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Repudiating the Debt and the Honor of Bankruptcy

December 29, 2012

This is a long rant at 1500 words, or about three pages.  My only excuse is that I had my children home for Christmas and am grateful for all I’ve been given.  That is why I ask:

Are we being smart or being stupid by paying our taxes?

Pay your debts and meet your obligations!  That is what we’ve been told to do as honorable citizens.  Yes, it makes sense for us as we pay off our credit card, but what if they are not our debts?  Today we are being told to pay for the political promises a politician made to get elected.  The politician has simply given the bill to us and our children.  That is true!  Much of what government now does is for narrow political gain rather than broad public benefit.  Our government now owes so much money that it can not pay its bills.  It has to borrow, and each dollar it borrows puts a burden on tomorrow’s taxpayers to pay our debts.  A politician guaranteed his political career today by sacrificing our children’s future tomorrow.

Who benefits?

My state and city borrow money to pay their current expenses.  They could save for tomorrow.  They could pay as they go.  Instead, they simply promised more than they can tax.  Their solution is to promise to tax the next generation at an even higher rate.  The next generation gets to pay for its services and for the ones I didn’t pay for.  Yes, we want to help our neighbors in need.  That is charity,but what if the state demands our children pay the debts owed to highly paid state employees who are insulated from competition and retire early to live in another state?  Now that stinks!  What if the state demands that our children pay for our neighbor’s political contributions?  That is even worse!  I think that is the exactly what is happening and our children should refuse to pay these debts.

What would happen if the state defaulted on its debts?

As borrowers, if you or I make a late payment, then the lender understands there is an increased risk that he might not be paid.  This causes penalties and interest rates to rise.  That is a good thing and a necessary action.  These higher costs are a signal to the borrower to adjust his finances.  Look at the opposite approach and see what happens if interest rates do not go up.  Keeping interest rates down tells the borrower to go borrow more and pay less.  That is how our local governments got into this financial mess.

What would happen after a default?

The borrower faces higher interest rates after a default or bankruptcy because the lender recognizes that there is a considerably higher risk to his loans.  Again, that is a good thing.  There was always risk of not getting paid when you plan to rob future citizens!

Could government continue to borrow after the default?

Sure, the borrower may continue to borrow after bankruptcy.  The lender probably demands a short term note at high interest rates.  The lender demands that the loan is backed by collateral property.  Let’s use my state as an example.  Said another way, sure, I’d loan California some money after it defaults on its loans.  I’d only loan as much as I could afford to lose.  I’d demand that they sign over a hard asset to me, say their fleet of cars or aircraft.  I’d look for an asset I could remove from the state rather than something like a park or parking lot that the state could later regulate to repossess.  If the state paid off the loan, then they get their property back.

Is it worth it?

That way of borrowing sounds cumbersome, and it is.  California probably wouldn’t bother to borrow under those terms.  That is a good thing.  It is a feature, not a bug.  It has always struck me as stupid that a state that exists for hundreds of years can’t plan for a 20 year project but needs to borrow money from people who don’t vote yet.  I’m obviously not thinking like a politician.

Is it likely that we will see default?

California is supposed to collect property taxes and then return most of those taxes to local governments.  In a similar manner, the federal government taxes and is supposed to return money to the states.  That won’t happen as special interests at the federal and state level start to get squeezed.  The federal and state governments will keep more of the general revenue as the economy tanks and the politicians need to increase their political payoffs to maintain political power.  The federal government will inflate the currency, but states can’t do that.  It is the towns and counties who will default first.  Again, that is a good thing.

How could that come about?

Suppose that tomorrow “Our Fair City” couldn’t pay its obligations.  Business is down and expenses are up.  It has to pay wages to its employees, pay its venders for materials and services, and pay other venders for personnel overhead like health insurance and pension costs.  At some point the city has to choose between paying for fire and police protection, or paying public employee pensions for workers who retired long ago.  The city also has to pay its lenders.  Someone isn’t going to get paid.  The city makes some feeble cuts, but pretty soon a judge gets to decide who gets paid and who doesn’t.  Problems surface immediately as some venders stop providing services.  For example, the auto repair shop won’t return the city vehicle until they are paid some of their long overdue bills.  The repair shop wants the work but the business can’t be treated like a free vending machine that gives services without payment.

What does the city do?

“Our Fair City” goes to court and files for bankruptcy protection.  City police are replaced by county sheriff’s deputies.  The fire and EMT services are replaced by a lease agreement with a nearby town who has a better labor agreement with its public safety employees and uses private contractors for fire protection.  “Our Fair City” has to choose.  It can continue to overpay its unionized employees, or pay its retiree insurance.  New employees are now on a defined contribution plan rather than a defined benefit plan.  Now the city manager and the labor unions are both in court.

What are the ethical factors in this decision?

Politicians mortgaged the future of our cities in order to get reelected.  They did it in Detroit and they did it in Vallejo.  They lied to us, so we have every right to repudiate their false claims.  They promised us a legacy of well educated people, great roads, a lean-mean government bureaucracy and a welcoming business climate.  Instead we have poor schools, crumbling infrastructure, high taxes and fees.  We did not get what we were promised.

What should a judge do?

Government debt is a commitment from one generation to the next.  It is a loan in which one side did not deliver as promised.  The state claims that high salaries give us the best value workforce.  Instead they simply delivered high costs and large political donations back to the politician.  California claims that state retiree pensions are really an asset.. while state retirees repudiate that claim by leaving the state for better places to live.  Politicians claim that crumbling bridges and public buildings are an asset rather than a used-up road to nowhere.  A bankruptcy court should say that we are robbing our children’s future for a politician’s present profit.  The judge should wipe out the debt.  Young men and women are already leaving California for more competitive states.  California has not taxed them as they leave.  At least, not yet.

Is that likely that a judge would protect the next generation?

Judges hold political office.  They usually vote their self interest rather than seek justice.  That means they will vote the interest of the present voters rather than protect future voters and tax payers.  They will claim that we voted for the politicians who did this to us.  They will ignore that public employees and other special interests paid by the state made huge political contributions to put their favorite politicians into office and keep them there.  The judge will ignore that the special interests outspend the voters by ten to one when the citizens tried to curb special interest influence.

What would happen if there were a few honest judges?

Everyone would get less and the next generation would get more.  Present state employees would get less pay.  Past state employees would get less insurance and pension payments.  Citizens would get fewer services.  Lenders would not get fully repaid.  Most importantly, politicians would get smaller donations into their political campaigns and the quality of governance would improove.

What would the lenders do after bankruptcy?

Lenders would recognize the risk of government debt.  Governments would have to spend less because borrowing is now very expensive.  To me, that sounds like a good thing.  It is a feature of bankruptcy, not a fault.  The public employee unions will complain bitterly, but they miss the point.

We invest in education because it is gives children a better life, not because it is good for the union teachers who have jobs in government run schools.  We pay public employees well because we expect a lean and low costs workforce to deliver prompt service.  We’ve had this backward for quite some time with the union tail wagging the citizen dog.

Is it really slavery?collar and chain

We are asking our children to pay our bills.  We take from them without their informed consent.  Slavery is ugly whether it is based on skin color or date of birth.  An honest judge might simply confirm that after 150 years, slavery really was illegal after all. 

This is my fantasy, since it is unlikely that we will find honest judges who repudiate slavery.


Robert the dreamer

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2 Comments leave one →
  1. David permalink
    December 29, 2012 10:49 am

    I want to hear more about this judge.



  1. The US Debt Made Real | SlowFacts

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