Let's Find Out What State Bankruptcy Means
One of the things that disappointed free-market types -- and I'm one of those -- is that back in 2008, when the financial system faced near-collapse, we didn't let it just...collapse. We've hashed and rehashed the reasons why, of course -- in Nicole Gelina's excellent posts here, especially -- but I still can't help wondering if it wasn't worth finding out. I know, I know: chaos, depression, people selling apples on the street.
And yet: I wouldn't mind seeing some people selling apples on the street. Some people who, for instance, worked at major insolvent investment banks and financial institutions. Some people, for instance, who were rescued by bailouts. Selling apples might clarify the mind a bit and remind the next generation of investment bankers that the world is divided into downsides and upsides. Right now, barely two years later, all they know is that the world is divided into huge, whopping bonuses, and smaller but still impressive bonuses.
So it's interesting to read that some states -- especially the ones looking at financial collapse -- are thinking the unthinkable: bankruptcy. From the NYTimes:
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
Bankruptcy, in this case, is really just a way to give governors the leverage they need to deal with their public sector unions. And the public sector unions know it:
“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”
This all seems like saber-rattling to me. The states threaten to declare some version of bankruptcy just to get the unions to start talking seriously about their contracts and pensions. It all gets papered over in some unholy alliance of future-pension-increase-cuts (Know what I mean? Something like, "Starting in 2017, pensions will be 3% funded by a reduced rate of increase to begin at 1.6% and top off in 2025 at 4.3%......") and, of course, tax hikes.
But I'd still like to know what state bankruptcy really means. I'd still like to see it happen -- not almost-happen, or nearly-happen, but happen. Whatever the state equivalent of selling apples on the street is, well that's what I'd like to see.
I'd like to have seen it on Wall Street, too. If for no other reason than to be able to say, Okay, now we know what that looks like. Let's never let it happen again.
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Re: Let's Find Out What State Bankruptcy Means
Look at the Drudge headline about California.
Methinks the question might not be, should there be bankruptcy. It may just happen because some states have no choice -- and we should all watch what happens after. I know serious people on both sides (state bankruptcy is the answer to getting out from all these impossible state contracts and labor agreements v. those who think it is not the answer).
What I think we are going to see are a lot of painful lessons in federalism as different states try different things. And that seems to me good -- because we'll learn from the different examples.
Jan '11
Re: Let's Find Out What State Bankruptcy Means
In game theory, if you don't penalize non-cooperation, you get more of it. What was missing from the bailouts was any penalty. Sure, it may have been a disaster to allow some institutions to collapse, but that doesn't mean that we let them get away scot-free. We had more choices than (a) complete collapse or (b) pay off their mistakes or (c) take control of the company.
My question is, how do we penalize states for unrealistic promises to public sector unions? It's a myth that the huge entitlement debt was inevitable. Quite the contrary. A large part of the entitlement crisis was caused by politicians competing with each other by making yet more and more unrealistic promises. They did so without penalty; in fact, they were rewarded by it.
They need to pay a penalty.
May '10
Re: Let's Find Out What State Bankruptcy Means
Have you seen Kevin Williamson's interview with Jim DeMint? Sounds like the GOP ain't havin nothin to do with no state bailouts, and will pave the way for a pseudo-bankruptcy process. Which could cost vital electoral votes in, um, Illinois and California.
The only problem I see is with step 3 (no, not "Profit"): forbidding the Fed from buying up state bonds, in a back-door bailout. The Dems could block that part, but that's a political fight we'd dearly love to have.
Jul '10
Re: Let's Find Out What State Bankruptcy Means
If I understand bankruptcy properly, then I have problems with states declaring bankruptcy. Declaring bankruptcy means, to some extent, turning your financial affairs over to disinterested third-party administration, ie a bankruptcy court. A state declaring bankruptcy would amount to the cedeing of a large part of the state's sovreignty to a single individual, the bankruptcy judge. I can see this also causing control issues, since the judge would be overruling the legislature under the bankruptcy laws of the state, which can be changed by the legislature, which would throw the whole thing into the laps of the state supreme court, which may lead to filing with the USSC. Yuk!
All of the issues forcing states to the financial brink have begun in the state legislatures. Those same bodies can most effectively deal with the issues. Pensions are not holy writ; they can be trimmed. Budgets can be cut. Rascals can be thrown out. Bonds can be discounted to junk status. Bankruptcy is just trying to get someone else to be the adult.
Jun '10
Re: Let's Find Out What State Bankruptcy Means
The flaw in capitalism is that insiders can steer the lion's share of profits into their own pockets. In theory board members are subject to stockholder approval. My broker sends me proxy ballots all the time, but what do I know? Senator Bingaman's wife walked off with a pocket full of bonus money just before Global Crossing went belly up. What was a senator's wife doing sitting on a board of directors? The Bingamans got theirs, but millions of investors got squat. This is what Ayn Rand meant by "looters." And bankruptcy won't stop them. They are skilled at finding stacks of money and somehow getting their hands on it. When bankruptcy occurs they wash their hands and declare "my job is done here." Then it's off to greener pastures. Such people if subjected to living in a village economy would be driven from the community under a hail of sticks and stones. In a developed economy the parasites sit atop the food chain. Color me disgusted. The problem is not "the system;" it's human nature.
Sep '10
Re: Let's Find Out What State Bankruptcy Means
No, infact the problem is the system, because instead of having a well-functioning free market, in many industries we instead of corporatism, state capitalism, mild fascism (ala Jonah Goldberg), or some other name of the same set-up. Many, if not most, of the behemoth corporations that exist today would not be able to exist in an environment in which regulatory barriers to the entry of smaller competitors or more overt financial support from the Leviathan did not exist.
