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No.8886599

Interesting interview with Mitch McConnell discussing states being able to declare bankruptcy.

https://www.breitbart.com/politics/2020/04/22/mitch-mcconnell-floats-creating-bankruptcy-process-for-u-s-states/

Wednesday during Hugh Hewitt’s nationally syndicated radio show, Senate Majority Leader Mitch McConnell (R-KY) said he favors allowing states struggling to meet their financial obligations due to the Chinese coronavirus pandemic to declare bankruptcy instead of providing a federal bailout.

A transcript is as follows:

HUGH HEWITT: I know when you put the CARES Act together, you used the task force, you used some of your best people like Marco Rubio. I have great respect for Lamar Alexander. A lot of the state governments are gonna be smashed up by this. But there is no Chapter 8 in the bankruptcy code. Who are you going to, you know, for states — no states can go bankrupt. Local governments can go bankrupt and reorganize. Who are you going to task to lead the effort on deciding what to do or not to do for the states?

SENATE MAJORITY LEADER MITCH MCCONNELL: I think it’s going to be a broad discussion without, you know, throughout the conference. I mean, we all represent states. We all have governors, regardless of party, who would love to have free money. And that’s why I said yesterday we’re going to push the pause button here, because I think this whole business of additional assistance for state and local governments need to be thoroughly evaluated. You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs. There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.

So this is a much bigger conversation than we’ve had providing assistance for small business because the government shut them out, put them down, put them out of business, or assistance to hospitals, which were overwhelmed by the COVID-19 disease. This is a very different decision. These are all taxing authorities, just like we are, and I think that’s why we need to have a fulsome conference-wide discussion among Senate Republicans before we go down this path.

HEWITT: I agree. I think people do not understand how badly mismanaged some states have been and their unfunded liabilities. And if they were in the private sector, they would have to reorganize under the bankruptcy code. But there is no bankruptcy code chapter. Do you think that we need to invent one for states so that they can discharge some of these liabilities that were put in place by previous governors like, I mean, Jerry Brown ran a giveaway program for public employee unions that was just astonishing, and — as did Gray Davis, as did, you know, a lot of Democratic governors, Illinois is probably the worst, and Connecticut. They’ve just given money away for years to people who aren’t working.

SENATE MAJORITY LEADER MCCONNELL: Yeah, I would certainly be in favor of allowing states to use the bankruptcy route. It saves some cities. And there’s no good reason for it not to be available. My guess is their first choice would be for the federal government to borrow money from future generations to send it down to them now so they don’t have to do that. That’s not something I’m going to be in favor of.

>>8886755

Trump has notes bankruptcy as a business tool.

https://www.cnbc.com/2016/05/06/donald-trump-on-us-debt.html

Donald Trump just threatened to cause an unprecedented global financial crisis

PUBLISHED FRI, MAY 6 201612:08 PM EDTUPDATED FRI, MAY 6 20161:01 PM EDT

Vox

Matthew Yglesias

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In an interview Thursday on CNBC, Donald Trump broke with tired clichés about the evils of federal debt accumulation. “I am the king of debt,” he said. “I love debt. I love playing with it.”

But he replaced fearmongering about debt with an even more alarming notion — a bankruptcy of the United States federal government that would incinerate the world economy.

“I would borrow, knowing that if the economy crashed, you could make a deal,” . “And if the economy was good, it was good. So therefore, you can’t lose.”

Read more from Vox:

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With his statement, Trump not only revealed a dangerous ignorance about the operation of the national monetary system and the global economic order, but also offered a brilliant case study in the profound risks of attempting to apply the logic of a private business enterprise to the task of running the United States of America.

Trump’s business logic makes sense

Premium: Donald Trump Smiling during speech

US Republican presidential candidate Donald Trump

Jewel Samad | AFP | Getty Images

Trump is a businessman, and in terms of thinking like a businessman his idea makes sense.

The interest rate that investors currently charge the United States in order to borrow money is very low. A smart business strategy under those circumstances would be to borrow a bunch of money and undertake a bunch of big investment projects that are somewhat risky but judged to possibly have a huge payoff.

