The Next Big Crisis: State Bankruptcies

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Many say that the situation in Greece is a harbinger of what is coming to the United States. They are right. But first it will come to states like New York, California and Michigan, which are stretched way beyond their means and deeply in debt.

Until now, the problems in these states have been papered over by federal aid. Essentially, Washington has relieved these states (and the local governments they fund) of their constitutional obligations to balance their budgets by giving them welfare checks in the nick of time. Barack Obama now seeks to pass $50 billion in additional welfare to the states.

But, since these federal funds are not necessarily recurring — and the jobs and obligations they fund are — they simply enlarge each year’s deficit hole and enable the states to go more deeply into the red.

As these deficits mount — particularly if a newly elected Republican House and/or Senate refuse to fund them — bondholders will get more and more nervous. Eventually, they will realize that the less solvent states are bankrupt and will refuse to buy their debt. Eyes in Sacramento, Lansing and Albany will turn helplessly to Washington to guarantee their debt, just as Athens turns to Berlin.

Republicans, if they control either or both Houses, should stand firm and insist that these states sink or swim on their own. America’s taxpayers will not take kindly to having to bail out other states — or even their own — to pay for years of reckless spending. Americans will swarm to the GOP and will hail its stand.

The time is long passed when a local newspaper can generate sympathy — even from its own readers and the state’s own citizens — with a headline like “Ford to New York: Drop Dead.” Now, people in other states (and even in the affected state) would stand up and cheer should the Republicans take so strong a position.

There is currently no legal procedure for a state government to go bankrupt.

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  • Cuban Refugee

    Excellent article, and pertinent post by Nathan Bickel. There is a light at the end of the tunnel for my state of New Jersey with the Republican Chris Christie at the helm. Our new governor is putting a stop to the corrupt unions' gravy train. Christie's is taking N.J. from the brink of bankruptcy and making it whole. If only we had his fiscal twin in the Oval Office …

  • Cody Redbear

    It seems to me that we are heading into another Major Depression like that of the 1930's only and if the Government wishes to monetize its huge debt. There really is no other solution to this massive spending the Government has undertaken. The States will follow through by issuing worthless or near worthless Muni's. In effect we are all in bankruptcy. Will the pensioners cut back?, will the Unions cut back? what about State employees as to salary and benefits, will they cut back. The answer to all of these questions is a resounding NO.

  • Thunder

    UN -friggin' – BELIEVABLE!!!
    Barrrak Hussein stops all efforts to protect shores/stop oil damage……
    Who pays him for effing us up???? Un-bel-ie-vab-le
    Yo, treehuggers! You like his sabotage????

  • sflbib

    "As these deficits mount — particularly if a newly elected Republican House and/or Senate refuse to fund them — bondholders will get more and more nervous."

    Yes, and remember the fiscal crisis New York City faced about 25 years ago? There was a big debate over whether the federal government should back the city's bonds. In the end, it did, but somewhere along the line, it was revealed that THE KENNEDYS held some of the bonds. You can extrapolate from there what will happen today if some big political figures hold state bonds.

  • USMCSniper

    Want to know which states are in the worst financial condition? One telling indicator that might not immediately come to mind is where most of its citizens identify themselves as Democrats. The five states in the worst financial condition–Illinois, New York, Connecticut, California and New Jersey–are all among the bluest of the Democrat states. The three most fiscally fit states are Utah, Nebraska and Texas boast significant Republican majorities.

    • The Hammer

      Thank you. Great point. My democratic friends just don't get it however and believe this ponzi scheme can go on forever.

  • Kary

    It will be the ultimate in taxation without representation if states get ANY "bailout" money. For instance, why should the prudent people in Texas who do NOT have those outrageous pension plans or have NO pention plan at all, pay for pension plans the idiots in California knew weren't affordable when they voted for them, or voted for the people who allowed it to happen. Yeah there will be rioting in the streets if this happens.

  • USMCSniper

    There has been and will continue to be a China reduction in US debt holdings and no credit for US. The Chinese government clearly knows the game is nearly done, and is starting to pull back a large portion of its US investments towards home soil. With it’s economy out of control and headed for an implosion; they need to repatriate money to keep some semblance of order once the wheels come off in the US economy.

    The question is not if but when will China mass-dump US treasuries when they hit the wall? Some political pundits have spread this thought around in the past, pointing to China as the evil schemer in the east. In reality China will always be the ultimate pragmatists, and may see the money parked in the US as a nest egg that will be used to prime their system once the financial storm has blown over. With China focusing on saving their own skin, days of money loans or investments from China are coming to a close fast.

    • The Hammer

      Yes, this is a looming disaster no one is talking about. 13% of US federall bonds are held by China. A catastrophe in the making.

  • BOB