Getting Ready For Bailing Out The States And Cities

Experts keep saying that there is only so much bailout money to go around. That going around is getting bigger as states and municipalities try to figure out what to do as their tax revenues fall apart and the credit markets get so tight that they have to pay exorbitant interest rates for bond issues.

Several states including California, Florida, and Michigan have already hit the tipping point. It is likely that they will begin to cut essential services if they cannot come up with more cash.

According to Reuters, "U.S. states and local governments are heading into dangerous territory as a strained municipal market forces them to delay deals while fund managers worry that a lasting recession may lead to defaults."

States can’t print money for their obligations like the US government can. That gets to the heart of the matter. The federal system can either take on critical programs for schools, infrastructure, and social assistance or it can loan states and municipalities money which they are unlikely to be able to pay back for years. That is very different from banks or car companies. A state in receivership is a state which may be unable to educate its population or support the jobless and the homeless.

The amount of money Congress will need to salvage the local government system is likely to be in the tens of billions of dollars. And, its money at real risk, which is why no one wants to buy municipal bonds.

Douglas A. McIntyre