No Federal Bailouts: Let Them Eat IOUs

I first saw David Skeel’s proposal to make a federal law to allow for entire states to go bankrupt back in November 2010. Kenneth Anderson at The Volokh Conspiracy pointed out some real state sovereignty issues with this proposal– federal judges making essentially political decisions? [not like they’ve not already dictated state budgets before].

Later Joe Mysak notes that Chapter 9 bankruptcy, which is available to municipalities, would not fix the public pension problem painlessly.

People look at historical examples, which show that under municipal bankruptcies, everyone will get screwed. Except the politicians who had set up the problem and left in a timely manner. States do go bankrupt, in terms of defaulting on their bonds — it was more common in the 19th century, and we’ve not had a good state bond default for almost 80 years now.

I’ve been sitting on some of these links for months and cogitating on the possibility of federal bankruptcy law for states, and yadda yadda yadda. I’m going to let the law-talking dudes talk that one over. I’m more in the money-counting/number-crunching crowd. And definitely, like Tom Sowell, in the No Bailouts crowd.

There’s going to be a lot of whining from the “Ooooooh, won’t somebody think of the poor public employees!” crowd, in trying to gin up a federal bailout, but boy, your timing is bad. Reality will hit, and that “will” is not that far in the future.

Those who wrote a “positive right” to the public pensions for workers forgot that government is not all that great at enforcing positive rights like that — if they’ve not been good at preparing for their promises, they will be able to squeeze taxpayers only so much to try to fulfill them. Once the financial event horizon has been crossed, it will not matter what various parties “deserve”, it will not matter what is “guaranteed” in various state constitutions. When there ain’t no money, somebody is going to have to alter their expectations, and that’s going to hit a lot of somebodies.

While some have argued that the recent plummet in the muni market is overblown [and yes, the market does usually overreact/overshoot whenever it does large moves], I still say bondholders should do some of their own, independent analysis of the financials. There are probably plenty of good bonds out there, as we only hear of the large state profligates in the news — California, Illinois, New Jersey, New York. But the fireworks may start first with municipalities… my eye is on Chicago.

And don’t expect to get bailed out like Goldman Sachs did with regards to AIG — the Democrats aren’t in charge of the House any more, like they were in 2008.

About Meep
Meep is a member of the Irish Catholic mafia, having a suspiciously high number of green-eyed, red-haired friends. While she doesn’t have red hair herself [except when she goes into the sun (rare for any vampire)], she does have green eyes. She’s a raving Papist and is a life actuary on the side [i.e., she counts dead people]. An amateur pain-in-the-ass [willing to go pro!], she likes covering retirement, mortality, math, and education issues.

3 Trackbacks & Pingbacks

  1. Tweets that mention No Federal Bailouts: Let Them Eat IOUs | POWIP --
  2. The Coalition Of The Swilling » As Vallejo, We Go
  3. California’s fiscal future… and that of other states/munis | POWIP

Leave a comment

Your email address will not be published.


three × = 3

Subscribe without commenting