THE USA IS NOT EUROPE
As noted last week, the municipal bond panic has been blown well out of proportion. While the state budget woes are serious issues and will require substantial cutbacks and perhaps even tax increases, it’s important to keep things in perspective and avoid comparisons of the USA and Europe. First of all, the state budget issues as a whole are simply not comparable. Figure 1 from a recent report out of the CBPP puts the historical debt levels in perspective. As you can see there is nothing that far out of the ordinary currently occurring:
More importantly, however, one must recognize the operational differences between the USA and Europe. Europe has no central treasury. They are not truly politically unified. They are a monetary union of individual countries with individual political systems. While they have one central bank they still lack the key ingredients that makes them even remotely comparable to the USA – a central treasury and centrally unified political system. This, combined with the true unity of the USA exposes the vast differences between the two.
Make no mistake – I am by no means encouraging reckless spending policies at the state and local level, however, we must recognize the operational reality at hand. Localities can and likely will default in the coming years, however, an event as potentially catastrophic as a state default would be a purely political decision (as the US federal government can never not have the funding to aid its states). The Europeans are unwilling to unify and provide aid to their neighbors. I am confident that Americans remain unified despite the growing political divide.
A Euro crisis cannot truly occur in the USA because the purpose behind being a “United States of America” is acknowledging that California’s problems are also New York’s problems. This by no means says we should encourage profligacy or irrational spending, however, a state in dire consequences (such as potential bankruptcy) must be helped by its brethren. If we fail, as a country, to recognize this, then we have to all very seriously reconsider the purpose of our union to begin with. Arguments that say otherwise are divisive and purely politically driven.
Jean-Claude Trichet said it best: “Monetary policy responsibility cannot substitute for government irresponsibility.”
“California’s problems are also New York’s problems.”
I don’t think this type of individualistic culture wold see it that way.
“The U.S. federal government can never not have the funding to aid its states.”
Even if that were true, with that much power, an outside regulator would be necessary.
Even God provided the Jews with 613 regulations.
We’re talking about a select group of people here wielding this much authority.
Very dangerous without specific guidelines to go by.
Don Levit
If NY gets nuked I am willing to pick up a weapon and man my post. That’s how it’s supposed to work in a United country. That’s obviously not how it works in Germany when Greece gets nuked.
We might not all like one another, but when it comes to the very serious issue of protecting our livelihood (and yes, an economic situation as dire as state bk is that serious) I would assume that the rest of us are willing to choke back our anger and move on. Is it fair that CA gets more funding than Deleware? Not necessarily. But Deleware isn’t the 8th largest economy in the WORLD. We have to recognize how unusual this situation is. This is not your usual recession. And a larger govt response is necessary. We weren’t hit by a truck. We were hit by a train. And the response to save the patient from death is going to be larger.
I am all for regulating spending. That’s why we have balanced budget amendments. That’s why these states are all suffering to cut and/or raise taxes. Unfortunately though, revenues have collapsed and everyone in these states is still demanding their usual state benefits. Some people are going to have to bite the bullet because revenues aren’t coming back nearly fast enough to fill the gaps.
But this situation is not so dire that we now need to start encouraging states to file for bankruptcy. That’s just madness. As we now know, the govt can save virtually any entity it wants. Personally, I would prefer that they not save pvt institutions. But when it comes to matters that threaten national security then yes, the govt can and should use its powers to protect that. Without it, we collapse. You want hyperinflation? State BKs are a good first step towards getting us there.
i have to point out that when thousands of people were killed in NY on 9/11 many in california acted like it didn’t happen or the people deserved it or even the president covertly did it.
but i get your point.
I think that’s a pretty absurd comment. California isn’t some foreign island where a bunch of neanderthals live. In fact, I’d say that 80% of the people I know from out here are from the east coast….
Logic Please?!
If NY gets Nuked…is NOT the same AT ALL as the reality on the ground.
The reality is that powerful Public Employee Unions have constitutionally binding contracts which FORCE the issue.
And there is only ONE WAY to break those contracts (as so far ALL Pubic Employee Unions have proven intractable) and that ONE WAY is bankruptcy. Why have so many private corporations gone the same rout – for the SAME reason.
