As several insightful Exchequer readers predicted, the federal bailout of the most irresponsible states has started with Obama’s loan-forgiveness scheme.
Under an initiative to be attached to the president’s budget proposal, our fiscally incontinent states would be further subsidized by the federal government through a moratorium on interest payments owed to Uncle Sam. These states, having spent all the money they had, borrowed billions from Washington to continue making unemployment-benefit payments. Of course, lending money to broke parties is a very good way to ensure that you are not repaid, and that is what Washington is headed toward: delaying interest payments today and, in all likelihood, simply forgiving interest (and probably principal) tomorrow.
This is the first step toward federalizing state and local debts, and it should be stopped.
Thirty states owe the federal government a combined $42 billion — chump change compared to the nearly $1 trillion in bailout schmundo already showered on the states. But the real story here, as I have argued before, is the acute fear in Congress, and the state and local governments, of being shut out of the credit markets. Legislation to allow states to reorganize their finances under something like bankruptcy is being fought tooth and talon, because the mere prospect of such a thing is sure to drive up governments’ borrowing costs. And Washington is willing to throw another $42 billion at our insolvent states because the municipal-bond market is spooked — and banks and money-market funds are holding about a half-trillion dollars in junky munis. Most munis are held by individual investors — hello, grandma! — but pension funds own them, too. Which is to say, this is a big bag of bailout bait begging to be bitten.
The fundamental problem is that all of these one-time gimmicks — stimulus shots, bailouts, accounting shenanigans — are being used in a vain attempt to finesse permanent recurring deficits. We can bail out the states this year, but those pension funds are still going to be broke next year. We can put off Fiscal Armageddon this quarter, but Medicaid is still going to bankrupt the states — even the fiscally prudent ones — in the near future. That which is unsustainable will not be sustained.
Oh, and here’s some bad news: Remember how we were all going to be a lot more sober about credit and risk after the financial crisis? Well, get this: Back in the heady, risk-loving days of 2005, about 57 percent of municipal-bond issues were insured. Today, in the Age of New Sobriety? About 6 percent. That’s gonna hurt.
We cannot go on carrying these states forever — Washington simply does not have the money. We’re going to have a national public-finance crisis if Washington tries to take all this trouble off the states’ hands. We have to force the states to balance their budgets and rationalize their finances — especially their pensions — right now. We do not have the time or the capital to put this off.
And attaching this wreck to a tax on job creation? That is pure Obama.
(EDITORIAL NOTE: I’m writing this post from just outside the Texas capitol, where Obama’s proposal is not going to be well received.)