Been some discussion of this on the TV news. We have some states that are pretty deep
underwater. They keep themselves running
by borrowing from banks and Gawd-knows-who.
Right now I believe the states are considered “sovereign risk”, which
means they will never go bankrupt and can always pay back the loan by raising
taxes. So it is perfectly legal to loan
states more money, all the money they want.
And if the state looks flaky, charge them a good stiff interest
rate.
Should there be a
state bankruptcy option, some deep under water states will take it, and the
banks will loose money big time. Which
ought to make the banks more wary lending to states that will never be able to
pay them back. Sucker banks in New
York loaned Puerto Rico $80
billion over the years. Puerto
Rico is never going to be able to pay that off, so they just got a
special act of Congress allowing them to declare bankruptcy. The sucker banks will have to kiss off $80
billion, which is enough to hurt even the big banks. Puerto Rico is going
to have to tighten its belt, because nobody in their right mind is going to
loan them a dime for many many years.
It is reasonable
for a state to borrow money for a long term capital project like new school
buildings, new bridges, and new flood control projects. It is not reasonable for a state to borrow
money for ordinary operating expenses such as paying state workers salaries or
pensions, plowing the roads, or fixing potholes. If states could declare bankruptcy the banks
would be more cautious lenders. States
that do declare bankruptcy will find that nobody will loan to them, which ought
to be incentive enough to avoid doing bankruptcy.
In short, allowing
states to declare bankruptcy will save tax payers money, save the banks money,
and cut down on “waste, fraud, and abuse” by the states.
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