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Bankruptcy For States, Part Seven Trillion; A Nice Editorial

By Joseph McDaniel, Esq.

I just read a nice editorial on the issue of permitting States to file Bankruptcy, perhaps under Chapter 9 of the Bankruptcy Code.

The tone of the editorial was appreciated, because the issue seems to provoke people with strong opinions into shouting.

Frequent readers will recall that I wobbled for a while, and now I'm generally in favor of permitting States to file Bankruptcy, because I have some despair that politicians can bring themselves to be honest enough to say that a State is insolvent, and has to cut spending, and all those promises made over the last twenty years to purchase votes were poppycock. Or worse.

There's one argument that is often made against permitting States to file: that argument is that permitting such a filing would have bad effects on the Bond Market, and make it hard for States to borrow.

Frankly, I see that as a plus, not a minus.

Because I don't see any good reason for States to borrow; it just gives them a better opportunity to become insolvent.

Perhaps I shouldn't soft-peddle this: a State that becomes insolvent isn't like you and me. A State has a thousand professional bean-counters who can tell politicians what the numbers look like. You don't.

A State knows precisely how much dough is coming in from taxes; you don't know how much dough you have coming in, because you can lose a job, experience a divorce, or get garnished. A State cannot.

So if a State is insolvent, that's for precisely one reason: a politician knew, and didn't care, that he was spending pretendadollars. Or didn't know, which is just as bad. 

So if a State can't borrow, this is a bad thing in which ways?

You decide!

Because ultimately, you'll be footing the bill for insolvent States, or an insolvent United States.


  

Full post as published by Arizona Bankruptcy Attorney Blog on February 10, 2011 (boomark / email).