Tuesday, November 09, 2010

What Happens When a State Goes Bankrupt?

Richard Epstein on Ricochet.com:


[T]here is no obvious mechanism for state bankruptcies, even if there are some procedures, I believe, for municipal bankruptcies. This is a ticklish issue because states are sovereigns and it is a frightening prospect to think that when mired in bankruptcy, they could not discharge their essential functions because they could not pay their pension obligations, among others. So the battle over the form of bankruptcy will be acute, and I have no idea how this would play out -- except badly.

[...] I don’t think that full-fledged bankruptcy is a realistic prospect as of now. I think that the much more sensible approach is to side-step the bankruptcy proceedings and find ways to attack the union pension obligations directly, given their enormous size. It is odd that these days the only sacred contracts are those which the state enters into with unions for the benefit of their members.

I doubt that any state could actually go bankrupt.  Where would they file in the first place?  They might default on bonds and debts, but the creditors will not be able to collect anything without the cooperation of the state.  I can't imagine the Feds telling California to pay up ... or else?  Maybe they might threaten to withhold highway funds.  That's really going to scare Jerry Brown!  It's much more likely that the Feds will decide that California is too big to fail, so the rest of us must pitch in with our federal tax dollars to bail them out.  There will be harsh words and demands for reform, but the money will be air-dropped before chaos breaks out. Eventually everyone will forget how the state got into such trouble in the first place, and re-elect Jerry Brown, who did such a wonderful job of dealing with the federal government to save California.

Posted via email from The Blue Pelican

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