High-Risk Local Government and Bankruptcy

One recurring theme of my posts is that when governments expand their operations and powers beyond those needed to provide for the equal protection of our individual rights, they generally do a very poor job of providing the given service, they inevitably end up failing to protect our individual rights, and they fail very unequally in protecting our rights as well.  When governments fail, they often put all of that government's operations at risk.  This is the situation in such states as Rhode Island, New York, New Jersey, and California where terrible state debt and massive liabilities clearly exceed the level that taxation can support.  Higher taxes there will simply lead to more economic stagnation and the flight of many capable and often wealthier people from the state with lower tax revenues resulting.  After a point of government ineptitude, there is no way out but to drastically cut even the most legitimate services.

Here is another example of how a local government put its essential services at risk by trying to perform services which should have been left to the private sector.  Responsible local government has no business departing from the few legitimate services such as police protection and the courts, because other activities increase the need for involuntary taxes and also the risk of the failure of the government.  Businesses in the private sector fail more often than not and there is no reason to expect that city, county, and state governments can operate more efficiently than do private sector businesses.  Of course, however badly they operate a business, they can call upon a large tax base to subsidize the poor operation, which will commonly allow a government to avoid acknowledging that they are operating the business they have take on poorly.  This usually leads to further deterioration of the operation of the business with time, since incentives are missing to improve the operation.

The capital city of Pennsylvania, Harrisburg, is considering a Chapter 9 bankruptcy because it lost so much money in one operation it could have left to the private sector that the entire city government is now at risk of collapse.  This case was reported in today's issue of The Wall Street Journal.  Harrisburg incurred a debt of $288 million in an attempt to renovate an incinerator!  It owes $68 million in payments this year on this debt, but its entire annual budget is less than that amount.

Chapter 9 bankruptcy entails:

• A municipal government can reduce its debt even if the chief creditors oppose such a reduction.
• The settlement must have the support of at least one class of impaired creditors.
• An automatic stay of all litigation against the city occurs.
• The city can reject union contracts.
• Bankruptcy prevents judges from forcing asset sales or liquidation of the municipality.
• Pennsylvania's Community and Economic Development Dept. must approve the Chapter 9 bankruptcy and work with the city in the bankruptcy proceedings.
• The city must expect to pay huge fees to lawyers and accountants.
• The outcome of the request for bankruptcy is uncertain.  It could be rejected.
• Assured Guaranty Municipal, which assured the bond payments, will have to make the payments at great loss to it.
• Covanta Energy operates the incinerator and gave the city a loan of $25 million, which the city cannot repay in whole.

City Controller, Daniel C. Miller, favors this Chapter 9 way out of the city's predicament.   The first Pennsylvania municipality to use Chapter 9 bankruptcy was Westfall Township in Pike County.  They faced a legal claim of more than $20 million to a real estate developer.  The settlement was reduced to $6 million over a 20 year repayment period with no interest.  But, its bill from the lawyers and accountants was $600,000.  If its request for bankruptcy had been rejected, the lawyers and accountants fees would have put Westfall Township into even worse shape.

Of course a Chapter 9 bankruptcy may allow the city of Harrisburg to go on.  But, after the loses that creditors and bond guarantors will take, the city will still be in a tough situation.  First, it will still have to pay a substantial amount of money.  Second, it will have impaired its credit for quite some time.  These factors are likely to force a reduction of other services the city has provided its residents.  Some of these impaired services are likely to be its legitimate services.  In addition, the city's irresponsible actions will certainly hurt its creditors and those who invested in them.  Governments have no business causing such harm.

All of this grief could and should have been avoided by simply leaving to the private sector what is the private sector's.  Leave unto Commodore Vanderbilt what is Commodore Vanderbilt's.  Leave unto J. J. Hill what is J. J. Hill's.  Leave unto John D. Rockefeller what is John D. Rockefeller's.  When government leaves unto the private sector all functions which are not legitimate to it, any risk is taken only by those who have chosen to undertake it voluntarily and the legitimate functions of government are not put at risk.

Fannie Mae and Freddie Mac and the Full Faith and Credit of the USA

Robert Romano posted an interesting article on the debt of Fannie Mae and Freddie Mac and the U.S. debt on 7 April 2010.  Romano is the Senior Editor of the ALG News Bureau.  ALG is Americans for Limited Government, which is an organization doing good work for the cause of American liberty.  I will summarize the most interesting points in his article below.

