Watching the raw footage of the union-led protests in Madison, Wisconsin—footage reminiscent of this past month’s rioting in Egypt, sans the gang rape—I began to wonder whether we might be exiting the Age of the Bailout and entering the Age of the Default.
That is, the time might have passed when any and all problems are solved by the Federal government and the Federal Reserve throwing billions at them. (The bailouts of the banking- and housing-sectors, the Big Three automakers and their unions, and commercial real-estate investors were only the most memorable episodes in what was a global phenomenon.) We might—and I stress might—be at a point when the only choice for the massively indebted is bankruptcy.
In a statement on January 8 that didn’t receive the attention it deserved, Ben Bernanke announced that the Fed would not assist state and local governments with their municipal bonds and obligations. Bernanke’s Wall Street overseers will have their losses socialized by the Fed, but Madison, Sacremento, and Springfield will be forced to make do with their unpayable burdens. (Ben's economic forecasts are some combination of propaganda and bunk, but when he makes a clear statement on policy, he should be taken seriously.)
I was shocked, and disappointed, really, at the absence of physical protests when Bernanke dolled out unfathomable sums to the “banksers” throughout the fall and winter of 2008-09. The scenes from Madison—and Athens last spring—make clear that when entitlements and government jobs get negated, the bureaucratic and dependent classes will take to the streets.
Illinois or California outright reneging on their debt and pension obligations is probably just outside the range of the thinkable for the media and most Americans. But the fact is, there’s a long history of state’s defaulting debts. Murray Rothbard described it:
Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840's, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called "internal improvements"), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830's. Most of these securities were financed by British and Dutch investors.
During the deflationary 1840's succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in "readjustments." Specifically, of the 28 American states in the 1840's, nine were in the glorious position of having no public debt, and one (Missouri's) was negligible; of the 18 remaining, nine paid the interest on their public debt without interruption, while another nine (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt.
Hat tip to Credit Bubble Stocks for bringing this passage to my attention.