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.)

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