This is not a war. GNP has recovered, total spending has recovered. The private sector has made giant adjustments which are continuing. Public Employees are holding the tax payers hostage.
Sweet Baby Jesus TPC! Read what you write here. Many public employees are making up to 4X their private sector equivalents when one includes benefits. Are you saying they are “The Chosen People?” What makes them exempt from the laws of supply and demand? Why do they get all they want at the taxpayers expense?
I’m not sure why you’re assuming that I am protecting the unions? I am not at all. Cut their wages if that’s what is involved in balancing the budgets. People act as if these unions have everyone over a barrel. That’s not so. What ever happened to pushing back? GM wouldn’t do it. The states can. If you don’t want your wage cut then I am sure there is someone else who is perfectly willing to do your job for a lower wage. I recognize it’s not that easy, but unions are not invulnerable entities that just bully people around. It just so happens that the entities getting bullied do not push back hard enough. The states hold the keys to the castle here. Not the unions.
The renegotiation of union contracts is not easy, some of their perks are constitutionally mandated, or written into law so they can not be changed for years. Why should we bailout the states? Wouldn’t that just perpetuate the same structural flaws that has caused them to be bankrupt (the same with the banks)? Is not bankruptcy the solution to fix these flaws? I agree bankruptcy is a drastic step, but it may be the only way out.
Although I do not entirely agree with you on this topic, I still love your blog TPC
I visit here every day and greatly appreciate your work and insight. Thank you.
Trust me. I am very conflicted on this subject….I am not a fan of any sort of bailout, but I think there are some things that really are too big to fail. States and the federal govt is where I draw the line.
I agree. I’m concerned about the slippery slope of state bailouts by the federal government or the Fed or whatever. At some point, somebody has to bite the bullet. As you have said before, we can’t have a system where nobody loses. Wouldn’t widespread bailouts of states trigger inflation, or does one not necessarily follow the other?
If the federal gov’t bails out states, THAT is the political decision. They have no “right” to be bailed out.
I think there’s a HUGE difference between allowing Lehman to file bk and allowing California to file. The potential harm from an entity like that going bk is enormous. Lehman was a private entity, whereas the pseudo sovereign default of a state jas the potential to disturb the stability of the nation and its currency. That is simply not an option.
The obvious retort is that a bailout of a state would be inflationary. That is wrong. It would simply avoid the deflation involved in letting them file bk.
It’s pretty clear now that if a re-do were possible, Lehman would not have been allowed to go under. The consequences of putting CA under are unthinkable. It would be incredibly stupid, the more so since it is entirely unnecessary.
I tend to believe that under a redo, ALL of the banks should be allowed to fail, and the government may have to guarantee 100% of the funds of any ordinary depositers.
The Fed should have served as lender of last resort and the banks that were truly insolvent should have been dealt with in a manner similar to the RTC….Instead, we have Wall St back to its old tricks. It’s very important that people understand the distinction in my thinking when talking about the pvt sector and the govt….Anything that risks the viability of the currency simply cannot be exacerbated.
Sorry…. but what is ” the RTC”
http://en.wikipedia.org/wiki/Resolution_Trust_Corporation
And then you have set precedent and created 50 TBTF fannie and freddies whose actors will act badly knowing when push comes to shove the unlimited printing press will come to the rescue. And via transitory theory the municipals can act bad knowing they will be bailed out by states which will be bailed out by federal. And then you have hundreds of thousands of fannies and freddies. Sounds like a reasonable way to run a country.
States have balanced budget amendments. They’re not like pvt institutions which can just perpetually allow their finances to spiral out of control. It’s VERY different.
Simple fix—federal govt block transfers to states during economic downturns PROVIDED the latter can show (using CBO criteria, or whatever) that with a full employment economy their budget is balanced. Transfer is only sufficient to bring budget back to balance. Only being able to demonstrate less than a balanced budget with full employment brings a (perhaps substantially) smaller transfer. States then have an incentive to always have budgets set that would be balanced at full employment (again, verified by third party like CBO), which is what they should do anyway—they shouldn’t be contributing to cyclical swings.
Yes. And people have to understand that this is a particularly unusual circumstance. This sort of collapse in state revenues is highly unusual.
If states have balanced budget amendments they need to clean there act or go bankrupt but when the a country bails out its Investment Banks how will it politically be possible not to bail them out ?
