The following prediction analysis of possible future events was made in the Boston Phoenix by Steven Stark. Here is number one, on his five item list:
1. HOW DO OBAMA AND CONGRESS DEAL WITH THE STATE AND MUNICIPAL DEFAULT CRISIS? Another cliché: this is the ticking time bomb of our politics and economy. In the coming year, hundreds of cities and maybe even some states are likely to face what amounts to bankruptcy — an American version of what is currently happening in Europe. If they’re not bailed out, as many essentially were with the 2009 stimulus, the effects on the economy could be profound, as bond markets tank and thousands on public payrolls are thrown out of work. The GOP Congress is going to be ill-inclined to bail out anyone on a public payroll and states aren’t allowed to officially declare bankruptcy, nor are cities in half of those states.
The main two things Stark leaves unsaid are that the very real and credible scenarios exist where Congress does not vote on any bailout, but the cities and states who were the most irresponsible and are largely Blue states (see this graph) simply walk up to the Fed discount window and say, “Uh, cough.” And the Fed coughs.
Issuing bonds is like printing money anyway, so the Fed has said it may continue its money printing — why not do it for Americans, instead of foreign banks? It is no doubt the preferred option of The One, the unions, the cities and the states.
Do you think the Democratic Governors of Illinois, California or New York would rather have free Fed cash, or face Congress?
George Will recently addressed these possible “backdoor bailouts,” and concluded that if the Fed did bailout the blue states or cities it would result in the end of the Fed’s independence, presumably triggering a massive reform the Fed movement:
People seeking backdoor bailouts hope that the fourth branch of government, a.k.a. Ben Bernanke, will declare an emergency power for the Federal Reserve to buy municipal bonds to lower localities’ borrowing costs. This political act might mitigate one crisis by creating a larger one – the Fed’s forfeiture of its independence.
Since Bernanke shows a tin-ear on money-printing concerns, Congress needs to pass a law banning the Fed bailout of spendthrift cities and states. It needs to be at the top of the agenda for the Republican House once they are sworn in next year.
And by then, it may be too late. The second main thing that Stark did not mention is that for all we know the Fed is now accepting applications from cities and states for the Fed window — or has given or are about to give cities or states bailout funds or loan guarantees.
Last time I checked, the Fed does not need permission from Congress to act.