The Cheerleading For State Bankruptcies And Municipal Defaults Is Downright Ghoulish

Texas Girl Cheerleader

This week the buzz was all about state bankruptcies, and the latest is that a bill to allow them wil be introduced as early as next month.

One weird thing is that no state has expressed any interest in having this obligation available to them, but what’s really odd is to see policymakers and pundits cheerlead the insolvency of the states.

Of course, since we’re all adults here, we can talk about the real motivation behind this cheerleading. First of all, the GOP wouldn’t mind seeing economic turmoil into the ru nup of 2012. And the second is that public sector unions (or maybe just workers in general?) are hated right now and there’s a great opportunity to exploit that (as we put it yesterday, states are the new banks).

Felix Salmon made a good argument yesterday that the existence of a state bankruptcy law would pretty much instantly shut some states out of the market, and would likely spill over. Remember, one of the best reasons for investing in munis is that they’re frequently loaded with all kinds of clauses guaranteeing their priority in terms of when they get paid.

What makes it all ghoulish is that states already have a mechanism for solving their budget woes: It’s called cutting spending or raising taxes. Illinois, which everyone loves to harp on, did that last week, when it raised taxes. California has been slashing aggressively, and the new Governor Jerry Brown seems intent to do that more. New Jersey has been cutting spending hard, and its governor has forced concessions from unionized workers.

If it became clear that states were at the end of the rope, and simply had no other choice, then that would be one thing. A state bankruptcy bill might offer some relief. But as long as they have options that work — and they do — such a bill would only hasten their demise for the political purpose stated above.

Click here to see 12 reasons Meredith Whitney is wrong about the crisis >

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.