Jul 172012
 July 17, 2012  Posted by at 7:11 pm Finance

I’m always surprised by the common argument that central authorities will “not allow defaults to occur”, as if a) they have a clear-cut choice in the matter and b) those defaults haven’t ALREADY occurred. Obviously, this threat is the most acute at the so-called “sovereign” level in the Eurozone, in which countries are inextricably wedded to each other in unholy monetary matrimony. Greece has already defaulted on its obligations to private creditors, while the so-called “autonomous” regions of Spain are following quickly in pursuit, and the regions of Italy are in a close second (the Sicilian governor is being forced to resign due to the region’s proximity to default).

Yet, the dreaded “D” word is by no means limited to that side of the Atlantic. People tend to forget that the states and cities of America borrow vast sums of money and provide a whole range of services and benefits to their citizens, including education, police, firefighters, transportation, utilities, etc. These are governmental authorities that are now being forced to file for bankruptcy in increasing numbers and renege on many of the promises they have made to institutions and people in the past. It may not seem like much when considered individually, but when you add them up in the context of an already struggling private economy, they can certainly rival the effects of defaults in Europe.

Some of the more notorious bankruptcy filings by cities/counties in recent times have been San Bernardino and Stockton in California over the past few weeks, which were the second and first largest bankruptcies in U.S. history respectively, as well as Jefferson County, Alabama and Harrisburg, PA late last year. Leading the way in bankrupted government entities, though, is the state of Nebraska, as reported by Steven Church of Bloomberg:

Nebraska, Not California, is King of Municipal Collapse


Busted land deals and empty subdivisions bankrupted more governmental entities in Brian C. Doyle’s home state than anywhere in America. With the recent financial collapse of three of its cities, it might be easy to assume he’s from California.


Doyle, however, lives in Nebraska.


Quirks in local, state and federal law have made Nebraska home to almost one-fifth of the more than 220 Chapter 9 bankruptcies filed in the U.S. since 1981, according to a nationwide review of federal court records. California, with more than 20 times Nebraska’s population, is second, followed by Texas and Alabama. California may soon add to its total, as San Bernardino decides whether to seek court protection this week.


The main difference between Nebraska and its larger brethren is the kind of governmental bodies that file for bankruptcy. No town, city or county has sought court protection in the state. All 45 of Nebraska’s Chapter 9 cases were by special tax districts, most of them owned by residential subdivision developers who used property-tax revenue to pay for streets, sewers and other infrastructure.


“Chapter 9 is an effective tool that can be used to protect taxpayers and treat creditors fairly,” said Doyle, a land-use attorney in Omaha who represents bankrupt subdivisions. Those special tax districts become vulnerable to bankruptcy when housing sales slow, he said.

What’s key to remember, though, is that the filing of bankruptcy is simply the culmination of a process in which an increasing number of obligations are not met by the entity involved. San Bernandino and Stockton had been cutting services and payments to various public institutions and creditors for quite some time before they finally had no choice but to file Chapter 9. Bankruptcy is truly the last option for a desperate government that can no longer find ways to squeeze and manipulate their obligations to creditors, public officials and citizens without creating a massive political and public relations disaster.

For example, Ben Duronio of Business Insider explains that the city of Stockton, CA had imposed massive austerity on its police department over the past few years, and that had led to a “surge in murders” and an “emboldened criminal element”, all before they were forced to file for bankruptcy:

STOCKTON GOES BANKRUPT And Already The Murder Rate Is Soaring


Stockton, California is filing for the largest bankruptcy of any U.S. city in history due to the decline in the once hot housing market and an intake of debt during its boom years.


The city has cut more than $90 million in spending over the past few years, specifically in its police department. The city has cut over one quarter of its police jobs, which has led to a “surge in murders”, and has created an”emboldened criminal element” in the city. According to police spokesman Joe Silva, the city has had 87 murders since the start of 2011, 29 of which have already occurred this year. In contrast, there were 35 murders in 2009 and 48 in 2010. With six months left in the year, there have already been more murders in the city since the start of 2011 than the two-year stretch of 2009-2010.


Further cuts to the police department would likely only worsen the issue, so filing for bankruptcy after already having cut 40 percent of its city’s employees was the only option, according to Mayor Ann Johnston.

So how many more counties/cities in the U.S. are being forced to systematically gut their institutional services to citizens on the road that inevitably leads to bankruptcy? Ben Duronio also profiles twelve other large cities/counties that find themselves in dire financial straits –  OH CRAP: A Whole Bunch Of Cities And Counties Are Now Seeing Their Finances Collapse. And those are only the ones that are worst off right now. I suspect many readers living in the U.S. can attest to various ways in which their cities are gradually imposing austerity on the public to continue rolling over their debts and meeting their obligations to private creditors. 

It won’t be enough, though, just like it was never enough for Greece. And for those who are expecting Ben Bernanke to ride in and save the day with a QE3 program that targets municipal bonds, they need to first explain why he just gave the following response to a question about how much QE the Fed can realistically do – “I assume there is a theoretical limit on QE as the Fed can only buy Treasuries and Agencies. Personally, I don’t think Bernanke is stupid enough to place an arbitrary constraint on the Fed unless he already knows for certain that the option will not be pursued.

Home Forums The Dreaded Defaults are Here

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    I’m always surprised by the common argument that central authorities will “not allow defaults to occur”, as if a) they have a clear-cut choice in the
    [See the full post at: The Dreaded Defaults are Here]

    Basseterre Kitona

    I’m not surprised to see Detroit, Michigan on that ‘Oh Crap’ list. Just this morning I was reading about the dire state of living in that city via detroitbloggerjohn’s column at the Metrotimes. Here’s a link if you want a glimpse of the desperation that comes to the surface in a collapsed society:

    Sign of the Times


    Got Gravity’s recursive algorithm?

    Golden Oxen

    Another poignant reminder that austerity and deflation are not an option for our problems, not in this day and age.

    Give me inflation over this for sure, but please, not a hyperinflation. Perhaps it will not work, but it is worth a try. Anarchy, murder, and mayhem aren’t going to solve anything.


    And yet the stock markets surge ahead: anticipation of QE3 or what?


    I disagree with a growth mentality. No matter how you argue it continuous growth is not possible during a time of depleted resources. In fact once resources start to wane and growth use up more resources we have a name for that CANCER.

    If we can maintain our size and consumption we would be something called sustainable. There would be no issues. We are unsustainable and will not grow or even maintain what we have. We will reduce it is just a question of how much.


    No amount of defaulting will make difficult to produce oil less expensive to produce. No amount of Chapter 9 activity will make it rain or halt global warming, and push down the cost of food.

    Due to the huge population of the planet, we’re dependent on the marginal oil fields and the marginal fields of corn. And the prices for these things are set at the margin.

    The deflationistas are scratching their heads, wondering when the deflation in wholesale and retail prices will arrive. When you see Godot, you will still have to wait some more. The ‘deflation is a monetary phenomenon’ is a paradigm for developing, or even mature, systems. It doesn’t apply to systems, such as the present world economy, where shortage of cheap oil and arable land is in play.

    Theoretically, the world’s government could get together and renounce war and divert several trillion dollars from military spending to food production, alternate energy, etc., but that isn’t politically possible at the present time. Hyperinflation will arrive first.


    Isn’t it true that the Fed can legally buy gold in addition to the assets Bernanke mentioned?

    “”I assume there is a theoretical limit on QE as the Fed can only buy Treasuries and Agencies”. “

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