Michigan town wants to declare bankruptcy - the state won't let them

This is going to become quite common over the next few years; municipalities large and small backed up against the wall and finding the only out to be bankruptcy.

The problem is that if states begin to allow these smaller governments to go under, it will depress the muny markets which could kill the big cities with increased borrowing costs.

It's going to be a question of pick your poison:

"We can make it until March 1 - maybe," Mr. Cooper said of Hamtramck's ability to pay its bills. Beyond that? The political leaders of this old working-class city almost surrounded by Detroit are pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances.

"The state is concerned that if they say yes to one, if that door is opened, they'll have 30 more cities right behind us," Mr. Cooper said, as flurries fell outside his City Hall window. "But anything else is just a stop gap. We're going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted."

Bankruptcy, increasingly common among corporations and individuals, remains rare for municipalities. Local leaders who want to win elections find it unappealing and often have other choices for solving financial woes. Besides, states have a say in whether a municipality may pursue bankruptcy at all, and they have every reason to avoid such an outcome, not least of all for fear of a creating a ripple effect that could cripple the municipal bond market and drive up the cost of borrowing.

Yet with anemic property tax revenues and forecasts of more dire financial times ahead, some experts and elected leaders fear that more localities may have to at least consider bankruptcy.

Another reminder that our fiscal woes are worse than anyone at any level of government is letting on. The chances of a total collapse are small, but not insignificant. Washington can't bail out everyone - at least, to do so would probably be worse in the long run than forcing local and state government to make the hard choices that will put them back on the road to fiscal solvency.

How much government can we afford? The next couple of years will see the answer to that question.