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Should States be Allowed to File for Bankruptcy?--Skeel

The next big bailout issue in the U.S. is likely to be the question whether to provide rescue financing for states like California and Illinois that are running huge deficits.  I make an argument for adopting a bankruptcy chapter for states, similar to the provisions we already have for municipalities, in this little magazine article.  In my view, bankruptcy wouldn't be a perfect solution, but it is likely to be a lot better than the current alternatives (such as a federal rescue or simply watching California default).

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Comments ( 5 )

There are several interesting parallels to the fiscal problems facing several states and the response of the U.S federal authorities and the problems facing member states of the EU and the response of the ECB. Lucky for California (and the rest of us) that it is not a sovereign state for which formal bankruptcy is not considered an option.

Great article in The Weekly Standard Mr. Skeel. I live in CA so I am painfully aware of the budget/money problems here.
Though I hold my nose at the prospect, I agree that a state bankruptcy law would be better than having the Fed bail out a state. For one thing, to do so would not doubt increase our Federal debt and the Fed would undoubtedly print more money, further inflating our already nearly worthless dollar.
What's sad is that the reason a state or municipality gets into these problems is, at least in part, a direct result of voter choice. The elected representatives - the people's choice - made the decisions that led them into debt.
We will see how Jerry Brown, a democrat, working with the democrat dominated legislature does to rein in debt and keep us out of bankruptcy, but I'm afraid I don't hold out much hope. But if we eventually have to declare bankruptcy, the people who caused it, the majority of voters, are the ones least likely to suffer. Even if we all do - and I suspect it will affect us all in some way - no one, not the people or the politicians, will accept responsibility. So we're likely to end up in the same place again on down the road.

Interesting article. You should be aware of the work of Jurgen Von Hagen, U. of Bonn Economics (and a pastor and university VP too), who is working on EU country bankruptcy rules(as an academic).

I'm confused about the current situation, tho, so if you write more on this, please clarify. Can a state currently simply repudiate its bonds? Can it repudiate its union contracts? If so, what would bankruptcy rules add? Also, what happens if a state refuses to honor a debt, now? Can the union get a court judgement and then send the sheriff to seize state government automobiles and sell them?

It's hard to know what to think of bankrtupcy rules until one knows the background rules for debt collection. After all, the purpose of bankruptcy is to protect the debtor's assets from debt collection.

This is definitely an issue that no one is talking about, a pink elephant of sorts. I don't see bankruptcy as a long tern solution, but it may help a few of the more indebted states.

A longer term solution is being more money conscious, and not just as a state, but as people. If everyone works harder to manage their finances and then takes ownership of their states finances, then I see this as being the solution. Although it will take longer, this change will be more lasting.

I'm not so sure that bankruptcy is a solution for entities like states. Maybe, this should extend to municipalities as well.

I remember back in 94, Orange County in CA had declared bk after some failed investment strategy. Not because it didn't have the revenue from the tax base, but because someone got greedy (sound familiar) and thought they could outsmart the market.

I'm not one for more government intrusion, however, this is an area where they are handling public funds - our funds - for the benefit of their citizens. Maybe, it's time for better oversight, better reporting, and more austerity measures before allowing an entity to to essentially slough off it's obligations and waste our money.