Momentum Builds For Big Muni Bailout

barneyfrank tbi

The NYT provides an update on the effort by cities and states to feed at the Washington trough.

To some extent the details are old. Since cities and states can’t print their way out of debt, they have to either slash services or borrow more to make up for tax revenue shortfalls. But spending cuts hurt children and the police and fire fighters, and the debt markets are closed or at least extensive. Big problems. Barney Frank’s solution is to provide some kind of backstop, or insurance — which carries with it the convenient talking about that the government may never have to actually pay it out (ha!).

But the real story here is not the details of the bailout but the fact that a ludicrous idea of a city and state bailout when it was first put forth (last October) is now pretty mainstream. Both Tim Geithner and Obama have made nods towards its inevitability. None of them have come out and used the “b” word, but it’s really a matter of how Washington can help California (and, to be fair, other states and cities) raise more funds, rather than if Washington helps them.

Meanwhile, one of the arguments that the states are making to collect federal funding is actually pretty amusing:

Also clamoring for help is a group of municipalities that purchased Lehman debt, which is now nearly worthless. Legislation authorizing the use of relief money to make these purchases was introduced by two California Democratic representatives, Jackie Speier and Anna Eshoo. If approved, this would be more like a bailout than a guarantee, because the federal government would be paying face value for debt that otherwise has little value.

The price tag on that proposal is around $1.6 billion. The argument promoted by the two congresswomen is that the Treasury and Fed allowed Lehman to fail, causing governmental bodies to lose money.

Ah, yes. The government abdicated its duty to bail out Lehman’s bondholders, therefore they should be repaid in full. We wonder if Reps. Speier and Eshoo feel the government must do the same to all of Lehman’s other bondholders.

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