Banks or States have no “right” to be bailed out.
If this continues eventually the Federal Government will have to be bailed out.
How can that be ? By Inflating of course.
One could argue that it’s been going on for a long time already in the form of devaluing the currency.
If the States truly do have balanced budget amendments in their constitutions (and 49 do) then why would they ever need to be bailed out. They simply need to perform as per the law.
Public Employee Retirement programs are the prime problem and they are also constitutionally mandated in nearly every state.
This is a complete contradiction.
Yes. We have to recognize that this recession really was different. State revenues collapsed. So it will take more time to balance their budgets. There is no need to implement a BK law. Just provide the cushion until the states get back to even. It’s not as if we’re running out of time or something and need to rush these things. There is no expiration date on the US economy….
Let Illinois go bankrupt. They all deserve it. Why should Indiana fund Illinois’ reckless spending.
There must be consequences, isn’t that what you’ve been saying all along.
Governments ALWAYS default. There has NEVER, EVER been an exception, not ONE.
Find me a government that’s been around 1000 years and hasn’t defaulted, and I’ll be interested.
Quietly, people / congress? is looking for a way for states to declare bankruptcy. It is unconstitutional now.
While I agree with the thrust of the post, it is also necessary to recognize the politics underlying. The EZ has a lot of momentum behind keeping EMU together and can do so, if it exhibits the will. On the other hand, there is a strong push in the US on the part of a powerful faction to use the crisis to break public unions and their thinking is that if this takes state and muni bankruptcies, so be it.
prescient11;
How about China, are you interested?
Does the above chart include unfunded pension obligations? If not, then I would ignore it.
Isn’t it true that states have defaulted before? This is what I have heard. I know this goes back to the 19th century. I think a state filing for bankruptcy would be a really serious issue beyond a mere default. Talk of amending the bankruptcy code to allow them to file sounds like a veiled threat to get creditors (i.e. pensions and muni bond holders) to the table. I think something short of bankruptcy will happen, but whatever does happen, it’s not going to be pretty. Somebody is going to lose something. If CA or another state is bailed out, it won’t be without lots of strings attached. Things need to change. The first thing that needs to change is the guaranteed pension. States need to switch to a 401k or 403b type of system. Existing retirees are another issue that will have to be dealt with. When a company, such as United Airlines, goes bankrupt, the pensions get dumped on the Pension Benefit Guaranty Corporation. Maybe states should set up something like that to deal with retirees who have guaranteed pensions for life.
Look, at this point whether a state is permitted to default or not is irrelevant. The repercussions will be the same regardless, so unless you’re a federal employee, you likely don’t care. Either event would invoke a run on our currency, by either questioning the ability of our government to meet obligations, or the fallout from all the people who suddenly find themselves broke and are now not able to contribute in tax revenue. While technically these issues are separate, abstractly they imply the same outcome.
There is simply no escaping the repercussions from uneconomical decisions. The soul hope of the US government at this point is to keep devaluing to temporarily boost domestic balance sheets and by extension state balance sheets, while praying that money all ends up over seas.
The US is not Europe.It’s more like Greece but on a much bigger scale.
Greece was always the same even when they had the drachme. It’s just the way of living. It’s simply silly to spent more than there is income.One day it all shows. Than there is no goverment and no Fed to help.
This is true for a single family , for Munis and for every institution.
May be there is one more time. But then it’s over.
That’s how I see it.
Let’s be rational here. If a state like CA is allowed to file for BK we will certainly have a banking crisis several times more traumatic than LEH. Countless jobs will be lost and it will likely cause the dollar to tank. The USD is now vulnerable as investors worry about sovereign default. This is when hyperinflation enters the fold. In fact, the risk of hyperinflation is FAR more likely under the BK scenario….
So, either way the risk are enormous. States and the sovereign govt truly are too big to fail. It simply cannot be allowed to happen. Anyone who argues otherwise is not thinking thru the realistic scenarios.
doesn’t the market always celebrate when the dollar tanks? i thought Dr. Ben would be delighted to see dollar tanking.
You have to differentiate between a decline in the dollar and what could potentially threaten the existence of the currency.
