And now the Federal Reserve is bailing out state and local governments

This crisis is getting real. I’ve been talking privately with friends about how state governments have less than a year of unemployment benefits in reserve (and that is estimated unemployment benefits under a normal economic downturn, not a complete and utter collapse of GDP). Many states have less than a quarter in reserves.

There is no way, under normal circumstances, that states can handle this sort of pressure on their finances without defaulting on their bonds. They suddenly have no money to operate schools, Medicaid, all their other essential government services. There’s no way they are going to pay Wall Street over all that.

Some state and local governments operate like literal Ponzi schemes now. Places like Chicago cannot function unless someone gives them short-term financing because they are in such a bad financial position that they rob Peter to pay Paul in a normal fiscal year and their tax burdens are already driving people out of town. It’s like a game of musical chairs. When the music (lending) stops, essential services stop. And that’s what’s happening right now.

And so now the Federal Reserve is taking municipal bonds onto its balance sheet. This did not happen in the Great Depression or the Financial Crisis of 2008.

Like most government bailouts, this is a terrible but necessary thing. The Fed is going to prop up the asset values of institutional investors who were holding the worst paper out there. They are rewarding the people who in good years kept the Ponzi scheme going rather than allowing responsible structure change to take place. But that’s how it goes. The worst people in financial services are very good at holding ordinary people hostage for money. (Also, it never gets less funny that progressives think this is a story about Republicans. The most dysfunctional state and local governments financially are blue states. Fiscal conservatives actually think to prepare for crises, though this one is beyond anything anyone has ever seen. The Fed is buying bonds from major Democratic donors. This is the truly antisocial crew.)

This cycle of financial crises that we are in and how the regulatory response always rewards bad behavior is infuriating on so many levels. It means that during good years, people always behave in ways to ensure another crisis is around the corner. And to ensure that the next crisis will be worse than the one before it.

3 thoughts on “And now the Federal Reserve is bailing out state and local governments

    1. If Fedgov bails everyone out, yes, we will have moved a lot closer to the Japanese condition. But the Yen holds up, the economy wobbles along, despite all the structural problems, terrible demographics, lack of natural resources, and lack of competitive Advantages compared to the United States. In this dark hour, remember Micawber. Something will turn up.

      Liked by 1 person

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