrastructure at the same time.