Sunday, January 9, 2011

When States Default: Then and Now

The Wall Street Journal has an interesting article titled: When States Default: 2011, Meet 1841:
Land values soared. States splurged on new programs. Then it all went bust, bringing down banks and state governments with them. This wasn't America in 2011, it was America in 1841, when a now-forgotten depression pushed eight states and a desolate territory called Florida into the unthinkable: They defaulted on debts.
History repeats itself, but things are always a little different. One difference between then and now is that back then bonds were sacrosanct. When GM's bondholders took a hair cut during the GM bailout, an example was set. That example is that bondholders need not be paid back in full. This will wreak havoc on the bond markets once sovereigns begin partially defaulting on their bond obligations. And, of course, they'll try to avoid doing this as is the case in Portugal where debt worries have driven up bond yields:
Investors are worried the government won't be able to meet its debt obligations and may need a bailout like those provided to Greece and Ireland last year.
Papering over your debt with other people's money, or, as in the case of Portugal, the money of other countries, is always the preferred option. But western countries have shown themselves unable to rein in the root cause of all of this debt: spending; therefore, I believe that they are merely deferring the day of reckoning.

3 comments:

JD said...
This comment has been removed by the author.
JD said...

One approach we could take to the broken states asking for bailouts is rather than bailing them out, BUY them out. Rather than watch any state go into default, the federal government and the rest of the states should buy them out, subject to the following:

1) All debts get transferred to the federal government,
2) Statehood gets revoked and the state becomes a federal district like DC, PR, Guam, etc.
3) All voting representation in both chambers congress is revoked.

If the citizens of 49 states are asked to pay the debts of the citizens of one state, then those 49 states should get some form of ownership over the resources of the fiscally irresponsible state.

dsm said...

@JD,

I kinda like that suggestion; however, I'm opposed to bailouts. The passage of TARP is what got me blogging.

I guess, I'm inclined to let insolvent states default and deal with the fallout associated with that. Unfortunately, so much of each state's budget is Federal funds (somewhere between a third and two thirds of the Missouri budget) that there's an argument to be made that the Federal government is a sort of defacto cosigner for every state's spending profligacy.

I've begun to believe that the intertwining of State and Federal budgets is a huge problem. Every state (except VT) has a balanced budget requirement. This means that states are easily persuaded by offers of Federal money. That Federal money comes with Federal strings attached that erode state sovereignty.

That said, I'll have to think more about your suggestion. I wonder if we missed an opportunity to partially do what you want when the House rules were re-written. I believe those rules could stipulate that members come from solvent states.