In equilibrium, the local knowledge and dynamism of smaller companies would provide a competitive advantage over larger companies with schlerotic management and looting directors. Yet this advantage is overcome by uncompetitive actions by the government that prop up the businesses, some due to corruption and some due to regulatory capture. And we all pay the price, in the form of higher prices and in lower equity returns due to things like the "looting" you outline above.
If we really freed our economy to function in the most efficient manner, we'd all be better. So, let's try to throw off the shackles, comrades! ;)
Sep '10
Re: Let's Find Out What State Bankruptcy Means
Let me further add one more basic philosophical point: human nature can't be a "problem". It is what it is. We have to construct systems with structures and incentives that point human beings with their distinctive nature towards the best ends possible given this nature. Not the best ends period, without regard to what men can actually do.
Man is fallen and imperfect, and the sooner everyone remembers this the sooner we can get on to living in the world we have, instead of the utopia we dream of.
Fortunately, there is this great social technology constructed by man over thousands of years to solve many of these problems. It's called a price system, and it functions in a free market. With this great technology, we can use the competing interests and local knowledge of people around the world to distribute goods and labor in the most efficient manner possible, so we can grow our prosperity as quickly as possible. And the great thing is it let's us work with the men we have, instead of the angels we don't.
Jun '10
Re: Let's Find Out What State Bankruptcy Means
During the recent financial crisis some firms were bailed out, but others were sold to their rivals for pennies on the dollar. Perhaps we should try that approach with states. As a Californian I would love to shut down Sacramento and give the Arizona legislature a shot at running the state for a while.
Jun '10
Re: Let's Find Out What State Bankruptcy Means
KC Mulville: My question is, how do we penalize states for unrealistic promises to public sector unions? It's a myth that the huge entitlement debt was inevitable. Quite the contrary. A large part of the entitlement crisis was caused by politicians competing with each other by making yet more and more unrealistic promises. They did so without penalty; in fact, they were rewarded by it.
They need to pay a penalty. · Jan 21 at 9:50am
Great point. How about: any state receiving federal bailout money forfeits representation in Congress and the Electoral College for 10 years or until it recovers solvency, whichever is longer.
Just imagine the impact on the fiscal health of the whole country if Nancy Pelosi, Barney Frank, Barbara Boxer and pals were kicked out of Congress for a decade, and if CA plus NY electoral votes were off the board until 2024...
Oct '10
Re: Let's Find Out What State Bankruptcy Means
Demaratus
Let me further add one more basic philosophical point: human nature can't be a "problem". It is what it is. We have to construct systems with structures and incentives that point human beings with their distinctive nature towards the best ends possible given this nature. Not the best ends period, without regard to what men can actually do. · Jan 21 at 11:28am
It has been said, I believe by Milton Freedman, that 'the best system isn't one where we get the right men to do the right things, but where we create an environment where even the worst men do the right thing.'
Oct '10
Re: Let's Find Out What State Bankruptcy Means
The states, under the Constitution, are sovereign, and therefor the Federal Bankruptcy Court has no jurisdiction. My guess is that the administration will deal with that issue the same way they have dealt with any Constitutional limitations... simply ignore them. In the end we'll wind up with Cali-Motors. The administration will step in, pervert any general understanding of the orderly process of bankruptcy, and purchase the AFSCME with taxpayer money or debt. In the end, Obama will accomplish what the South accused the Lincoln administration of attempting; seizing the sovereignty of the states and submerging them into the feral government's control.
Any bets???
Dec '10
Re: Let's Find Out What State Bankruptcy Means
State bankruptcies have occured before, I believe in the 1880s. It was a mess.
The essential problem with a state bankruptcy, as Three-legged Dog intimated, is it isn't "allowed". The Constitution ensures American citizens that they will live in a republic; that they must have representative government. Therefore, the Constitution requires the federal government to bailout the state, so that elected representatives and not a bankruptcy judge, are in charge. I dearly wish we could allow the spendthrift states to enter bankruptcy (and do not know what transpired in the 1880s that allowed it to occur, then), but my reading, so far, indicates to me that an activist Administration will not allow it to transpire.
That being the case, and republican representation having to be maintained, I agree with Joseph Stanko that representation from bailed-out states be limited. I think they should become more like territories, Puerto Rico, or the District of Columbia; allowed representation, but no vote.
Perhaps Professor Rahe can weigh in on what transpired in the 1880s that allowed states to default on their debts.
May '10
Re: Let's Find Out What State Bankruptcy Means
Rob Long
I wouldn't mind seeing some people selling apples on the street. Some people who, for instance, worked at major insolvent investment banks and financial institutions. Some people, for instance, who were rescued by bailouts.
You know, that hits home with me, because I've been seeing signs around my area this past year of people selling their homegrown fruit for a few measly bucks.
I deliver meals sometimes to this old man, poor, who has a single fruit tree and puts a cardboard sign on his mailbox saying "4 for $5" or something like that. This guy is all alone. He's a retired Marine. His wife's in the hospital and he told me he was completely alone for Christmas.
So that picture hits home. You don't have to damage an economy much to hurt a whole lot of people.
May '10
Re: Let's Find Out What State Bankruptcy Means
I've got my bicycle, and skis ready for stikes and protests and walkouts here in NYC (to get around). Unfortunately, I am fearful that there won't be the Big Failure Event that might wakeup some people here in New York.