lets discuss!
Apparently states can’t go bankrupt; it’s against federal law.
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lol, if they dont receive federal funds they will have to just violate the law i guess. they cant print their way out like the federal government. the only other avenue is to raise taxes, and cut govetnment benefits, i think their biggest cost is the pension.
What would be the chain of events if they did go bankrupt? Obviously borrowing costs skyrocket, and I suppose they’d have to slash spending leading to job loss while also increasing taxes. In other words total pandemonium.
Lot of talk in Canada about that right now, particularly for the energy reliant provinces. I don’t think the Feds will allow a province/state to declare. They’re offering loan guarantees, transfer payments and whatever else is necessary. The downside is the risk of the country itself losing their AAA rating. That’s the case in Canada due to provincial debt and the agencies knowing there will be a bailout.
That’s probably not a concern for the US, however. Although US budget deficit will likely exceed 18% of GDP this year, and total debt/GDP is now in excess of 100%. Doesn’t matter. The dollar is still the safe haven for the time being and they can basically print as much as they want with no immediate consequences. But eventually it will be time to pay the piper.
2 reasons:
(i) the federal bankruptcy code doesn’t allow states to declare bankruptcy, but Congress can change laws
(ii) harder to change would be the contracts clause of the US constitution
Article 1 - The Legislative Branch
Section 10 - Powers Prohibited of States
No State shall … pass any Law impairing the Obligation of Contracts
aint there a guy with an 8b muni portfolio up in here.
I’m in favor of it, obviously this requires a change in law. This has been discussed for some time and when you look across a lot of state finances as unfunded pensions experience escalating payouts you are going to increasingly have this discussion as the situation becomes untenable. You have NYC bringing this to the forefront but for most of these municipalities, including NYC this has been 20 years in the making as they borrowed against pensions and stakeholders and left themselves too precariously situated to handle disruption. This isn’t because of COVID, that merely impacted the timing, NYC for example has been openly unable to maintain the time bomb that is their infrastructure ultimately coming to a head with 2019’s $50B subway bill and that is not nearly the end of it. NY and NJ had been relying on SALT deductions that essentially allow them to dip from the federal tax pool to even stay afloat. It’s time to switch gears and stop propping up an unsustainable and irresponsible situation. After decades of waiving taxes on developers, taxes will have to go up.
The issue with say NY right now is if you prop them up it will never stop as CA, IL, PA and a host of others will be right behind them. Federal finances are not in a position to be bailing anybody out, much less states. We have had disaster relief but there is clearly a line that needs drawn.
Additionally, you have to remember who you’re bailing out here, you’re not really bailing out NY, NJ etc, who you’re bailing out is the bond holders that openly acknowledged the situation and plugged their nose and bought, this is a major moral hazard and I don’t see why tax payers need to be bailing out the state bond holders.
TL;DR: Let them fail, do targeted relief later as necessary to smooth the process.
Full agreement. But bond holder might argue that they invested with the law in mind. You can’t retroactively change the law that would be unfair. Ultimately they should raise taxes and cut costs. End the pension. Extend retirement. If states accept federal money, I think they should lose their power. I am big fan of centralized states. Why do we even vote for local officials. Just have trump appoint them. Lol
Mnuchin quote: I think this is somewhat reasonable. pay for coronavirus expenses. but to bailout ****ty pensions. nahh. let them cut the benefits. pensions shouldnt exist imo. lets not baby adults here.
He also insisted that while giving federal money to states to reimburse their coronavirus-related expenses was undoubtedly the “right thing to do,” the secretary said poorly managed states (like, say, Illinois) shouldn’t be rescued from the poor financial decisions they made before the crisis.
How is COVID related expenses defined? Does it include lost tax revenue?
Fair point. But technically speaking lost revenues is not an expense!
I don’t think so. Mnuchin is a hard ass, he realizes the hole the federal government is digging itself into. It’s why he ultimately gave less than the approved grants to the airlines at a 70/30 split and wouldn’t entertain bailing out the car rentals.
He’s clearly talking first order covid expenses, second order he feels states should have prepared for. The states pleaing for support right now were openly circling the drain long before someone Ozzy’d a bat. If you bail one it will literally never end with the train that will form of mismanaged states that borrowed against infrastructure maintenance to kick the liability down the road, borrowed against pensions, etc, Ultimately you’re just creating moral hazard and supporting bond holders.
Changing topics, I’m surprised this directive Cuomo was unaware of that put covid patients back into nursing homes is not getting more traction. Well, surprised is probably the wrong word.
its the bond holders that are getting bailed out. imo just bankrupt the city. muni bond holders have avoided federal taxes. let that be their punishment. wipe it slate clean for the states. states can restart all over and follow a zero deficit budget either through higher taxes or massive layoffs.
anyways tehre is an argument why states should be bailed out. this isnt europe where we’d be cool with brexit. if you decide to leave the federal government. prepare to go to war. because is no leaving the freedom train alive.
as to the bondholders, while bankruptcy is unlikely, states defaulting on debt is less unlikely and sort of happened once ( The State That Went Bust (Arkansas 1933) ), which doesn’t seem to have been fully resolved in terms of the law (the state and the bondholders cut a deal)
lol what was the deal? like i udnerstand corporate debt. you get a restructuring. or you get a firesale and they give you ur money. but what happens when its a muni? should the bodnholders get control of city. hahaha
It’s just a markdown right, for states you’d have to look at the Euro playbook since they can’t print their own money. Probably a negotiation with creditors, take a principal markdown, restructure payment timeline and interest rates and then they offer spending cuts and austerity. Both reach an agreement, life goes forward. No reason for Federal tax payers to be involved or to push this onto an already strained Federal balance sheet.
It cracked me up hearing Cuomo give his big speech on states rights and state control then turn around a week later and try to make this a Federal issue when the bill came like a kid yelling at his parents about how he’s an adult then asking for money for rent. Press has been real quiet about how all these deaths came out of nursing homes (like half?) and Cuomo and co were shipping covid patients there.
I think it’s more like 25%, not half of deaths are nursing home patients (that includes nursing home patients that died in the hospital, for what it’s worth). There’s certainly a lot of monday morning quarterbacking to be done here, but I think the idea was to try to reserve as much hospital capacity as possible, and hoping that the nursing home would be able to take care of COVID patients effectively by isolating them, etc.
Arkansas 1933 is discussed in this cleveland Fed working paper (there’s a pdf to click on once you get to the page)
It was a restucturing.
state bondholders — the senior secured creditors — lost the least amount of money.
They received a portion of their coupons in cash in the first five years, and for the difference,
they received new coupon-paying bonds.
District bondholders — the junior secured creditors — lost a sizeable chunk.
They exchanged their bonds for state bonds of the same face value but with much lower coupons…
Unsecured creditors lost the most.
I mean even Cuomo was highlighting the risk of this getting into nursing homes. I don’t think its really Monday morning quarterbacking to say you should lock down the facilities housing all of the super high risk old people at all costs. The guy basically shut down the economy but left the fox into the hen house while pointing at the death charts as his rationale.
Again, I’m assuming there was rationale behind this decision. Perhaps he thought hospitals would get overwhelmed, perhaps he thought nursing homes might be able to better care of these patients. I think it’s safe to assume he didn’t put that policy into effect because he thought more people would die, although I’m sure CW will show up with that conspiracy theory any day now.