The Moral Hazard of a State Bailout

If the government does bail out the muni bond market, how should it go about things?  The initial assumption is that they'll only guarantee existing debt. Otherwise, it would be like handing the keys to the treasury to every mayor, county board, and state legislature, and telling them to go to town.


But once the treasury has bailed out a single state, there will be a strongly implied guarantee on all such debt.  So you don't give them the keys to the vaults, but you do leave a window open, point out where the money's kept, and casually mention that you've given the armed guards the week off.

I don't see how the government can make a credible committment not to bail out various localities who overspend, if it's already done so.  And if that's the case, there's no way to avoid the moral hazard, so we might as well go ahead and offer the explicit guarantee in exchange for some sort of say in how the money is procured and spent.

Farewell, Federalism . . . we hardly knew ye

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Things Not to Say to a Pregnant Woman

You don't have to tell her how big she is. You don't need to touch her belly.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Things Not to Say to a Pregnant Woman

You don't have to tell her how big she is. You don't need to touch her belly.

Video

Maine's Underground Street Art

"Graffiti is the farthest thing from anarchy."

Video

The Joy of Running in a Beautiful Place

A love letter to California's Marin Headlands

Video

'I Didn't Even Know What I Was Going Through'

A 17-year-old describes his struggles with depression.

Video

Google Street View, Transformed Into a Tiny Planet

A 360-degree tour of our world, made entirely from Google's panoramas

Video

The Farmer Who Won't Quit

A filmmaker returns to his hometown to profile the patriarch of a family farm

Video

Riding Unicycles in a Cave

"If you fall down and break your leg, there's no way out."

Video

Carrot: A Pitch-Perfect Satire of Tech

"It's not just a vegetable. It's what a vegetable should be."

More in Business

Just In