As poorly managed states go bankrupt, will solvent states bail them out?

Wednesday, December 12, 2012 by: J. D. Heyes
Tags: states, bankruptcy, financial bailout

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(NaturalNews) It is a colorful phrase used to describe financial institutions said to be so large that, if allowed to go bankrupt, they would cannibalize the U.S. and global economies.

But it is more than that, really.

In today's political vernacular, the expression "too big to fail" has morphed into a Keynesian political philosophy used by lawmakers in both major parties to inject government into the private sector to finance cronyism at the expense of the taxpayer.

What's more, there is a good chance this volatile and risky practice is about to be applied again, only this time it won't be the nation's biggest banks that get bailed out.

It could be entire cities and states, say experts who spoke with Natural News.

As debt continues to climb, local politicians are looking for a 'quid pro quo'

Victimized by career politicians who have used public coffers to spread political largess and buy votes, scores of city and state governments have racked up huge deficits over the past two decades, most - but not all - in liberal, progressive enclaves like California, Illinois and New York. According to, a site that tracks federal, state and local debt in real time, total debt owed by states exceeds $1 trillion; local debt stands at more than $1.7 trillion.

Now, overextended cities like San Bernardino, Stockton and Mammoth Lakes in California; counties like Jefferson County, Alabama; and even metropolises like Detroit have begun to declare bankruptcy.

And officials in at least some of these bankrupt enclaves are turning to Washington to bail them out, a strategy that would shift the burden - as well as decades of irresponsibility - to all taxpayers, including those who live in cities and states led by fiscally responsible leaders.

Detroit city Councilwoman JoAnn Watson earlier this week did not mince words during a meeting of the chamber on Dec. 4 when she said the federal government should bail out the terminally troubled city because most residents voted to re-elect President Obama.

"There ought to be a quid pro quo," she said. "After the election of Jimmy Carter, the honorable Coleman Alexander Young, he went to Washington, D.C., and came home with some bacon. That's what you do."

Government seems more free spending than ever

Steve Stanek, a research fellow of finance insurance and real estate at the Heartland Institute, said he can see a scenario where more cities, desperate to maintain the status quo of over-promising and overspending to keep buying votes, seek to dump their bad decisions on a wider pool of taxpayers.

"I think there's a good chance bankrupt cities will make an appeal. New York City in the mid-1970s received a federal line of credit of more than $2 billion (in 1970s dollars) to stay afloat," he told Natural News.

"The federal government seems more free-spending now than it was then, so I wouldn't be surprised to see some cities handed federal money as a rescue. Congress seems to have almost no regard for spending. Federal spending has doubled in barely 10 years," he says.

Technically, he said, states cannot declare bankruptcy because there is nothing in the U.S. Code that allows for state bankruptcy. That said, The New York Times reported in January 2011 that policymakers were "quietly" looking into the issue, which would require legislation that "would have to clear high constitutional hurdles because the states are considered sovereign."

Not everyone believes there will be a mass rush on the federal treasury from financially ailing municipalities.

"There already are appeals for bailouts and handouts from Uncle Sam, but so far state and local governments have been limited to indirect bailouts via payments in the so-called stimulus legislation," Daniel J. Mitchell, a senior research fellow at the libertarian CATO Institute told Natural News. "Fortunately, it is quite unlikely that Congress - particularly the House - would agree to a bailout. Simply stated, there's no incentive for politicians outside of the affected states to go along with that kind of scam."

"Taxpayers don't like bailouts for banks or car companies, and they would probably be even more upset about bailouts for profligate states. And they would be right to be angry," Mitchell continued. "Even taxpayers in bankrupt states would probably be opposed since they would understand the moral hazard issue."

Stanek isn't so sure that opposition to federally subsidized city or state bailouts would be overwhelming.

"People in other states that have controlled their spending and borrowing, and that have not made their legislatures wholly owned subsidiaries of government unions, should be very upset if poorly run states receive federal handouts, because the people in the fiscally responsible states will in effect be paying for the lousy governance in other states. But I suspect most people won't squawk," he said.

"Many won't understand what's happening. Others will figure there's nothing they can do about it, so they'll go on about their lives. Others will probably think it's good to help out because isn't that why we have government, to help people in need?"

Simple solution - Stop spending

Both Stanek and Mitchell; however, did agree on the solution: Politicians, at all levels of government, should just stop spending. And, as Stanek said, stop electing the same politicians who are responsible for all the profligate overspending.

"The key to good fiscal policy is to make sure the burden of government spending rises slower than private sector growth. Even nations like Greece and states such as Illinois could get back to fiscal health by following that Golden Rule," said Mitchell.

It's going to be an uphill battle, however.

"Unfortunately, voters in California, Illinois and some of the other troubled states have, if anything, handed more power to the people who are ruining their states," Stanek added.


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