The Fallacy of ‘Bailing Out’ U.S. Cities and States

I want to revisit something banking analyst Meredith Whitney said this week on CNBC about the huge financial insolvency problems facing many U.S. states.  She said, “You have to look at the states and the risk that the states pose, because the crisis with the states will result in an attempt at least for the third near-trillion-dollar bailout.” I feel there is no way Whitney reveals this possible $1,000 billion boondoggle unless she has some inside information or insight.  This is a lose-lose proposition.  If a massive bailout is done, it will further bury the dollar.  If it is not done, there will be massive layoffs at the state level, and the economy will probably plunge.  No bailout is the route that needs to be taken (no matter how painful) to get out of control states to rein in their crazy spending.  I fear the bailout course will be taken instead.  Either way, the effects on the country and your money will be profound.

Rick Ackerman from the website and newsletter called “Ricks Picks” wrote a piece about why the cities and states should not get federal help.   Ackerman has been writing on his popular site for more than ten years.  He has a dozen years experience as a professional trader and has a track record of making correct calls on the market.  I feel his call here is spot on.  Please read this excellent article below (published August 27, 2010) that defines the moral hazard of bailing out insolvent states.  –Greg Hunter–

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By Rick Ackerman

Guest Writer for Greg Hunter’s USAWatchdog.com 

Amazing how far a reallystupid idea can travel. Warren Buffett helped spread and legitimize one a couple of months ago, and now the Wall Street Journalhas pitched in on the same topic with an op-ed piece written by one Eden Martin, a lawyer and Chicago muckety-muck.  Here is what Mr. Martin wrote:  “The next big issue on the national political horizon may be whether the federal government should bail out the many budget-strapped states and municipalities across the country, especially their overly generous and badly underfunded pension plans.”  And here’s Mr. Buffett on the same topic, testifying before Congress in June on the role the credit rating agencies played in nearly bringing the banking system down: “I mean, if the federal government will step in to help [states and major municipalities], they’re Triple-A. If the federal government won’t step in to help them, who knows what they are.” Buffett himself should know the answer to the question he has implicitly raised, since, no matter who is doing the bailing out, or what is used to pay for it, we – and not some entity called “the Government” — will all pay heavily for it in one way or another.

We’ll explain in a moment. But first, let us be clear that we are not holding our breath waiting for the Journal’s editors to provide responsible counterpoint to all of this bailout claptrap. Unfortunately, the business community’s newspaper of record has always played an aggressive role in telling its readers not what is, but what they presumably want to hear. How else to explain why the Journal would continue to devote hundreds of column inches lately to the possibility that the economy just might be facing a double-dip recession? In plain fact, and as any of the paper’s two million readers could attest, the nation’s economy never even emerged from the first Mindanao-deep dip (except in Washington, D.C. and Georgetown, but that’s another matter).

As to Eden Martin’s plea for help on behalf of his beloved Illinois, how on earth can the federal government afford to bail out the states and municipalities if they themselves cannot extract from their own taxpayers the sums necessary to pay their bills and future obligations ? The idea that the U.S. Government can somehow afford things for us that we cannot ourselves afford is absurd on the face of it.  Here is the unspoken truth behind all of the talk: Whenever anyone proposes a federal bailout of a bank, or a pension fund, or a city, or a state these days, he is implicitly suggesting that the bailout be accomplished not with real money, but with those magical dollars that the U.S. is able to conjure up in virtually unlimited quantities. At this point, however, two years into the Great Recession, and having observed a so-far multi-trillion dollar bailout effort fall flat on its face, the thoughtful observer might be tempted to think only a few benighted Keynesians still believe that creating money out of thin air – which is to say, borrowing it against future production – can cure an ailing economy.

Economically speaking, nothing could be more absurd than the idea that the federal government can somehow “rescue” the cities and states. And heaven help us if they should do the unthinkable and try it with real money – i.e., hard dollars raised by taxation – for then we will discover in an instant how broke we really are. It will be an epiphany for many who have remained skeptical that the Social Security system is indeed headed for bankruptcy, or that the unfunded liabilities of all levels of government do in fact tally into the hundreds of trillions of dollars. Alternatively, if “The Government” should actually attempt to bail out the cities and states with printing-press money, as they well may, we’ll let the Keynesians (those unmitigated, leftist quacks!), Buffett, and the Wall Street Journalmake fools of themselves trying to explain how such a featherbrained scheme can possibly put the economy back on track.  For if they truly believe that open-ended federal bailouts hold the key to recovery, then let the Guvmint bail all of us out by –say, by Thanksgiving — mailing out million-dollar checks to each and every household in America. Surely that would be cheaper than taking on all of the liabilities — past, present and future – of the cities and states?

