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Generational Dynamics Web Log for 22-Jan-2011
22-Jan-11 News -- Congress discusses allowing states to go bankrupt

Web Log - January, 2011

22-Jan-11 News -- Congress discusses allowing states to go bankrupt

Korean Navy regains confidence by recapturing hijacked ship from pirates

Congress discusses allowing states to go bankrupt

Although it certainly is possible for a state to default on obligations, if it doesn't have the money to pay its debts, it's not possible for a state to restructure its debts by declaring bankruptcy. In this sense, states are different from cities and towns.

Now, with many states headed for default because of unfunded pension obligations, cadillac health care benefits, and excessive union contracts, the NY Times is reporting that policy makers in Congress are discussing how to make it possible for states to declare bankruptcy. The objective would be to permit a federal judge to repudiate all contracts and obligations, and force the parties to renegotiate.

Not surprisingly, a change this important is provoking a political battle between Democrats and Republicans.

Democrats are aligned with labor unions in opposing the concept. Unions would prefer federal government bailouts of the states, channeling money into labor union coffers.

Republicans are aligned with holders of state municipal bonds in supporting the concept. The fear is that in the case of a federal bailout, available money would go to unions, and bondholders would receive little or nothing.

The problem with not paying bondholders is that the states need them, in order to keep borrowing more money. Bond investors will not purchase state bonds if there's fear of default.

In fact, that's already happening, according to Reuters. Municipal bond funds suffered a record outflow of cash last week, some $3.6 billion. Fund-tracking firm EPFR Global is quoted as saying, "The combination of municipal and state budget woes, with some threats of impending bankruptcy and possible defaults, and a U.S. tax deal extending the Bush-era tax cuts for two years lessening demand for tax-exempt investments such as muni bonds are all weighing on investor minds."

From the point of view of Generational Dynamics, I don't believe that it will make much difference which way this issue goes. As the financial crisis deepens, pretty much everyone is going to be badly hurt anyway.

Korean Navy regains confidence by recapturing hijacked ship from pirates

Since 2006, Nine Korean ships have been hijacked by pirates in the waters near Somalia, but Koreans hope that the Samho Jewelry, hijacked on January 15, will be the last.

In all previous cases, the Koreans paid the ransom to the pirates. Most recently, they paid $9.5 million in November to free a hijacked ship.

But public pressure changed things this time. JoongAng Daily quotes one government official as saying, "It would be troubling to give the pirates money so easily. They must realize that South Korea isn’t so soft."

A South Korean destroyer followed the Samho Jewelry ship, and conducted a surprise military strike on the vessel. After a gunfight between the Koreans and the pirates, there were four pirates dead and three Korean soldiers injured. All the hostages -- the crew of the Samho Jewelry -- were saved.

One of the reasons for the military operation was for the South Korean military to recover its self-confidence, after receiving criticism for their passive response to North Korea’s sinking of the warship Cheonan and shelling of Yeonpyeong Island last year, according to Donga Ilbo.

(Comments: For reader comments, questions and discussion, see the 22-Jan-11 News -- Congress discusses allowing states to go bankrupt thread of the Generational Dynamics forum. Comments may be posted anonymously.) (22-Jan-2011) Permanent Link
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Generational Dynamics Web Log for 22-Jan-2011 22-Jan-11 News -- Congress discusses allowing states to go bankrupt

Congress discusses allowing states to go bankrupt

Korean Navy regains confidence by recapturing hijacked ship from pirates

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Generational Dynamics Web Log for 22-Jan-2011
22-Jan-11 News -- Congress discusses allowing states to go bankrupt