(Please start with Part I: Cutting off the Nose from Wednesday)

Having laid out the rationale for state-level municipal bankruptcy, it is clear that as with any bankruptcy there are some pluses and minuses involved. In the case of legitimate insolvency, one might even argue that this would be the best possible resolution. For a number of reasons, the generic "one" does not include me.

The flaws inherent in this proposal are numerous. I will focus on three: constitutionality, necessity, and political buck-passing.

1. Professor Skeel may know quite a bit about the bankruptcy code – I lack the knowledge necessary to dispute that, so let's assume he does – but he appears to be badly misinformed about the basics of federalism and how local and state governments differ. Simply put, the analogy between state and municipal governments is so inappropriate that I have to question the intellectual honesty behind the decision to use it.

City, county, and other municipal governments can file bankruptcy under Chapter 9. Skeel and the GOP feel like this means states can do the same. But local governments are corporations – municipal corporations, specifically – chartered by state governments. From the perspective of the bankruptcy code, General Motors and Detroit, Michigan are remarkably similar (although with obvious key differences). A local government can go tits-up (financially) because local governments have no inherent power except that which is granted to them by their state.

That is not true of states. Not even a little. State governments do have inherent powers independent of the national government – I thought conservatives were big on this idea? I guess "states' rights" is only a relevant argument when black people are asking to vote. Anyway, our federal system is based entirely on the idea that state governments relinquish certain powers to the Federal government for the common defense and welfare. That it is constitutional for the Federal government to administer the bankruptcy of one of its own building blocks is not at all clear. And remember we're talking about one or a few states. Not every state. For the Federal courts to administer a debt reorganization plan to one but not all states would be a federal version of what is called "Special Legislation" at the state level.

The debts of individual states at the founding were assumed by the Federal government (under the Residence Act of 1790) because Congress recognized that being a Republic it was directly contrary to the national interest for any individual state to collapse financially. You'd think people who quote the founders so often would be familiar with this argument. Many of the basic criticisms of bankruptcy also apply here, particularly the moral hazard (states could spend like drunken sailors and then simply file bankruptcy when the money runs out) and the petitioner would no longer be able to secure credit from the financial system (which in practice would probably result in Congress providing billions upon billions of dollars in Debtor in Possession financing).

2. In what world is bankruptcy the only or best option here? States, no matter their financial distress, do not lose the ability to raise revenue. While the previous post's comment thread has already touched on BABs (which, of course, Republicans want to chop as well because doing so will help force states into bankruptcy) there is an even more basic option: grow some fucking political balls and raise taxes. One need not believe that raising taxes is either good or desirable, but if this situation is so dire and such a crisis that we're talking about state governments becoming insolvent and filing for bankruptcy it would seem that every option should be on the table. Time for some of those "tough choices" they're always telling us about when they're cutting spending.

There's nothing "necessary" about what is being proposed here. It is simply a scheme to:
A) Legalize state-level bankruptcy
B) Restrict states' ability to raise revenue through bond sales
C) Cut off the flow of Federal funds (the GOP presuming it can continue to control Congress)
D) Force states into bankruptcy court where the judges will let them void their pension plans

Which brings us to the final point.

3) What is filing bankruptcy from the state perspective other than political cover? It's merely a way for gutless state politicians to say "The bankruptcy court made us sell all the state parks" or "Those bastards in Washington cut your pensions, not us." Again, if all of these steps are so gosh-darn necessary then get in front of the camera and tell the state's voters "This is what we need to do." Attempting to resolve problems with budgets, a fundamental political issue, through the legal system and the Federal one at that is nothing worse than a severe case of political cowardice.

Understanding that a lot of bad things could happen in a bankruptcy process that we'd be making up on the fly – courts could liquidate a state's public assets or, if the law was not sufficiently narrow, force a state government to institute revenue increases or spending cuts – what member of Congress in his or her right mind would support this? Why, Darrell Issa and Devin Nunes from California sure would! You have to admire the amount of political courage, or perhaps just blind hatred and ideological fervor, required for Congressmen to pitch a plan that will end up demonstrably screwing their own constituents just so the GOP can score points against public sector unions. I mean, that's amazing. What balls! Republicans in Congress are actually willing to enact a plan to drive their own states into bankruptcy, force austerity on state governments, and severely undercut the state and local services on which their own constituents depend…just to say "Hey, fuck you, unions!"

Of course the obvious obstacle to enacting any of these changes is the White House. Why would the President sign such a bill? If that seems implausible I would suggest you pay more attention to what goes on at 1600 Pennsylvania Ave. these days. Why wouldn't BO love to sign something that Mitch McConnell insists is a great idea? How bipartisany! How fiscally responsible! Won't voters love it if he bucks his own party? Hell, maybe his own party will support it in Congress as well. Perhaps they'll trade it for a $3 billion package of unemployment benefit extensions. Or maybe there will be a different president soon and the GOP won't perceive him or her as an obstacle but as an ally.
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As for how the Supreme Court could possibly find such a scheme constitutional, I almost hope this all happens just so we can marvel at the intellectual contortions necessary for noted State Power advocates Scalia, Alito, Roberts, and Thomas to explain why they think a Federal bankruptcy court should start giving orders to the State Capitol and governor's mansion.

