Πέμπτη, 4 Απριλίου 2013

What Stockton's Bankruptcy Means for the Rest of Us


What happens when the government goes bankrupt? This question is
one that sounds like a hypothetical exercise in a law school
classroom from just a few years ago, where it might have been met
with some derision. But today, it is a realistic and terrifying
inquiry that many who have financial relationships with governments
in America will need to make, and it will be answered with the
gnashing of teeth.


Earlier this week, a federal judge accepted
the bankruptcy petition of Stockton, Calif., a city of about
300,000 residents northeast of San Francisco, over the objections
of those who had loaned money to the city. The lenders -- called
bondholders -- and their insurers saw this coming when the city
stopped paying interest on their loans -- called bonds. In this
connection, a bond is a loan made to a municipality, which pays the
lender tax-free interest and returns the principal when it is due.
Institutional lenders usually obtain insurance, which guarantees
the repayment but puts the insurance carrier on the hook.


The due dates of many of these bonds have come and gone, and the
bondholders and their insurers want Stockton to repay the loans.
But the city lacks the money with which to make the repayments. It
borrowed money from the bondholders during good financial times,
when its real estate-generated tax receipts were greater than
today, and when its advisers predicted no foreseeable end to the
flow of cash to the city. The expected flow of that cash, the
natural inclination of those in government to want to give away
other people's money, and the self-serving manipulations of those
in power who rewarded their friends and themselves with rich
pensions combined to cause the city to make generous pension
commitments to its employees.


It is politically easier to offer generous pension payments to
municipal employees in the future than it is to raise their
salaries today. The promise to pay a pension to qualifying retirees
upon their entry into the retirement system, just like the promise
to repay bondholders the money they loaned, is a legally
enforceable contract.


So, confronted with an obligation to repay more than $200
million in loans to bondholders and more than $900 million to the
California pension system for its current and former employees, and
confounded by a serious reduction in real estate tax revenue, so
serious that Stockton cannot afford to pay either the bondholders
or the pension system, let alone both, the city that over-borrowed
and over-spent and over-promised has sought the protection of a
federal bankruptcy court.


Bankruptcy in America is a strange bird. It permits debtors to
be relieved of their financial obligations by paying less, often
far less, than they owe. It compels creditors to accept less, often
far less, than they are due. It is generally an orderly and
mechanical process presided over by a neutral judge without a jury.
Its goal is to get the creditors something, leave the debtors with
something, and let all parties go home in peace and resume their
livelihoods.


But it rarely happens to the government. That's because the
government, which has no competition, creates no wealth, doesn't
produce anything of value and needn't attract clients, has a
monopoly on the use of force with which it can extract what it
needs to pay for its mistakes in the form of higher taxes. These
extractions, of course, are not voluntary transactions as when you
buy gas for your car or food for your table. They are mafia-style
transactions: Pay us more, or else.


But there must be a limit even to the Stockton taxpayers'
willingness to part with their wealth in the form of taxes, hence
the filing for bankruptcy. The Stockton case presents a rare
opportunity for a federal judge to interfere with the contractual
obligations of a municipal government and actually modify or even
nullify them.


It also presents a confluence of a culture in California of high
taxes and generous -- often non-contributory -- pensions for even
short-term government employees and a federal system that when it
faces a shortfall simply goes to its banker -- the Federal Reserve
-- and asks it to print more cash. Stockton cannot legally print
cash the way the Fed can.


How does this affect the rest of us? Currently, state and local
governments owe about $4 trillion in pension benefits that they do
not have to current and former employees, and they know they cannot
politically acquire it by raising taxes. This affects all 50
states. So the odds are that the states and the similarly situated
Stocktons in America will go to the Obama administration and ask
for free cash. And the president will no doubt find it for them.
That "found" cash will be borrowed from the Federal Reserve and,
like all of the federal government's debts to the Fed, will never
be repaid. But countless generations of American taxpayers will
make enormous and endless interest payments on it.


Does that sound too apocalyptic for you? Well, consider this:
The federal government is still paying interest on the $30 billion
it borrowed to wage World War I nearly 100 years ago. So, to the
feds, mortgaging your children's future to save the Stocktons of
the country from the consequences of their own profligate ways is a
no-brainer.


Should Americans yet unborn pay for all of this? Is this what
you elected the government to do? What will it take to keep the
government within the confines of the Constitution?

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