Congress placed the government secured entities (GSEs) Fannie Mae and Freddie Mac under federal government conservatorship in 2008 because they were effectively bankrupt.  Congress formed the Federal Housing Finance Agency to manage their sorry financial mess, which Congress had long worked hard to foster.  In June 2008, their combined debt was $6.6 trillion, of which $4.7 trillion was mortgage-backed securities.  Congressman Scott Garrett asked Treasury Secretary Timothy Geithner why this debt taken on by the federal government had not been added to the national debt.  The U.S. debt of $12.6 trillion should really be $19.2 trillion and this would result in the downgrading of U.S. debt due to excessive risk.  There is quite a song and dance going on here while trying to avoid this.

Geithner says this corporate debt is not the same as U.S. Treasuries and should not be considered sovereign debt.  He says, "By statute, all obligations and securities issued by GSEs must include a statement that makes clear that such obligations and securities are not guaranteed by the United States and do not constitute a debt or obligation of the United States."  But, he also says the "Treasury is committed to supporting the GSEs while in conservatorship and to ensuring that the GSEs have sufficient capital to meet their debt obligations and honor their guarantees."  When Fannie Mae and Freddy Mac were nationalized, the FHFA director James Lockhart told Congress that "the conservatorship and the access to credit from the U. S. Treasury provide an explicit guarantee to existing and future debt holders of Fanny Mae and Freddy Mac."  It seems clear that when Congress nationalized the GSEs, the earlier statute that their obligations were not guaranteed by the federal government, had to be superseded or inherently contradicted.

Foreign investors held $1.5 trillion of the $4.7 trillion in mortgage-backed securities.  In June 2007, the last an accounting by nation was performed, China held $376 billion, Japan $228 billion, Russia $75 billion, Luxembourg held $39 billion, Belgium $33 billion, Britain $28 billion, and Middle Eastern national funds are also big holders.  Many of these nations apparently said they would not buy Treasury bonds to support the U.S. national debt if the government did not rescue them from the bankrupt mortgage-backed securities they held.  The federal government has since bought up $1.25 trillion of mortgage-backed toxic security debt.  The Treasury will not say whose toxic securities they bought, but they only dealt with primary dealers who could directly deal with the Federal Reserve Bank of New York.  When the TARP program was put together, the Treasury was forbidden to purchase the mortgage-backed securities of foreign central banks.  But, it appears likely that Geithner has done just that with paper which is indeed backed by the explicit backing of the United States.  What else could he have paid the primary dealers for the toxic securities with?

This is just me again:  Our real national debt is clearly much greater than the $12.6 trillion figure we are told in a huge lie that it is.  There is still much more hidden debt than just that of Fanny Mae and Freddy Mac also.

Government Motors or Despot Motors

The federal government has put about $20 billion into General Motors and plans to put in another $30 billion in the bankruptcy settlement. It will consequently own 60% of GM according to plan. Canada will own 12%, the United Auto Workers Union will have 17.5%, and the cheated bondholders will have to settle for 10% ownership. If the federal government is to come out of this restructuring of GM without losing taxpayer money, its 60% ownership will require that GM be worth $83.33 billion at some future date. And this neglects the fact that the taxpayer is not made whole unless the government investment earns interest over that time. More realistically, the taxpayer ought to get at least 6% real interest on his investment. So, in three years, GM needs to have a market value of $99.25 billion, or $83.33 billion compounded annually 3 times. Of course, it is more likely to be compounded monthly, with a result of at least $100 billion then likely.

What is the likelihood that GM will be worth $100 billion in 3 years? Well, surely we are all laughing at that question. GM is going to be managed directly from the White House, by the Despot-in-Chief Obama. He has no commercial enterprise management experience worth noting. His motivation in action is most certainly only political and does not include any concern for the taxpayer recovering his money, let alone with appropriate interest. The UAW can and will make demands for concessions before the next presidential election and the Despot will grant many of those demands. He will also mandate further small vehicles be built, which Americans will not want to buy. He will require GM to spend further huge sums on impractical power systems for cars and trucks. Americans will not buy these very expensive and impractical vehicles. Management will be afraid to make decisions for fear of stepping on the Despot's toes or what is the same thing, for fear of stepping on the UAW's toes. A shareholder with 17.5% of company shares is usually someone of power and they certainly are when the Despot holds 60% of shares and is allied with the 17.5% shareholder.

So, both management and labor union members will pretend to work in the best socialist tradition. This is a road much traveled and well-known. It is why nationalized companies in the U. S., in Great Britain, and in France, not to mention in the USSR and the post-WWII eastern Europe, have never worked. In the U.S., we have the well-known examples of the U.S. Post Office and Amtrak.

Despot Motors will lose the taxpayer's investment. The taxpayer will be very lucky to get out of this investment with $10 billion of the $50 billion committed or to be committed. That will only happen if the Despot does not win re-election and the in-coming President immediately sells GM for whatever it is worth on the market at that time. It is more likely that Obama the Despot will milk still more money out of the taxpayer for GM. At the least, we can expect an edict that all future federal government vehicle purchases or leases will be from GM at inflated prices. Most likely, there will simply be further grants of money as GM will be losing money hand over fist. No, Despot Motors will be squirting blood at least 10 feet.