Sorry to be such a downer at Christmas time, but this issue is less of a "what if" and more of a matter of time as Stimulus money runs out and state governments confront budget crises even more severe in 2011 and 2012 than what we've already seen in 2009 and 2010. Buckle up, it's gonna be…actually, don't bother. Buckling up helps in a fender-bender but when you ram your car into a concrete wall at 110 mph, frankly it doesn't matter.

25 thoughts on “PART II: TO SPITE THE FACE”

  • LOVE this post. Keep doing the Lord's work.

    But the "Bipartisan-y" analysis in the penultimate paragraph is a little weak.

    I would say that Obama and the Congressmen whose states aren't facing dire budgets have incentives that lean toward state bankruptcy. The other alternatives from a federal standpoint are a specific bailout of individual states or programs like BABs that help all the states. Republicans have already shown that they have the muscle to keep BAB-like programs down, and a specific bailout would get tremendous media coverage and TARP levels of outrage from the usual suspects.

    On the other side of the scale, state bankruptcy would be so wonky and technical that it would pass most of the public by. People actually paying attention would scream bloody murder, but we scream bloody murder all the time and nothing happens.

    And as you point out, the incentives for the Congressmen from states facing dire budgets are for bankruptcy.

  • Ben: "On the other side of the scale, state bankruptcy would be so wonky and technical that it would pass most of the public by."

    That's what freezes my blood. So many of the insidious changes of the past 10 years happened because they were hard for the public to track. (Not to mention the ones that the public got wrong or were suckered into accepting)

    We're heading toward a new Middle Ages, this one with iPads. The forces of greed make up a headless monster hellbent on destroying the polity and the planet. Somehow it's hard not to care.

  • Looks like you've described another aspect of the Compound Failure (AKA Charlie Foxtrot), the Randroids seem likely to pioneer an alternate route to economic oblivion, as effective, but faster acting than Bolshevism. With luck, it might force a split between conservatism and the desires of amoral billionaires. With a lot of luck, evangelicals might become aware of how compatible their social Darwinism is to the beliefs of Anton LaVey.

  • Great post(s), Ed. The comment about the political nihilism being advanced by Republicans is right on the money. At every opportunity, the modern GOP demonstrates how little they care for anything or anyone other than their own warped ideology.

  • Questions: don't some states have other nations as creditors? Wouldn't state bankruptcies have international repercussions?

    Also: who stands to gain from any fire sale? Personal wealth, I mean. I know some corporations large and small will suffer if CA flies the "We're Not Paying You" flag, but I don't know who benefits.

  • displaced Capitalist says:

    I hope that the federal government sells Yosemite national park. I'm so sick of seeing the half-dome and El Capitan standing with so many rich granite resources untapped! Those mountains should be reduced to rubble and sold to China!

    Yeah! That's capitalism at work, baby!!

  • This may end up being the issue that puts the country into a final tailspin. You could easily write a book on the socio-political ramifications of this interstate game of chicken because of what it tangentially reveals about our larger national economic problems. Where to begin? No matter how things play out, the last and final source of economically supportive money in this country is now the Federal Reserve. Even if privatization fears are realized, the money that Wall Street and the Hedgies will use to buy state assets will come from the Federal Reserve. Where does the money from the Federal Reserve come from? It comes from some GS-14 sitting in front of a PC terminal typing 0s into an account (His keyboard may even have a special multi-zero button to make such virtual money printing easier). Right now, Bernanke has stated that the Reserve will be buying 600 billion in Treasuries to provide additional stimulus in the form of keeping interest rates low for inter-bank lending in order to stem the supposed onslaught of deflation. This convoluted money lending practice will ultimately channel more liquidity to newly formed banks like Goldman Sachs. Sachs will then, in turn, use that excess liquidity to continue financing their work in emerging markets. (Anybody who thinks that some grease ball in NY is going to give two shits about doing his sacred national duty of reinforcing state financials by buying Moody's downgraded state or municipal bonds needs to get a clue.) By mid Summer of next year, when it has become all too clear that international monied interests have diverted another 600 bills overseas, our domestic political situation will hit final boil. At that time, Bernanke will say it worked because deflation was averted. What he won't tell you is that deflation was averted because of higher prices in Brent crude which may, in six months, reach about $110 unless 1.5 billion Chinese suddenly up and disappear. Also, by that point, the dollar will start to plummet to historically low levels and inflation will hit this country about as hard as anyone can imagine. That will have the unintended consequence of suddenly making domestic debt a whole lot cheaper to finance and manage. And, all of the sudden, because money is so darn cheap, increasing taxes such as sales tax will suddenly not be so painful for anyone who still has the will or stomach to buy anything. At this point, it's all about timing. When will inflation hit? When will the price of oil become unmanageable by OPEC? When will foreign interests lose their capacity to buy our treasury bonds because of our untenable political situation? How long do states and municipalities have before massive layoffs become their only fiscal option? Basically, when our shitty domestic account balances combined with our partisan squabbling finally collide with the absolute physics of global market demands, the US will enter completely unknown waters from a social contract standpoint. When the house starts burning down, the argument between the kids over who gets the rest of grandma's pie will come to a very sudden end. At that point, it'll be every man for himself. It will be an ugly time in American history. The only thing rational people can do now is prepare for it and figure out how to rebuild when it passes. I would suggest taking one item into consideration for the long term (5-10 ten years out). When the shit hits the fan here, and the likes of Goldman Sachs have successfully secured our money overseas, as things finally settle here, these bastards will try to repatriate those assets back here in the form of loans to us, to help us rebuild our local and state governments. They will essentially try to loan our money to us. When that happens, it is at that point that Americans must exert the one thing that no one can take from them and that is their right to sovereignty. We've basically already given up that right from a financial standpoint. The one great thing about this final economic collapse will be that it will afford us the opportunity to take our sovereignty back because such a collapse will free us from our debt burdens. I hope that we don't fuck it up.

