Coming soon: Trillions in bailouts for cities and states

Rick Moran
It's coming, say some of the same people who warned of the subprime meltdown. Mass bankruptcies of cities followed by weaker states going under, pulling stronger states with them. It's the Euro-debt crisis brought home to America via the probability that sometime soon, investors will be unwilling to underwrite more debt for many cities and states, causing defaults that could rattle our economy to its foundations.

This is where analysts see the national government stepping in out of dire necessity - despite the probability of strong opposition from both sides of the aisle.

Municipal bankruptcies or defaults have been extremely rare - no state has defaulted since the Great Depression, and only a handful of cities have declared bankruptcy or are considering doing so.
But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.

Analysts fear that at some point - no one knows when - investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones, much as the turmoil in Europe has spread from country to country.

Mr. Rohatyn warned that while municipal bankruptcies were rare, they appeared increasingly possible. And the imbalances are so large in some places that the federal government will probably have to step in at some point, he said, even if that seems unlikely in the current political climate.

"I don't like to play the scared rabbit, but I just don't see where the end of this is," he added.

The first thing cities and states that are on the brink have to recognize is that the party is over. In order to get their fiscal houses in order, deep, painful, cuts have to be made to budgets. In some cases, taxes may have to be raised. They must demonstrate they are willing to face the crisis squarely and deal with it - not by reaching out to Uncle Sam but by solving their own problems by working with all concerned. Unions - both state and municipal - as well as executives, contractors, and anyone and everyone who benefits from government spending has to take a hit. 

It will take strong leadership from the governors in these states to make it through. Are Democratic governors going to be willing to do what is necessary to save themselves? Probably not. They more than likely will try and tap the national government to solve their problems for them. We can't let them take us down with them. Somehow, a way must be found to deny the political cowards who would rather bankrupt the nation than risk their political hides the bailout they will need.

I'm not confident that either the Democrats or Republicans will be able to resist taking the easier path of federal bailouts than engaging in the hard, slogging, long term process of righting their fiscal ships. Republicans in the states affected will have too much at stake to stick to principle and vote against bailouts. 

The party is indeed, over.


It's coming, say some of the same people who warned of the subprime meltdown. Mass bankruptcies of cities followed by weaker states going under, pulling stronger states with them. It's the Euro-debt crisis brought home to America via the probability that sometime soon, investors will be unwilling to underwrite more debt for many cities and states, causing defaults that could rattle our economy to its foundations.

This is where analysts see the national government stepping in out of dire necessity - despite the probability of strong opposition from both sides of the aisle.

Municipal bankruptcies or defaults have been extremely rare - no state has defaulted since the Great Depression, and only a handful of cities have declared bankruptcy or are considering doing so.

But the finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.

Analysts fear that at some point - no one knows when - investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones, much as the turmoil in Europe has spread from country to country.

Mr. Rohatyn warned that while municipal bankruptcies were rare, they appeared increasingly possible. And the imbalances are so large in some places that the federal government will probably have to step in at some point, he said, even if that seems unlikely in the current political climate.

"I don't like to play the scared rabbit, but I just don't see where the end of this is," he added.

The first thing cities and states that are on the brink have to recognize is that the party is over. In order to get their fiscal houses in order, deep, painful, cuts have to be made to budgets. In some cases, taxes may have to be raised. They must demonstrate they are willing to face the crisis squarely and deal with it - not by reaching out to Uncle Sam but by solving their own problems by working with all concerned. Unions - both state and municipal - as well as executives, contractors, and anyone and everyone who benefits from government spending has to take a hit. 

It will take strong leadership from the governors in these states to make it through. Are Democratic governors going to be willing to do what is necessary to save themselves? Probably not. They more than likely will try and tap the national government to solve their problems for them. We can't let them take us down with them. Somehow, a way must be found to deny the political cowards who would rather bankrupt the nation than risk their political hides the bailout they will need.

I'm not confident that either the Democrats or Republicans will be able to resist taking the easier path of federal bailouts than engaging in the hard, slogging, long term process of righting their fiscal ships. Republicans in the states affected will have too much at stake to stick to principle and vote against bailouts. 

The party is indeed, over.