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Rick Ackerman gave USAWatchdog.com permission to reprint this article.  I’ve been following Ackerman for years, and I feel he lives up to his slogan which is “Phenomenally accurate forecasts for stocks and commodities.”  To visit the home page of “Ricks Picks” (click here.) To learn more about Rick Ackerman (click here for his bio.)

Comments
  1. MarkM

    Hey Greg,

    The whole idea about bailouts for cities and states is juvenile. It must be a sureal joke; but it is not.

    Here’s the montra again:
    Macroeconomics requires eigth grade level math skills. This is not difficult. Economics is not rocket science.

    Rick wrote:
    “For if they truly believe that open-ended federal bailouts hold the key to recovery, then let the Guvmint bail all of us out by –say, by Thanksgiving — mailing out million-dollar checks to each and every household in America. Surely that would be cheaper than taking on all of the liabilities — past, present and future – of the cities and states?”

    Giving the citizens a million dollars would be better for the economy than bailing out Union Fat Cats and their crony politicians. No corruption and voter intimidation that way.

    Gubmint workers are now royalty while taxpaying citizens are serfs.

    markm

    • Greg

      MarkM,
      Thanks for commenting.
      Greg

  2. Bob

    Bush tax cuts will not be voted on. Taxes for everyone will go up. States will get some help and some inflation is going to happen. My dad wage in 1950 was 50 cents a hr. When I retired at the same job in 2007 my wage was about 40 bucks hr. with benefits. Old money and benefits have always been payed for with inflation if you don’t plan on inflation you will be on the street with holes in your shoes. I maybe wrong about the Bush tax cuts but it’s a lie that the rich can bail out the country. They said this back in 70s are 80s and the numbers didn’t add up. Part of retiring is living without buy anything , having a little place paid off and hope that home taxes don’t run you out. The health care is the killer so stay healthy an grow good food. PEACE

    • Greg

      Bob,
      Words of wisdom. Thank you.
      Greg

  3. BRIAN

    Hey I know!! Why dont we just ask Lindsey Lohan or Mel Gibson what to do?!!!!! The money channel is a joke, and none of our politicians saw this collapse coming. Why are we still allowing these people to run our lives into the ground?????? Come on November!!!!

    • Greg

      Brian,
      The November elections will help slow the fall, but will not stop the crash that is coming. Thank you man!!
      Greg

  4. UncleJoe

    “For if they truly believe that open-ended federal bailouts hold the key to recovery, then let the Guvmint bail all of us out by –say, by Thanksgiving — mailing out million-dollar checks to each and every household in America. Surely that would be cheaper than taking on all of the liabilities — past, present and future – of the cities and states?”

    I would refine this just a bit. Mail that check to every SOCIAL SECURITY NUMBER in the nation and make it 2 million. That puts it in the hands of the CITIZENS who would surely put it into the economy, unlike the banks that are sitting on it in preparation of the collapse.
    If you’re over 55, you must retire after receiving that check and open up the job market for the next generation. You would be removed from the ranks of SS recipients which would eliminate that monster of a liability. $600,000,000, +/- would make far more sense than the 100’s of billions being created for the municipalities, banks and Wall Street, who pay exorbanate salaries and obsene bonuses for a handful of individuals.

  5. George

    Great Article!
    I was at one of the larger Doctors offices [30+ in just this one office and they have many satellite offices] in my area yesterday. At 10 O’clock there were about 6 cars in the parking lot. I’ve know my Doctor for twenty plus years. My Doctor said their business is off [I wont share the number because I feel our conversations are of a confidential nature] the past few weeks. My doctor said the last time they saw a drop off this big was right before the economic collapse. My doctor does not believe that we are in recovery. What shocked me is that my doctor confided a full liquidation of all of their stock holdings. I did the same thing about a month ago. In addition to my doctor feeling vilified for making money, Congress did not address the 25%+ cut in payment to doctors for Medicare but they have time to hold hearing with Colbert . He said they don’t break even on Medicare now and consider it charity work.
    Why did I sell everything? October / November scares the hell out of me. I think a lot of people that have worked hard all their life are seeing the Enron style accounting that Congress uses and know something is going to have to happen…and something BAD at that…
    I personally think that if the evil doers in Congress [both Reps and Demoncrats (not a misspelling)] get voted out that they are going to punish the American people for their insolence more than they have in the last two years. After all, we are being called “stupid” , “teabaggers”, racists by both Demoncrats and Republicans. How hard do you think it would be to get the lame ducks to pass things that damage the country further? Like printing a few more Trillion and bailing out every government worker /union penion but leave the rest of us out again and having to pick up the tab.

