America’s Bankrupt States and Broke States

Free­dom Ari­zona has a must-read post on the fact that the states, not only the fed­eral gov­ern­ment, are on the verge of eco­nomic col­lapse:

There is a high chance a major­ity of the States within the United States of Amer­ica could file for Chap­ter 9 bank­ruptcy. There are cur­rently 46 states with high bud­get deficits, Ari­zona being one of them…

Many States are already scur­ry­ing to cut unwanted costs, cut State-funded pro­grams, raise taxes, not issue tax refunds to their cit­i­zens, and bor­row money just to sur­vive in 2009. Unfor­tu­nately, many banks — the same banks the Fed bailed out — are refus­ing to loan money to the States and their Trea­sury agencies.

The arti­cle, State Bud­get Trou­bles Worsen, at the Cen­ter on Bud­get and Pol­icy Pri­or­i­ties web­site is an excel­lent piece to read. It shows where each State cur­rently stands in these chal­len­ing eco­nomic times, and you see 46 of the 50 States are clearly in the finan­cial red.

It’s very pos­si­ble you’ll see the end of the United States as we know it. If the Fed doesn’t bailout the States when their cash dries up and the banks don’t loan them money, then our States will be left in finan­cial ruin. This would be a tragic and unprece­dented event never expe­ri­enced in the United States.

Per­haps one of my read­ers can enlighten me. When a per­son files for bank­ruptcy, all of his debt dis­ap­pears. His debtors must write-off the debt because they will never see it.

But what hap­pens when a state gov­ern­ment files for bank­ruptcy? Would a fed­eral court rule that its debts — to cit­i­zens or whomever — are null and void, and any cred­i­tor will never be paid? What would hap­pen to ongo­ing trans­fer pay­ments like wel­fare and unem­ploy­ment insur­ance in the future?

I am not an expert on munic­i­pal eco­nom­ics, but I have a hunch that a major prob­lems lies in how cities and states have funded them­selves over the past sev­eral decades. Since rais­ing taxes is always a polit­i­cal firestorm, cities and states sold bonds to raise funds. Are the states bank­rupt because they can­not repay the bonds? This blog­ger would love to be enlightened.