Why would you want to lend good money to a state that shut down its education department? Or to a city that is cutting out nearly half of its street sweepers? Or to other governments under financial stress?

Connecticut, faced with a budget stalemate, last week closed not only its Department of Education but also shut the doors of dozens of other departments, commissions, and boards. New York City adopted a budget with cutbacks totaling $1.6 billion. Other states and cities from Maine to California wrestled with grave money problems as the great 1991 transformation in governing continued to lurch along without signs of arriving anywhere.

Prices of municipal bonds, meanwhile, have risen modestly since mid-June, and long-term bond yields have declined perhaps 20 basis points, moves that seem to show the tax-exempt market is unperturbed by the fiscal wrangling in state houses and city halls. The quarreling and bickering over taxes and services seem divorced from bond prices and yields, as though politics and finance had nothing to do with each other.

Jim Grant, the pessimistic credit markets commentator who early on debunked junk bonds and real estate excess, recently spoke to David Gillen of The Bond Buyer and said he was "astonished" that municipal bond investors are so confident and complacent.

"What I find hard to square," Mr. Grant said, "is the credit news chronicled daily by The Bond Buyer with the pricing of these things. It's as if the budget problems don't matter." And he added, "I don't get it. I would think there should be greater distinctions drawn between gradations of credit risk in the municipal bond market."

There are, to be sure, ample investment dollars sloshing around the economy, and many investment opportunities apparently have become less enticing, now that junk-bond financing for leveraged corporate buyouts is in disrepute. It's our not-very-scientific guess that there are more dollars for investment in the United States these days than there are growth opportunities. Furthermore, the Tax Reform Act of 1986 did away with many investment havens, leaving only municipal bonds. Consequently, funds flow toward the municipal bond market despite the civic financial problems that receive so much attention in the newspapers.

In this current balance, municipal bonds are able to clear the market at interest rates more beneficial to bond issuers than bond investors. To us, it's a wonder that states and cities that have to shut many of their agencies' doors sell bonds that are nevertheless regarded as decent investments. Investors have every right to be more selective.

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