Sunday, March 7, 2010

California and the B Word

And no I don't mean one of those cuss words, recently outlawed in the Golden state, I mean bankruptcy. I have heard the idea of bankruptcy as a way to get our dysfunctional legislature to deal with the gaping deficit the state faces. As best I can tell, a state, unlike a municipality, cannot declare bankruptcy. It can certainly fail to pay its obligations, but it can't seek court protection from creditors and work out a settlement. This is because each of the states have sovereignty under our federalist constitution. I just want to make sure that we don't believe that bankruptcy is an option that will force the state to cut spending, the way it has worked in some municipalities.

The inability to declare bankruptcy doesn't mean the state can't be bankrupt in the popular sense that it has no means to pay its obligations. Steven Greenhut has an invaluable article on the current state of the state's finances that points out that we are probably already there. He points out that the current union dominated legislature is not going to solve this mess on its own.

As I pointed out earlier, maybe some reasonable solutions could be put into place. Best to have them at the ready if fate offers us a chance to push them forward.

I agree with Greenhut that the state is headed for a financial melt down, the debt ratios are unsustainable, and the eventual tightening of monetary policy will have a downward spiral effect. As interest rates rise, the state deficit will increase, then the bond raters will downgrade the state's credit rating. This will lead to increased costs for short term borrowing, eventually to prohibitive rates. The end result will be an obvious de facto bankruptcy. Workers will be furloughed, and state bonds will go unpaid. Beyond that, I can't really predict the future, but I pray to God it happens near November, so we have a chance to dislodge all those legislators who believe they represent the SEIU and not the voters of the state.

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