Sunday, January 23, 2011

State Bankrupcty

The idea to allow states to declare bankruptcy demonstrates just how dire the situation is for some states.  Make no mistake, we are being prepared for what is to come by people making it all sound perfectly normal.

The Federal government will have two choices should a state become insolvent...

      1. Bailout
      2. No bailout 
Bailouts have become politically untenable not to mention unsustainable as we saw with TARP--like a junky, one is not enough.  However, a state going belly-up is also unprecedented (get used to that word). 

The middle ground here is severe cutbacks in spending and programs, but states seem unable or unwilling to do what is necessary on their own.  The level of order and civility in our country is fragile as-is, who knows what impact the end of government cheese would have?  Additionally, a reduction in social programs isn't just government breaking its promises, it's a career ender for big government proponents.

So what's left?

A "managed bankruptcy."  No, not a traditional one where a judge divides assets and pays liabilities, but a new kind of bankruptcy.

Think GM.  In the Government Motors bankruptcy there was one thing kept off the table; pensions and benefits.  This too was unprecedented and only possible by an unholy collusion of unions and government.  The bond holders lost all, but retirees were intact.  This is precisely the kind of model that states will need to keep their pension plans and some of their social programs going.  A way to isolate some liabilities and ditch others, and we see the usual players working towards this end.

It's not so much illegal as "not legal."  There are no laws or articles/amendments to the Constitution that allow for this.  But if recent events provide any insight, it's that leadership is no longer playing by the rules--they make them up as they go along.

Should a state be able to ditch it's debt, it will have a very hard time selling debt in the future.  This means the entire weight of the state's budget will be leveled on taxpayers--budgets that are already unsustainable with the ability to write debt.  This will eventually force the producers out of these states leaving only the moochers.

We could see massive population shifts to more solvent states with lower taxes.  Hopefully, they will leave their big government politics behind!

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