  • @Da Moose

    Thank you for your post.

    I read it twice. Please have mercy on old guys like me and bang some white space in there once and awhile on those longer ones.

    Ho Ho Ho as appropriate.


  • bb. 'preciate it. Call it the Great American Reset: Capitalism's Greatest Love Story.

    Seriously considering starting my own thing here along the lines of Ed, without advertisements and such. Don't worry. There'll always be room for whitey in the equation.

  • But seeing as how most states are broke, how exactly will this work? When California is singled out, won't someone in power look like a hypocrite for not saying "too big to fail"?

  • # Turok Says:
    December 24th, 2010 at 8:28 pm

    "But seeing as how most states are broke, how exactly will this work? When California is singled out, won't someone in power look like a hypocrite for not saying "too big to fail"?"

    Looking like a hypocrite hasn't stopped anybody before.

  • Hey, look, the baby's going into the bathwater!
    And when the RepubliConfederates are holding the child, nothing good can come of that…

  • displaced Capitalist: El Capitan and Half Dome are leeches off The Producer Class. If they cannot pay for their own way, we should find alternative arrangements for their contents.

  • The state of Indiana went bankrupt (de facto) in the 19th century as a result of public works projects . Bond holders took a 50% haircut. The second Indiana State constitution was partly caused by the financial problems enabled by the original constitution.

    Advocating for state constitutional crises isn't a good idea.

  • I still have burnt in my mind the video Ed posted earlier of that fat tub of guts gleefully predicting how they were "going to shut the government down". Like Ed, I can handle a situ like Holy Crap! We've gone Greek! Now we really do have to make some ugly choices, and we really don't want to because we understand that this is going to hurt people.
    It's the gleeful, smirking, oh I can hardly wait to do this, behaviour that gets to me.

  • Once again I'm late to the game but preserving the commonwealth is the obligation of the individual state governments. Our short-sighted zeal over tax cuts will eventually make states much less likely to attract talent and compete not only nationally but internationally.

    I was born and raised in California. For decades, it was ground zero for technological innovation based, largely, on the lifestyle it offered. It had top schools and universities, world class parks, museums, and cultural offerings, and an infrastructure that was the envy of the world. In my youth, Post Proposition 13, I watched the public schools disintegrate, the formerly free University of California tuitions rival those of elite East Coast private schools, and watch the roads, bridges and ports fall into disrepair.

    The few bucks in our pockets that go to by more useless Chinese electronics and unstable investment portfolios are actually, despite popular right wing thought, much better spent by state governments on maintaining the very services that attract not only labor but the business that always seeks it out.

    The GOP thinks its about to win a victory in the privatisation of state resources but what they'll find is that business will flee to the more liberal, and solvent states that actually make business possible. California, with its monumental failings, will start to see its primary resource; water, literally dry up and its viability as the fifth largest economy in the world slowly evaporate while the inland imbreds cheer until their taps run dry.

    There is a reason why so many educated people have fled California in the last 20 years… the formerly great state has fallen into an ungovernable mess.

  • Ed, thank you for posting this fantastic two-part series. It has been absolutely fascinating and thought-provoking.

    You really need to write a book. Screw academia; get yourself out there as a writer and lecturer.

  • I'll never understand how conservatives fail to understand that destroying unions and the middle class sucks money out of the economy and, ultimately, weakens the economy. There is a lot I don't like about Wal-Mart. But, it is America's greatest business, and it isn't built by the rich: it's built by the unwashed masses. I buy as many loaves of bread as Bill Gates does. Any business that relies on mass amounts of consumers relies on the middle class, and it is completely stupid in an economic sense to bite the hand that feeds.

    Henry Ford understood that his workers were also consumers. Conservatives today destroy consumers. Be careful what you wish for, conservatives.

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