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Policy makers work behind the scenes to come up with a way to let states declare bankruptcy and...

Policy makers work behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the public employee pensions, NYT reports. This would raise more questions that it answers, Barry Ritholtz writes: "Why should anyone lend money to states again?"
Comments (11)
  • coloneldebugger
    , contributor
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    how many retirements are going to get crushed by this? the usual save the rich ream the masses attitude.
    21 Jan 2011, 10:14 AM Reply Like
  • Morg
    , contributor
    Comments (250) | Send Message
     
    Colonel,

     

    The rich are some of the biggest muni investors because of the tax free income. This would obliterate muni bond values most likely putting a big dent in both their incomes and portfolio values.

     

    Retirements would get crushed by this (rich and poor alike). But this is more a ream the masses to cover politicians asses moment.
    21 Jan 2011, 03:10 PM Reply Like
  • youngman442002
    , contributor
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    Why canĀ“t a state or city build with just the revenues...you need a 100 million new football stadium....save your tax revenues until you have the 100 million to spend.....sounds good to me
    21 Jan 2011, 10:15 AM Reply Like
  • Harry Tuttle
    , contributor
    Comments (2221) | Send Message
     
    I disagree with Ritholtz. Capitalism works when there is success and FAILURE. The States should have their creditworthiness challenged in order to ensure that they do not borrow too much.

     

    In fact, in my opinion, this is the first reasonable proposal I have heard in a long time.
    21 Jan 2011, 10:19 AM Reply Like
  • rhgordon
    , contributor
    Comments (49) | Send Message
     
    i dont know why this ritholz guy gets so much play and credibility. why shouldn't states or municipalities go bankrupt? it wont cut off their ability to float bonds deals once current debtholers have their values reduced. happens in the corporate world all the time. restructure the balance sheet, bring debt more in line with revenues and the ability to re-finance or even raise additional debt increases BECAUSE BALANCE SHEETS ARE IN BETTER SHAPE. Capitalism is ugly and sometimes people lose. this is one of those situations...unless one wants to go to State Socialism
    21 Jan 2011, 10:24 AM Reply Like
  • Richard Mackenzie
    , contributor
    Comments (453) | Send Message
     
    Yeah. Given what we have learned about how budgets go when they are controlled by elected politicians, I don't think anyone in their right mind would loan to a democratic municipality, state, or national government if they were allowed to declare bankruptcy.

     

    And I agree that it might not be such a bad thing for them to have to operate without so much borrowing. More bonds would end up having to be tied to specific items/projects/whatever that could be evaluated by investors. General issue would dry up.
    21 Jan 2011, 10:28 AM Reply Like
  • Duude
    , contributor
    Comments (3394) | Send Message
     
    Do you think states will learn there is an end game to lavishing taxpayer money on state employees through generous pensions and salaries? Its done for the benefit of union support of politicians and nothing more.
    21 Jan 2011, 12:15 PM Reply Like
  • Morg
    , contributor
    Comments (250) | Send Message
     
    Like what rhgordon said, if they are allowed to file for bankruptcy they would restructure just as a corporation would. Just like a corporation they would have to come back to market and pay higher rates as their creditworthiness would be destroyed.

     

    I personally feel this would be a good thing as it would force states to live within their means and not through massive borrowing as the financing costs would be to great to fund. This would encourage borrowing only for things that would bring in more money than went to finance it. As it is now governments around the country use cheap borrowing to plug deficit holes and continue further spending increases.

     

    Increases cannot go indefinitely. At some point there should be reductions to eliminate waste.
    21 Jan 2011, 03:15 PM Reply Like
  • davidbdc
    , contributor
    Comments (3181) | Send Message
     
    This would be an excellent move! Its a way to ensure that the public unions can't bankrupt our children and grandchildren (who don't get to vote on their outsized pay and health care and stupidly outsized pensions - which IMO is simply taxation without representation). Lets throw all the state employees, school teachers and the rest into a bucket and divide up whatever is left amongst themselves - something like 40-50%. In the township I live in, the average wage is 28,000, yet the average schoolteacher earns over 60,000 (they start at 40) and they only work 9 months of the year. Now how in the world are the 28,000 people going to support these folks pensions in another 10 years? Its nonsense - oh, and by the way, they want to strike unless they get pay raises of 5% each of the next three years!!!! I say fire them all and lets hire all new teachers - lots of college graduates need jobs.

     

    It would be good if states couldn't borrow money easily and had to prove to investors where the funds would come from - it probably would eliminate about half of the stupid spending that goes on currently!
    21 Jan 2011, 03:55 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4845) | Send Message
     
    The real problem with this approach is that the states are microcosms of the federal government and in aggregate make up the USA and if debt relief is to be accomplished by bankruptcy at the state level then why not at the federal level? Government bonds across the board will fall huge and our borrowing costs will jump which will push us further into debt thereby taking us closer to federal default.

     

    The idea that part of our government structure can claim bankruptcy without impacting other areas is similair to the recent logic that if subprime credit goes bad it will not affect prime credit. That was certainly proved wrong.

     

    If the whole idea of going to bankruptcy is to get rid of union contracts rather than default on the munis then we need to hire some really tough negotiators to just redo the union contracts rather than take down the government bond markets.
    24 Jan 2011, 09:04 PM Reply Like
  • Michael2343
    , contributor
    Comments (457) | Send Message
     
    Whats a big deal about this, is its a prelude to the nation going bankrupt. The states owe the federal government more money than can ever be paid back. When some go bankrupt, the burden will shift to other, healthier states. Meanwhile the federal government will have bad loans on its books and have to borrow more from the fed and china.

     

    Its amusing to watch stock market and economic bulls during this period. The fan is on more than ever to talk up the economy - the band playing on the deck of the titanic.
    24 Jan 2011, 11:57 PM Reply Like
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