Bankruptcy as a state option

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Bankruptcy sign photo

        The country is beginning a discussion about the unsustainable trajectory of federal expenditures and the reforms necessary to right the country's fiscal ship.
        Washington is not the only place with an overspending problem. We are starting to see attention being paid to the financial straits of state governments.
        New Jersey Gov. Chris Christie said that, for states, the "day of reckoning has arrived. This day of reckoning has convinced policy experts, political observers and some on Capitol Hill that federal legislation allowing states to file bankruptcy might be the only way to avoid a federal bailout of the most fiscally reckless states in the union. [Seattle PI, May 4]
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Dollar as Toilet Paper graphic

Myret Zaki photo

        The United States greenback has become the biggest speculative bubble in history and will soon go the way of the dinosaurs, warns Swiss financial journalist Myret Zaki.
        “The collapse of the American dollar… is inevitable. The world’s biggest economy is nothing but an illusion. To produce $14,000 billion of nation income, the United States has created over $50,000 billion of debt that costs it $4,000 billion in interest payments each year.”
        There can be little doubt about Myret Zaki’s opinion of the American dollar and economy, which she considers technically bankrupt, an opinion she backs up in her new book, La fin du dollar (The end of the dollar).
        Over the past few years, she has become one of Switzerland’s best known business journalists, with a book about the UBS debacle in the US and another about tax evasion. [Swiss Info, April 16]
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should not
be allowed
to file for

        Total state debt is estimated at more than $1 trillion, and that doesn't include another $3 trillion in unfunded liabilities from pensions and other obligations. We can afford neither a federal bailout of this sum nor the precedent it would set. But how about giving states the option of filing for bankruptcy, as municipalities can do via Chapter 9?
        University of Pennsylvania law professor David Skeel, a specialist in corporate finance and bankruptcy, thinks that's a good idea
        Local governments already have the power to go bankrupt, and the results to date have not been inspiring. For the most part it hasn't helped them address problems of overspending, red tape, federal mandates, and unfunded liabilities. [, April 12]
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Lawmakers Resist Bankruptcy for US States. Congress may not have the constitutional authority to allow states to seek bankruptcy relief. Under the US system of federalism, states are co-sovereigns. A state bankruptcy option may actually encourage states to borrow more money, knowing that they could later restructure their debt in bankruptcy. [CNBC, Feb. 15]

Polls: Voters oppose state bailouts and bankruptcy filings
A pair of polls are the bearers of bad news for state governments struggling with looming budget deficits, as a majority of voters oppose both a federal bailout of ailing states, and allowing states to file for bankruptcy. The polls, commissioned by Rasmussen Reports, indicate that the public does not want to extend major lifelines to states with serious financial problems.

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. [Reuters

Ten U.S. states, accounting for about one-third of the U.S. population, are insolvent. You will find the list of states below. . . . Technically, there is no legal process by which a state can file for bankruptcy. Chapter 9 of the Bankruptcy Code permits cities and municipalities to file for bankruptcy, but not states. One of the most famous municipalities to go bankrupt was Orange County, California, in 1994. Fifteen U.S. municipalities filed for bankruptcy in 2009 and 2010. [Wall Street Pit Jan. 19]

* VIDEO * - Larry Kudlow moderates debate on states’ bankruptcy and ‘breaking municipal unions’ [Youtube Jan. 17]

By Dick Morris & Eileen McGann

As Margaret Thatcher famously said, the problem with socialism is that sooner or later "you run out of other people's money." When the states come calling, the House must say, "No." More, it's time to amend the federal bankruptcy laws to create a procedure for state bankruptcies -- allowing states to abrogate their municipal-union contracts from the school-board level on up. [NY Post Jan. 17]

Newt Gingrich has proposed changing federal laws, so that states can go bankrupt. [Moneywatch Jan. 17]

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