It has been speculated that no one will want to buy from Ford Motor Company because the government will be doing favors for Despot Motors. Frankly, if Ford Motor does manage to stay out of bankruptcy, it will be the only game in town. The Despot will try to tilt the playing field toward GM, but he will not be able to compensate for GM's mismanagement. Meanwhile, Ford has experienced a much lower loss of sales than have the Japanese and Korean car makers, as well as lower losses than Chrysler and GM. Both Chrysler and GM will find it very difficult to get private investors to put money into them as shareholders and as lenders. Ford will have a very big advantage here. If Ford fights hard for UAW concessions, it will do even better. The UAW and federal government mandates on car mileage, size, and power systems will still be nightmare problems for Ford. Frankly, the traditional American auto industry has been milked to death and is not where any young professional would want to build a career. Go elsewhere, young man or woman. But cars will still be needed, so Ford is the only viable source for that commodity.

It Depends on What the Meaning of Change Is

Obama, or BO as Prof. David Mayer has dubbed him, is bringing promised change to Washington. It turns out that his idea of change is a return to the old discredited redistributionist socialism of the past, managed almost entirely by bureaucrats and politicians of the Clinton Administration.

The only real change is that it will be harder for Democrats to rally behind the charge that America is hopelessly racist. Given that so many people of European, Asian, and Hispanic descent voted for BO, we ought finally to be able to judge people only by their character, ability, and accomplishments at last. No longer should it be considered racist to do so. Finally, we may be able to enforce the 14th Amendment to the Constitution, particularly as regards equal protection of the laws. No longer should there be race-based college admissions quotas and hirings for jobs. No longer should conspiracy theories claiming that whitey is somehow responsible for the terrible public schools of Washington, D.C., and other cities such as Baltimore and Cleveland with similarly miserable schools, be given any credence.

So, we can expect as vigorous an effort against terrorists as we had during the Clinton Administration. We will return to the level of response seen for the first attack on the World Trade Center, the attacks on the two U.S. embassies in Eastern Africa, and the attack on the U.S.S. Cole. We will see BO's promised closing of Gitmo. Will the troops be trained to give Miranda Rights statements to the prisioners they take? Perhaps they will have to shoot all prisoners for fear they will simply be released later by the courts. These troops had better be good, because Barney Franks says the Defense budget will be 25% smaller. This is change we can believe in!

Among the domestic policy changes, the most prominent is a return to the higher tax rates to be levied upon the upper middle class and the rich which we used to have. These rates have been shown to be so high that they greatly change people's behavior to one of extreme tax avoidance. These higher rates are simply punitive and do not serve the purpose of increasing federal tax revenues. They will decrease federal tax revenues, while also forcing many of our hardest working and most creative and innovative people into modes of activity which are much less productive. This will lead to the levels of unemployment such redistributionist schemes have generally created in Europe. America, the land of the free and the home of the brave, is to follow the leadership of Socialist Europe. This is the change we can believe in!

We can also expect punitive carbon taxes on coal-fired electric plants, on coal mines, on steel plants, the railroads that haul coal and oil, on natural gas-fired electric plants, on oil refineries, and on trucking firms hauling coal, oil, or gasoline. These industries are to be kicked in the teeth. BO says he is going to put all of the coal-fired electric plants into bankruptcy! This in the name of global warming caused by man-made CO2 emissions as we slip into the next Little Ice Age. This is the change we can believe in!

Meanwhile, the United Auto Workers Union will be given a bailout. These semi-skilled workers will be among those who will receive the money stolen from many others of us, those with no pull in Washington. They and legions of people who will not pay their debts will leach a hefty portion of the blood from many of us. Not being able to pay your mortgage or your credit card debt will entitle you to be receiver of stolen goods provided by the kind-hearted BO. That he will threaten the use of brutal and overwhelming force to collect the goodies to be redistributed will be ignored. This is the change we can believe in!

Young workers, those not in the legions of low-paid government service corps modelled after Hitler Youth and the Brownshirts, will ultimately be groaning under the weight of higher taxes to support the retiring Baby Boomers on their cush retirements under Social Security. These Baby Boomers will do no work from age 67 to age 89, on average. Twenty-two years of leisure at the expense of the younger generations. This is the change we can believe in!

The United Nations will be given total control of the seas and will be acceded the right to tax all countries in the world. The United Nations will determine what rights the individual has and condemn any nation with a different concept of individual rights. The United Nations will designate nations with different concepts of rights to be, let me guess, fascist nations. The United Nations will require massive redistributions of income and wealth within all nations and between all nations. This is change we can believe in!