On Today's Menu: US Federal & State Default

♠ Posted by Emmanuel in at 2/01/2011 12:01:00 AM
Simply put, Americans have money management issues. By any conventional accounting standard, the US is bankrupt. Democrats are generally reluctant to reduce benefits that cost a lot but would probably result in Main Street USA looking like downtown Cairo if removed. Meanwhile, Republicans' understanding of fixing America's hellish fiscal mess involves rejecting any sort of tax rises--a logic which helped bring on its current financial morass in the first place. Mix these folks up willy-nilly in the American political system and you have a stalemate whose compromise is the best of worst worlds: No benefit cuts to appease Democrats + no tax increases to appease Republicans = further pauperization of what I call Paramount Leader Hu Jintao's subprime North American real estate.

However, if life gives you lemons, you might as well make lemonade. (As an aside, they always serve water with slices of lemon in upscale Hong Kong restaurants and hotels.) So, in the land of the free spender, the Republican party is behind two potentially risky strategems at the national and state levels. Let's begin with the former. Current Speaker John Boehner (R-Ohio) is threatening to waylay efforts to increase the congressionally approved debt ceiling which the US is shortly going to hit of an astronomic, almost unfathomable $14.3 trillion. Aside from stopping payment to federal agencies, hitting this limit would also mean cutting off debt service. That is, AAA-rated American sovereign issues, AKA Treasuries, would default. While I for one would be most interested in seeing what happen if this is allowed to come pass, it's more likely that Boehner will tie Republican approval of lifting the debt ceiling to pet issues--not all of which necessarily deal with budgetary concerns. From Fox News, appropriately enough here:
The United States will not default on its obligations, but must reduce spending at the same time it raises its debt limit, House Speaker John Boehner said Sunday. Suggesting that lawmakers are willing to uncouple the debt ceiling from the spending debate so that the U.S. doesn't default on its loans, Boehner said the Republican-led House will demand that an increase in the debt limit is met with changes to the budget process so that Washington's spending spree "never happens again."

"If the president is going to ask us to increase the debt limit, then he's going to have to be willing to cut up the credit cards," he said. "I think our team has been listening to the American people. They want to us reduce spending, and there is no limit to the amount of spending we're willing to cut." But Boehner said suggestions that the U.S. go into default are a non-starter. "That would be a financial disaster not only for our country, but for the worldwide economy," he said. "You can't create jobs if you default on the federal debt."
So same old, same old there I guess. However, something else House Republicans are cooking up appears ever-so-slightly more promising: the introduction of state defaults. It is no big secret that US states are running in the red nearly across the board--and with large doses of red ink to boot. With even Texas falling into hard times, the idea being bandied about is that states ought to be allowed to default. Now the prospect of state default may is not particularly enticing to state governments as it is to national politicians (I wonder why). With $100 billion more in red ink projected to be run this year by the fifty, it's no laughing matter...
Senate Republican leaders said on Tuesday they were considering introducing legislation to allow financially stressed U.S. states to declare bankruptcy, even though the No. 2 Republican in the House of Representatives has rebuffed the idea. "We're exploring that as a responsible option," Senator John Cornyn, who sits on both the Budget and Finance committees, told reporters.

Some Republicans have embraced the bankruptcy option, which would allow states to sort out finances and renegotiate contracts with public employee unions, as an alternative to sending in federal aid. Pension obligations to state workers including teachers and law enforcement personnel pose a major burden on many states.

But analysts -- and states themselves -- are concerned that opening up a bankruptcy option would spook the buyers of state debt, driving up interest rates and making borrowing more expensive.

Washington Governor Chris Gregoire and Nebraska Governor Dave Heineman said in a joint statement on Tuesday that states would not use bankruptcy as a budget solution. "The mere existence of a law allowing states to declare bankruptcy only serves to increase interest rates, raise the costs of state government and create more volatility in financial markets," they said.
I too like the idea of sending states to the poorhouse. Like at the federal level, it would be good for them to have a taste of what's coming. The endgame is most certainly unpleasant for this profligate nation and its states, so it's better to have it come sooner than later. As the saying goes, the bigger they are the harder they fall--so it's better for them to collapse while being monstrously indebted instead of being colossally indebted.

Still, it's doubtful anything will be done along these lines. Aside from having money management issues, modern-day Americans simply don't have big enough balls.