Alabama or Arkansas one of them defaulted 100 yrs ago and there was no hyper inflation. You say we can print to our hearts content and the US is not at risk due to 14T of productive capacity. Hence why changes if IL tells creditors to take 85 cents on the dollar? Creditors get stiffed, IL gets back in balance, the 14T economy rolls on, the US suffers a black eye as investors flee to…well nothing. They are trapped by the USD as the worlds reserve currency. Where is hyperinflation in this scenario?
Tend to agree with nottpc
Debt restructurings are different from full blown state bankruptcies, which a lot of people are calling for now.
You don’t think a state bankruptcy would cause serious turmoil for the USD? I do.
That’s why there has been talk about replacing the dollar as the reserve currency with a basket of currencies. At the moment, there really isn’t a viable alternative but that hasn’t stopped them from trying to find one.
It’s not a decision that is consciously made, no authority decided that the US Dollar is the reserve currency. It’s just the most viable out there.
Cullen,
Often you are right; on this you are wrong.
A “bailout” for State/Local government is a bailout of their labor unions, at the expense of everyone else, nothing more.
It is no different than “car company bailouts”, which were in fact bailouts of the UAW, nothing more.
The United States can not afford to NOT enable State bankruptcy as that is the only way to break the public sector union leaches. That does not mean we will have bankruptcy, only the threat.
You can break the unions without BK.
Yes you can.
Ronal Reagan proved it.
But no leader in this country today has the courage to fire en mass entire unions of public employees.
Not on my watch!
So we agree then. We need leaders with backbone.
i’m rarely interested in what ‘should’ happen…i’m wayyy more on the ‘will happen’……cullens right, states will be bailed out…..localities won’t….(other than the biggest 40)
states n big cities will solve nothing, spend more on public unions w/outrageous pensions–now funded by ben’s electrons.
all these big stupid fat things that are TBTF….propped up with electronic $….oh, but its only temporary….right.
the PMI goes up, i invest more……real bad $ things happen……i can still go fishing.
its every man for himself.
US gov is not responsible for state’s finances. if it is, we should just out with it and abolish the states altogether, and just have federal administrative units. this is just more “tanks in the streets” argumentation, a la hank paulson.
I have to disagree here to some extent. The Federal govt makes annual disbursements to the states so it’s not really accurate to imply that the two entities are entirely independent of one another. I know there’s this fantasy of separating states from the federal govt, but that’s just not how it actually works. The states are highly dependent on federal funding to survive.
If the topic is California government, the first thing you need to take account of is the dysfunctional set of mandates that the referendum system has wrought. As described by The Economist magazine:
http://www.economist.com/node/1897472
TPC “Hit by a Train” is a good analogy.
A runaway train at that – but who was driving that train? Greenspan and Bernanke.
What has changed? Bailing out the States, brought to you by the perps of the whole mess.
Who controls margin requirements? And why do they not do the right thing…even today where 3%is all that is required?
Bailing out the states when the underlying structural problems that caused the last train wreck are still the rule of law?
Folks – follow the money. Stand still little lambs…
Did the states cause this crisis? I don’t think that’s a very fair assumption.
Make no mistake, I am not saying that pvt entities shouldn’t fail. I pushed hard for more bank failures. But govt and psuedo govt failure is a political decision.
As I agree there are differences between Europe and the USA it’s also similar in the end. California pays out more federal taxes than it gets back in federal spending (been that way for years). Problem is all the mandated social welfare spending and union obligations. Although I respect teachers and what they do is important the entitlement of pension at 50 years of age for working 9 months of the year? These teachers now earn $60-$75k a 9 month work period. What about janitors at the schools and admin why are they reaping the pension benefits? As witnessed in the City of Bell elected reps on all levels of government pension, medical, and perks are way out of line. Excluding public safety unions which actually are a small % of the pension pot and deserve a pension. But public safety is always used to create fear in the sheep by cutting them first. Too many illegal immigrants on the take too. I disagree that NY and California is everyone’s responsibility and we are united to bail us out. The common string is US citizens are fed up with government like Europe. We will limit and focus the powers of government to a free market supported by real supply and demand. We dont need wall street speculators making straw buys and artifically inflated prices for profit. This is a breaking point for too big to fail. California and other states were not responsible.
It is possible the Fed money printing exercise ends with a collapse and a giant war.