    • Greg

      George,
      Thank you for your comments and for the news from the front lines of the economy.
      Greg

  6. George

    Buffet is for the bail out because of the muni bonds he is holding, not because it good for the country. Used to admire him

  7. M SMITH

    Greg, I must agree with MarkM. But I would do it a different way,instead of each house hold getting a check from the govmint for a million dollars that is losing value daily, the govmint should send a check for 2 million dollars to ALMOST every “LEGAL AMERICAN HOUSE HOLD” EXCEPT HOUSE HOLDS THAT ARE ALREADY MULTI MILLIONAIRES/BILLIONAIRES,FEDERAL RESERVE MEMBERS-OWNERS/ILLEGALS/UNION BOSSES. That would leave out many in congress,wall st bankers,I think you get the ideal whom should receive the 2 million dollar checks, then they would be required to pay off all of their debts,spend what is left after you pay off all debts on things that are “MADE IN THE USA” that will create Lasting Jobs.
    Greg,I know it will never happen because the control that the Private for Profit Federal Reserve Banking Cartel & its owners will not give up the power it has over our nation & the Progressives that Support them. Now that congress has took off to try to keep their power & jobs, our only hope is to expose those Progressives in congress & what they have done to our Nation. We can’t count on the MSM to tell the truth,so it will be blogs,radio shows like C2C,men & women that step forward to lead the voice of truth!
    Greg,time is short,Obama is already pushing to have the Ability to use exec powers to shut down the Internet in the name of a “NATIONAL SECURITY” & that could be almost anything he deems as so,”stock market crash that the fed could do like a “flash crash”, a terror attack by our own gov,who knows what length the owners of the fed will go to keep the power it enjoys so much,no matter how much the people must suffer or die! We are truly in a time that will try our faith,but those that turn to GOD for strength will remain strong against the Evil that surrounds all of us! Thanks Greg,your work is vital to all seeking to hold on to our freedoms!

    • Greg

      M Smith,
      We “live in interesting times.” Thank you for your comment.
      Greg

  8. schweizer40

    This is the most truthful website I have found. You guys are hitting the nail on the head. George, you are right I have the same feeling. The reps and dems are going to make us pay. We need to coin a new word because “traitors” doesn’t begin to describe them. How are we going to get our troops home from Iraq and Afganistan?

  9. Jan

    The Feds have been bailing out the states. They are not labeling the funds as bailouts, education, transportation and other programs have received big cash infusions that allow the states to keep spending and kicking the can down the road.

    If Feds get to the point of labeling it “bailout” they will get to pick and choose the winner and loser states. We could all be paying for California.

    • Greg

      Jan,
      Good point.
      Greg

  10. Bob

    Some unions have private pensions and should not be all put in to one big blame game. We all know that the government is to big , but to blame unions is just a talking point. How about farmer are arms manufactures we could find all kind of blame. The congress has the check book and the right to declare war. We are paying for these worthless wars. After Vietnam we had some big time inflation, the difference this time the people don’t have money to pay high interest rates, so people who live off stocks, bonds are any other form of interest are going to be looking for a job. Labor well recover before Wallstreet it’s call work today paid today. It’s only a depression when bankers and the Wallstreet boys are on the street. My private pension took are money out of Wallstreet a couple years before the big stink. It makes a person wonder what they saw coming. You can blame unions for many things but they didn’t cook the books are start worthless wars. If you get hungry kill something an eat it. Peace

    • Greg

      Bob,
      I have no problem with private unions in the business world. I do have a big problem with public employee unions. They should be illegal because they work directly against the taxpayer. Why should some city worker get medical benefits for life and a fat pension the average taxpayer does not get but still has to pay for? You are right, all unions are not bad but some are killing the country.
      Greg

  11. Jimbo

    Some time ago, I developed a theory that basically says that empires reach a “point of no return” in their growth cycle. When they reach this point, the political/business class simply MUST keep the game alive, at any cost. This seems to be a “law of history” that empires eventually succumb to, causing a paradigm shift, once the beast becomes unsustainable. The paradigm shift can be where “We the people” cannot continue to support the maintenance of the system any longer. The system goes into stages of collapse, at different rates, in different places. We are watching select manifestations of this phenomenae now.

    We cannot afford our own government as it currently exists!

    • Greg

      Jimbo,
      This is a very good theroy. Thank you for sharing it with us.
      Greg

  12. Deborah

    Fed stim $ was paid out in the form of a state grant, which funded a street scape project in a town made famous by a singer called the Boss. The town council, against protest by most of the business owners and many citizens, decided to remove all the trees in the business district “because if they didn’t use the money for something, they would lose it” is what one council person said at a meeting. They’re putting in pretty sidewalks and streetlights that look like gas lamps. Your tax dollars at work.

    • Greg

      Good info Deborah!!
      Greg

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