You have of course been following the news closely about the bankruptcy of Stockton, California.
Well the story is simple. During the boom times the city issued bonds and other borrowings totalling $190million, but the boom went, leaving the city with a budget gap of $26million, presumably annually. It then ‘discovered’ it had $400million in unfunded healthcare liabilities and I am sure that the pension deficit is still to be added on.
Sound familiar? Remember Greece? The country which is pulling the Eurozone down single handily according to some people?
So what happens now in Stockton? Is it pulling down the US or even California? Not really. They are just watching.
Stockton is in fact filing for bankruptcy, much the same as several other towns and cities have done in the US and many more are likely to do in the future.
Let’s take the story line back to our favourite country in Europe – Greece. What would happen if it went bust too? Well, the same as in the US. The bond holders and banks would not get paid. It is that simple. More worrying is that employees of the state (as is the case in Stockton) will get laid off, but this is happening anyway, certainly in Greece.
The difference is that everyone seems to think we should bail out Greece or worse, make them go back to the Drachma. Of course Stockton cannot go to the Drachma as the thought does not occur to anyone. After all, it is American, so the Dollar stays. So why can’t Greece go bust and simply stay in the Euro?
I have heard all the reasons and they usually boil down to one thing – it would cause a chain of bank failures. Well, maybe we should have some bank failures. The ones we have around seem to be failing us anyway if I look at institutions like Barclays and RBS and that is only the ones currently in the news.
Companies which do not manage their assets correctly go bust, and clearly towns and cities in the US who do the same, also go bust. So what is the big deal? The employees of Stockton will not be paid, the banks and pension funds that financed them will not be paid and yes there will be serious consequences. The good news is that a line is drawn in the sand and we can start to build again.
We got over the tulip bulb mania, the South Sea bubble, the 1930s and several devastating wars. Nobody worried then about the consequences for the businesses and nobody seems to worry now. Somehow I feel this pussyfooting around is not of great help to any of us.
It would make my life a lot easier if I did not have to pay for all this debt we have – if it was my personal debt, I would be forced to go bust.