Are the States Up Next for a Bailout?

Posted: May 08, 2009 8:12 AM
The latest word around Capitol Hill is that Financial Services Committee Chairman Barney Frank’s next big legislative item is to put the full faith and credit of the United States up as a guarantee for state and municipal bonds.  In fact, he held a foundation-laying hearing for such legislation just this week.

This is absolutely the last thing the federal government should consider taking on, as the Treasury has already extended the taxpayers’ credit line way too far. The only thing this will do is just open the flood gates to profligate spending at a state and local level.  As the L.A. Times reported this week, “With Uncle Sam fully backing muni bonds, and presumably thus lowering state and local governments’ interest costs, the risk is that some would borrow like the proverbial drunken sailor….”

Take the current example of California, the world’s sixth largest economy.  According to Chriss W. Street, the treasurer-tax collector for Orange County, California, writing in Forbes:

"California is asking Congress to take an unprecedented step: to guarantee the state's sovereign debt with the "full faith and credit" of the United States.  Such a move would be a life raft for California politicians, but it might jeopardize the U.S.' AAA credit rating and destroy the ability of local government to borrow.

"For 35 years, California led the nation in job creation and standard of living. The Golden State responded by taxing, borrowing and spending itself into an increasingly uncompetitive economic position. Today, California boasts the highest tax rates, the highest number of unemployed residents, the lowest credit rating and the largest deficit in the U.S.

"With its golden luster fading, businesses are leaving in droves. Instead of fixing a broken model, California wants a federal co-signer."

The National Conference of State Legislatures reported earlier this year that 43 states are reporting budget shortfalls – with California leading the pack.  Too many states  -- and cities -- have been paying for spending increases with high revenues from the strong economy and booming housing markets.  Too few prepared for a rainy day or the burst housing bubble.  As New York Governor Paterson said last year, “the fact [is] that when there was...wealth, we overspent," says Gov. Paterson.

If spending wasn't bad enough as it is, we now have the federal government possibly taking on the debt of the states and local governments? When will the fiscal recklessness come to an end?

The law doesn’t even allow the federal government to tell municipal bond issuers what they must disclose to investors, but we’re thinking about giving them a backstop?  

Now more than ever we need transparency to see what the Fed is up to. That is why I have cosponsored The Federal Reserve Transparency Act. This bill would eliminate restrictions on GAO audits of the Federal Reserve and open up the Fed’s books to the taxpayers.  Everyday we hear elected officials praise openness and transparency from our government, yet the Federal Reserve continues to act in the shadows without sufficient scrutiny or oversight.

Your money has been squandered for far too long.  You have a right to know what’s happening with your hard-earned money.