You now have two possible scenarios.

In one scenario, the investments work out and you make a ton of money. In that case, you can easily pay back the loan and everyone wins.

In another scenario, the investments don’t work out and you don’t make much money. In that case, you objectively can’t pay back the loan. You either work out a deal with the people you owe money to in which they accept less than 100 percent of what you owe them (this is called a “haircut”) or else you go to bankruptcy court and a judge will force them to accept less than 100 percent.

This is how businesspeople think — especially those who work in capital-intensive industries like real estate. And for good reason. This is the right way to run a real estate company.

Applying this idea to the United States would destroy the economy

Premium: Donald Trump speaking 160505

Republican presidential candidate Donald Trump addresses his supporters during a rally at the Charleston Civic Center on May 5, 2016 in Charleston, WV.

Ricky Carioti | The Washington Post | Getty Images

The United States of America, however, is not a real estate development company. If a real estate company defaults on its debts and its creditors lose money, that’s their problem. If a bank fails as a result, then it’s the FDIC’s responsibility to clean it up.

>>8886784

Pt2. This may be a big development.

The government doesn’t work like that. Right now, people and companies all around the world treat US government bonds as the least risky financial asset in the universe. If the government defaults and banks fail as a result, the government needs to clean up the mess. And if risk-free federal bonds turn out to be risky, then every other financial assetbecomes riskier. The interest rate charged on state and local government debt, on corporate debt, and on home loans will spike. Savings will evaporate, and liquidity will vanish as everyone tries to hold on to their cash until they can figure out what’s going on.

Every assessment of risk in the financial system is based on the idea that the least risky thing is lending money to the federal government. If that turns out to be much riskier than previously thought, then everything else becomes much riskier too. Business investment will collapse, state and local finances will be crushed, and shockwaves will emanate to a whole range of foreign countries that borrow dollars.

Remember 2008, when the markets went from thinking housing debt was low-risk to thinking it was high-risk, and a global financial crisis was the result? This would be like that, but much worse — US government debt is the very foundation of low-risk investments.

RT: Donald Trump campaigning Poughkeepsie NY 160417

Republican presidential candidate Donald Trump speaks to supporters during a campaign rally at Mid-Hudson Civic Center in Poughkeepsie, New York.

Eduardo Munoz | Reuters

What’s especially troubling about Trump’s proposal is that there is genuinely no conceivable circumstance under which this kind of default would be necessary. The debt of the federal government consists entirely of obligations to pay US dollars to various individuals and institutions. US dollars are, conveniently, something the US government can create instantly and in infinite quantities at any time.

Of course, it might be undesirable to finance debts by printing money rather than raising taxes or cutting spending. In particular, that kind of money printing could lead to inflation, and even though inflation is very low right now there’s no guarantee that it will always be low.

But a little bit of inflation is always going to be strictly preferable to destroying the whole American economy, especially because a debt default would cause a crash in the value of the dollar and spark inflation anyway.

Trump doesn’t know what he’s talking about

This is the second time this week that Trump has revealed a profound ignorance of an issue related to government debts.

The early instance in which he kept proposing that Puerto Rico declare bankruptcy even though doing so is illegal was on a question that’s very important to Puerto Ricans but not so important to everyone else. It is, however, important to pay attention to how presidential candidates approach issues across the board — and what we saw with Puerto Rico is that Trump approached the issue by simplistically applying business logic without bothering to check whether it applies to the actual situation.

Now in the CNBC interview he’s done the exact same thing on a matter of more consequence —not the debts of Puerto Rico but the debts of the United States of America. It’s understandable that a real estate developer might assume that what works in real estate would work in economic policy, but it’s not true. And Trump hasn’t bothered to check or ask anyone about it.

>>8886812

The conclusion to the article is not the point. Trump is a proponent of and has successfully utilized bankruptcy. What you are seeing is a shift in the discussion from the Federal government to individual States usilizing bankruptcy and the potential mechanisms that Mitch McConnell is discussing in the above interview. That is what makes Mitch's interview notable.