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State Bailouts & Bankruptcy

Date: 01-29-11
Host: Ian Punnett
Guests: Andrew Gause, Adam Fergusson

In the first half of the program, monetary historian Andy Gause joined Ian Punnett to discuss the serious ramifications if states start filing for bankruptcy protection. According to Gause, many states have unfunded pension obligations that they are legally required to pay but have no way of meeting. California, for example, owes half a trillion dollars to its public servants. The state may choose to increase the tax burden on its residents or possibly seek to restructure this debt through bankruptcy, he explained. Municipalities such as Vallejo, CA, which recently emerged from bankruptcy, may set a precedent for state-level bankruptcy, Gause suggested. And a real threat of bankruptcy could compel the federal government to step in with a bailout. "I think you're going to see a bit of an abdication of sovereignty by the states in exchange for bailout-type deals," he added.

Fiscally troubled states may also look to help from large private investors who, flush with low interest loan money from the Federal Reserve, could go in and buy up their public assets (garages, airports, turnpikes, etc), Gause continued. This has already happened in Arizona, where the state sold off its capitol buildings (to an investment group from whom they now rent) in order to pay off debt obligations. For some states, even selling all of their infrastructure projects may not be enough. Massachusetts, for instance, is sinking under the enormous and continuing financial burden of its universal healthcare plan, and Illinois has its own $40 billion unfunded healthcare liability to contend with, Gause said. These states, and others in similar situations, will likely also need to increase taxes while slashing public services. If states do end up pursuing bankruptcy, in addition to the taxpayers, the biggest losers will be individual bond investors, he warned.

Currency Collapse

In the third hour, journalist Adam Fergusson talked about what caused the German financial collapse in the 1920s and what can be learned from it today. Fergusson said the German economy was in a terrible state after the first World War and the value of their mark fell by half. The German government's solution to a slumping economy was to print more money. This resulted in monetary inflation and, as people lost confidence in their increasingly worthless currency, the mark collapsed totally, Fergusson explained. It took a million million marks to buy what a single mark had once purchased, he noted. Countries cannot inflate their way out of trouble, Fergusson continued. "I do not believe that quantitative easing, or inflation, or printing money, ever has a desirable... effect on any economy," he added. Fergusson further suggested that quantitative easing has not helped the U.S. economy and, like an addictive drug, can be hard to stop and lead to much deeper problems.

Open Lines followed in the last hour.

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Bumper Music

Bumper music from Saturday January 29, 2011

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