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Conservatives Continue to Raise Borrowing Costs for States by Discussing Bankruptcy

The successful strategy to talk about state bankruptcy continues. Politico gives valuable space to announce that Patrick McHenry (R-NC) will hold Oversight Committee hearings next months on the topic.

It’s an issue that “needs to be addressed,” McHenry, the chairman of the House Oversight and Government Reform Committee’s Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, told POLITICO in a brief interview Wednesday.

Former House Speaker Newt Gingrich, a possible 2012 Republican presidential candidate, has been working to whip up support for legislative authority to enable cash-strapped states to enter into a bankruptcy process to restructure or unload debts owed to public employees and other creditors. The idea has gained traction among some conservatives who want to ensure that taxpayers don’t bear the burden of bailing out state governments.

Senate Minority Leader Mitch McConnell (R-Ky.) has said he opposes state bailouts, and House Majority Leader Eric Cantor (R-Va.) says states have better tools than bailouts or bankruptcy to avoid default.

The last point is the key, and should end the entire discussion of the issue. If the Republican leadership in both houses of Congress have no interest in state bankruptcy, then it isn’t going to happen. This makes very clear that municipal bonds aren’t that risky right now.

But the point isn’t to actually pass legislation to allow states to go into bankruptcy. It’s to talk about it, therefore raising interest rates, which acts as a pure subsidy from state taxpayers to investors and banks. The more nervous investors are leaving the muni market entirely, with $30 billion coming out of the market since November. Part of this is the stability and success in the stock market, but it’s certainly also being driven by this hysteria about defaults which is completely unfounded.

Someone will buy those bonds, probably the TBTF banks. And they’ll get a nice subsidy for their efforts. McHenry, who represents bank-heavy North Carolina, knows what he’s doing.

David Dayen

David Dayen

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