It’s worth remembering here that most municipal bondholders are individuals, rather than sophisticated institutional investors. If your aunt Sally put her savings into state bonds, she is not going to be happy if she can’t get her money back, and she is certainly not going to be mollified by talk of lower deficits in future. The deficits are what allowed her to buy the bonds in the first place; she doesn’t particularly want them to go away. But there’s no way she’ll stand for a haircut. And, of course, she votes.
The fact is that states are not going to declare bankruptcy, and they’re not even going to be allowed to declare bankruptcy. So the worst thing that can happen, for the municipal bond market, is that people continue to talk about municipal bankruptcy for the next couple of years. Let’s take the option off the table, once and for all, rather than taking it seriously and thereby only making it harder for states to borrow the money they need.
Good work, but I'd respectfully suggest it misses the elephant in the room. That elephant isn't just the Republican party, but it's worth noting that it's only conservative GOP members who are suggesting state bankruptcies.
There's only one real reason for that. They want to kill government-employee unions. Bankruptcy allows for the voiding of contracts with unionized government employees. The Gingrich & Company theory is that those contracts would then be re-negotiated and the states could choose to not bargain with the unions.
Since government employees comprise a very large portion of the remaining unionized workforce in the country, destroying government unions would, they believe, deal a crushing blow to organized labor, overall.
As the article correctly points out states don't need to declare bankruptcy, particularly now. Though the recovery is slow, the recession is over and tax receipts will be -- again, slowly -- increasing.
State bankruptcy is a sledgehammer poised over the heads of those least able to afford it. Government spending has damn little to do with it.
And in the interests of full disclosure, neither I or any member of my family has ever been a member of a union. I'm a proud capitalist.
#1 Posted by Jeff Bushman, CJR on Sun 23 Jan 2011 at 11:37 AM