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OK, you know there’s a bond market, right? There’s a bond market, stock market, commodities market, and currency foreign exchange markets (”forex”).

The bond/credit markets are far larger (in terms of money) than the stock and commodities markets.

Here’s some background on the muni bond market and the place in that market for the monolines:

http://www.directaccessbonds.com/insured-municipal-bonds.asp

Now, at some point in the recent past, some regulator decided it would be a suave idea to allow these monoline insurers to insure “structured investments” — things like CDO’s, CMO’s, CDO-squared, etc. And this they did, because there was a lot of money in it.

Well, as the CDO’s that contain tranches of sub-prime debt have started (NB: “Started” - meaning, we are nowhere near the end of this) have taken huge downgrades in creditworthiness and as a result, big decreases in their value, the monolines are being asked to make good on the insurance as well as having to mark down the CDO crap that is in their own portfolios.

Without the monolines, a lot of property taxpayers are going to be paying more whenever your state/county/city issues municipal bond debt - because you’re likely going to have a lower credit rating than “AAA” and as the credit rating of the issuer goes down, the interest they have to pay to attract buyers of the bond goes up.

So, let me net:net it for you, cutting to the chase:

The default of sub-prime mortgage borrowers is causing the monoline insurers to lose their AAA rating, which makes them almost useless to the muni bond market, which means you, as a property taxpayer, will be paying more property taxes when you want to issue a bond to build schools, bridges, roads, stadiums, etc. That’s a longer term issue.

The shorter term issue is that as posted above, these downgrades from AAA to AA will cause further write-downs at banks. This causes banks to further pull cash out of their lending stream to put into their reserves, which removes yet more liquidity from the credit markets.