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.)
Sadly, I moved to one of these dysfunctional states back in 2009 (for good job-related reasons). Over here on the Left Coast, Governor Moonbeam will love to see some third-world debt-relief scheme showered on his $26 billion dollar deficit cuz it will be a cold day in Hell when the voters here approve of $12 billion dollars in tax increases (to go with his $12 billion in spending cuts).
States need a bankruptcy mechanism. Will it be painful, hell yes! Will legislators finally get the point....maybe.
I have a question/thought for Exchequer fans to noodle on - why can't we have Fiduciary Responsibility requirements built into our politicians jobs by force of law kind of like corporate boards and high level executives? That is to say, why can't we make it so that politicians are legally liable (personally liable) for making knowingly bad fiscal decision? I realize it would be a tough standard to apply, but wouldn't the fear of personal litigation make them behave any better?
Reply to this commentLinkReport AbuseCan the Obama administration forgive the interest and debt owed by the States to the Feds or does it need Congressional approval?
Why does he insist on digging a bigger hole? I am starting to believe the right wing fringes explanation that Obama wants the country in a complete financial meltdown so he can rearrange it into that just socialist utopia the left deludes itself about.
Reply to this commentLinkReport AbuseIf these 30 States just had more light rail, I'm sure this issue would had been fixed years ago...........
Remember light rail fixes everything, Mr Biden says so.
Reply to this commentLinkReport Abusemdc1040: "... does it need congressional approval?"
KW indicates that this scheme is attached to the budget proposal. I don't see any way that's getting out of the House.
My concern is that Treasury might sweep it under the TARP like the the auto bailouts.
Reply to this commentLinkReport AbuseWhat will it look like when a state like California finally hits the wall financially? Cannot currently go bankrupt. Cannot print money like the feds. The bond market will eventually reject them, I would think.
This is not a rhetorical question. I have family there. This is something I am trying to wrap my mind around. Does anyone know how it would play out or does anyone know of any historical precedents where it has played out in the past?
Reply to this commentLinkReport AbuseWelcome back to the pink granite dome! Sorry your trip came at such a chilly time.
This plan is ridiculous. So first, we screw the right-leaning states on "stimulus" money, thus taking more of our taxes and handing them out as transfer payments to other states. Then Texas gets double-screwed on the education stimulus bill, being singled out to not receive funds. And now this.
Secession sounds better every day.
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Reply to this commentLinkReport AbuseSomething needs to.
They also need to go through job performance evaluations periodically.
Letting these thieves lose with all our money and no accountability is INSANE!!!!!!!!!!!! Human nature always prevails and human nature always looks out for #1.
Politicians have created a bubble of opulence for themselves that needs to be popped.
The states and the voters whom consistently voted to elect these same politicians that wasted taxpayer dollars should be the ones paying for their mistakes. These voters must feel the pain for the policies and politicians that they supported. Using federal tax dollars to bail them out is un-American and immoral. It makes me sick to my stomach to see these states and voters get away with this irresponsibility. Time to own up and buck up. They dug their hole now they should dig themselves out....
Reply to this commentLinkReport AbuseThe states and the voters whom consistently voted to elect these same politicians that wasted taxpayer dollars should be the ones paying for their mistakes. These voters must feel the pain for the policies and politicians that they supported. Using federal tax dollars to bail them out is un-American and immoral. It makes me sick to my stomach to see these states and voters get away with this irresponsibility. Time to own up and buck up. They dug their hole now they should dig themselves out....
Reply to this commentLinkReport AbuseDo these states have broadband yet?
That should get them turned around.
Reply to this commentLinkReport AbuseI wonder what Mr. Williamson means by "insured" when he says, "Back in the heady, risk-loving days of 2005, about 57 percent of municipal-bond issues were insured."
Does he mean "insured" in the same way AIG "insured" collateralized debt obligations? In 2005, over $400 billion in municipal bonds were issued, meaning that MBIA et al. would have insured $228 billion in municipal bonds that year alone.
Reply to this commentLinkReport AbuseSince we've been putting money into the Social Security Trust Fund since 1936, there must be a lot of money there that we can use to help the states with their monetary problems. D'ya think?
Reply to this commentLinkReport AbuseThis Califronian just got back from Home Depot. They were out of shovels. There is hope, not much, but a little.
Reply to this commentLinkReport AbuseThanks for keeping up with this aspect of the State and Muni bailouts, Kevin. Let's keep their feet held to the fire. Returning to fiscal sanity should be the goal, not enabling more bad behavior. Thanks again.
Reply to this commentLinkReport AbuseHas it not yet become obvious to any who have eyes to see that Obama cares not one bit about a future of prosperity for the U.S.?
It disgusts me every single time I hear anyone try to claim he is now more "centrist" since the elections. Please. To bite on his "I want to destroy at the rate of X, which is only half the rate we were destroying before at Y" tact is shameful and disturbing for anyone with a brain. WAKE UP.
He will use every single trick he has to further his destructive agenda--legislative, executive, judicial, or administrative.
Reply to this commentLinkReport AbuseTexas is just as broke as California. External Link
Nice $27 billion budget deficit. Williamson crowed against Krugman over this earlier.
"While Texas Gov. Rick Perry sucked up to the 'tea party,' declaring himself opposed to 'government bailouts' and prattling about seceding from the union, he papered over his state's budget gap with $6.4 billion in Recovery Act funds, including increased federal handouts for education and Medicaid. So when you, the [US] taxpayer, hear talk of the Texas Miracle, you should take pride in having helped pay for it."
How about a retraction Mr. Williamson?
Reply to this commentLinkReport AbuseNot a rhetorical question:
Which would cause a bigger fiscal mess(?), states unable to pay their bills or the federal government bailing them out.
By "fiscal mess" I mean hardship for people living in the states.
"If you owe $10,000, the bank owns you. If you owe $1 million, you own the bank." Yes, a very old saying.
It's possible that states owe so much that a fiscal collapse would cause so much damage that the feds are required to step in. This is an argument like the justification for saving the financial system.
Reply to this commentLinkReport AbuseARegularGuy,
Texas may or may not be facing a $27B shortfall, but we are Constitutionally required to produce a balanced budget. This means cuts to the budget. This will happen. It has happened before. The big debate today is whether or not to tap the "Rainy Day Fund." That does not appear likely, either.
Reply to this commentLinkReport AbuseThanks Mr. Williamson for the effort. You write,
"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."
Sad but true!!!
Reply to this commentLinkReport AbuseARegularGuy: You - and the writer of the article to which you linked - clearly don't understand the Texas budget process. Texas has a balanced budget amendment to our state constitution. We also start with a zero-based budget in each biennium. Right now, the Legislature is working tirelessly to find reasonable cuts, and we WILL have a balanced budget. Why? Because we are not slaves to the public employers unions.
Sorry, try again. And eat your heart out. The Lone Star State will remain fiscally strong, and we will resist all attempts for our citizens to bail out other states.
As for the ridiculous LA Times claim that Texas unemployment has "soared"? Gee, so that's why all the Californians are moving here these days, right?
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