This bailout, combined with the long period of absurdly low interest rates orchestrated by the Federal Reserve, will reduce the incalculable burden that a profligate nation is incurring and, like its trust fund children, will ultimately be forced into its own profligacy. It obscured the possibility of seeking relief from. Note that last week, California’s projected 2024-2025 budget deficit of $58 billion was revised upward to $73 billion.
I have always taken solace in the wisely constructed federal structure of this country, and have expressed my silent gratitude to Oliver Ellsworth and Roger Sherman, the architects of the Connecticut Compromise, when the Constitution was being drafted in 1787. said the words. This deal erected barriers against the plunder of smaller states by larger powers, or, as they are called today, against “marginalized” states by more populous or more powerful states.
Today, it’s hard to imagine that senators from 40 better-run states would vote to strangle spendthrifts from years of waste and pandering to government unions. They will find that President Biden’s student loan “forgiveness” (the correct term is “transfer”) plan will put voters in the same role as the Americans who have had their loans repaid.
So the next time a desperately poor state like California or Illinois spins around some sophistication about a “dynamic partnership” that will save other states from their own fiscal folly, it’s a mistake to think the door to the vault will be shut. Probably not.
But surprisingly, among several precedents, the pandemic panic has produced a less-noticed action that could open a backdoor to the bailout coffers. In April 2020, the Federal Reserve first announced that it was willing to buy state and local government debt. Among the many “emergency” measures launched at the time, this action received little attention. Even some of the veteran Fed watchers I consulted on this topic were unaware that this line had been crossed.
Until now, the central bank has been cautious about moving into local lending policy, which inevitably becomes entangled in politics. During the deep recession a decade ago, then-Fed Chairman Ben S. Bernanke testified before Congress that he had “no expectation or intention to become involved in state or local finances.” He, or someone else, could have added that the Fed’s authority to do so is itself constitutionally questionable.
Fortunately, the users of this new facility were limited to two suspects: the state of Illinois and the New York Metropolitan Transit Authority. By the time the window closed at the end of 2020, they had borrowed a total of $6.6 billion. But once the beggar is offered food at the back door, he is expected to knock again.
As of 2021, the state’s outstanding debt was approximately $1.2 trillion. Almost half of that is in six states, led by New York with $170 billion and California with $144 billion, followed by Connecticut, Hawaii, Illinois, Massachusetts and New Jersey on a per capita basis. Illinois has already come close to achieving a junk bond rating, but other states are also vying for it.
These borrowings were increased to cover operating deficits and capital expenditures. The large unfunded pension promises made by these jurisdictions to past and present employees are a separate and more intractable issue. Assuming a Congressional bailout isn’t a start, the day will come when they will rally their cronies of power elites and government unions to pressure the Fed to buy new bonds at prices the market won’t pay.
This is a situation that requires intervention. Before petitioners start knocking on banks’ doors, Congress should enact legislation now to ban the Fed from purchasing state and municipal bonds.
The Fed may informally welcome handcuffs to “stop us before we kill someone again.” Although it may prove to be an unnecessary precaution, the pandemic has reminded us of the benefits of vaccination. Ask for a booster.