Monday, February 28, 2011

Why Is Congress Trying to Make It Easy for States to Declare Bankruptcy?

According to The New York Times:
Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
Now, that might seem a bit strange, since in 2005, Congress made it much harder for individuals to declare bankruptcy.

So, Congress thinks that consumers should be forced to pay back all the loans they took out from banks and corporations, but that states should be able to default on its obligations to pensioners and bond holders? Smells like hypocrisy to me, and I'm not the only one.

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