Carney on the Dangers in the Muni Markets

John Carney has clearly been doing some heavy thinking about the muni market and has reached some important conclusions. Here's a series of tweets by Carney:

I spent way too much time on munis this weekend. Trying to organize thoughts now for big write up. It's very bad. Too many unknowns.
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How can PIMCO have "tested risk management" for general obligation munis if the historical default rate is almost nil?
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Claims of being able to pick "safe" munis are evidence of a lack of awareness of contagion effects.
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The unpredictability of muni defaults is strongly linked to contagion.

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Same with talk of "well-diversified municipal bond portfolios." Recent correlations suggest strong contagion dangers.

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Pimco officially favors "essential service revenue bonds," including public utilities. Biggest default ever was Washington Public Power
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The demand for technical or quantitative proof of muni risk is evidence of a lack of understanding of unique riskiness of muni bonds. [Take that Charlie Gasparino-RW]
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My point is not to forecast muni defaults. My point is that existing bullish forecasts in muniland ignore relevant fragilities.
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The notion that taxpayers and public workers will feel the budgetary pain, while bondholders won't vanishes in the presence of thought.

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A very good precedent to keep in mind. @eradke @carney what happened to bond holders in GM? History may repeat itself
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Selling muni CDS is the new leveraged muni fund. Recipe for disaster for sellers if portfolios get big enough.
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How many top Russian officials were openly advocating default in, say, February 1998?
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Also, we do have people in Congress advocating extending bankruptcy protections to states.

In general, I agree with Carney. I think what is most significant in Carney's argument is that it brings the discussion over to General Obligation bonds, many argue that while certain non-GOs may be at risk,  GOs are safe. Most of Carney's arguments can be applied to GOs as well as non-GOs. Further, Carney's focus on what would occur under contagion makes one realize how vulnerable the entire muni market may be to panic.