Excellent NY Times article Future Bailouts of America.
The Federal government has gotten in the habit of making guarantee after guarantee (some explicit and some implied) without putting enough money aside for those inevitable rainy days. From hurricane insurance that encourages homes to be built where they will soon be blown down, to FDIC deposit insurance where a token insurance premium is collected from the participating banks, insurance is easy to guarantee but painful to pay off.
But the implied guarantees are the worst. The Federal government had an implied guarantee (although you would be hard pressed to find any wording in any legislation that gave a hint of these guarantees) for Fannie Mae and Freddie Mac and look what that eventually cost Americans.
But with many US states approaching insolvency we have another big storm approaching. We have no bankruptcy provisions for a state to enter bankruptcy, no way to unwind the mess and no mechanism for a conservator or trustee to manage the state out of its mess. All we have is an implied federal guarantee because California and New York are arguably “too big to fail”. We need to work on this problem now so that the first state to go does not have to be rescued in a hasty plan written over a weekend.
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