Illinois and California - next in line for a FED Bailout ???

[Higgenbotham]

What would motivate them enough to make them want to kick the can down the road a few more weeks, months or years?

I would answer my own question like this:

The elites believe by doing so they can avoid, or at least delay, the uncontrolled chaos that will occur when the debt bubbles collapse.

They profit by what they can control, but they are put at risk by events not under their control.

This I haven't disagreed with. The question would be how would they do this if it comes to the point that the states are the tipping point. What Bernanke is saying is he doesn't want the Fed involved with that directly, that the Federal government needs to be involved. It's six of one and half a dozen of the other they would probably have the Federal government bail the states out directly, then have the Fed buy the excess US Treasuries that result from the bailout. I'm pretty sure that Bernanke does not want muni debt on the books of the Fed or the investment banks, nor would the investment banks want it. Of course Obama wouldn't want to take on the debt either (they would be swapping out bad muni debt for Federal debt, then transferring it to the balance sheet of the Fed) but that's my guess as to how they would handle it. In fact, with the stimulus for the states, that's already what has been done. The question may be who has the most to lose if "the union" is not preserved and it's not the investment banks or the Fed, but the federal government, and so I believe it is they who will step up to the plate.

[Reality Check]

Speculation on one way bailouts of California and Illinois might be engineered:

First, get the U.S. Congress to go along with a "limited bailout" to address the "emergency conditions" in California and Illinois.

This bailout, like the U.S. bank bailout in the fall of 2008, would be totally inadequate, but it would create the political atmosphere for more substantial bailouts by means that would not require a vote by Congress.

The Media would be full of stories showing what a large part of the U.S. economy California and Illinois represent, what the devastating effect on the entire U.S. economy would result if they had to "suddenly" balance their budgets, and the horror stories of disease and starvation that would result if the citizens of California and Illinois were denied Medicaid and Food Stamps ( state programs the states would no longer be able to afford). Economists would point out that it would be much cheaper for the Federal Government to provide a few Billion this year to continue existing programs and allow for a "gradual transition" to a balanced budget in California and Illinois.

Such a bailout would be similar to what is going on now in Europe where very limited bailout funds are being approved by the parliaments of all EU Zone countries. The hundreds of Billions available in these funds are totally inadequate to impact Italy and Spain's default problems, but they set the political stage for the European Central Bank to print money and provide support to Italian and Spanish banks and to the governments of Italy and Spain that far exceeds the ECB charter.

What Congressman would want to vote against an urgent call from the President of the United States and the FED to spend just a few Billion dollars and avoid the risk of a major United States recession. After all, it is just a few Billion, and if they do not spend the money and the economy tanks, it will be their fault. Besides, everyone knows it will cost the U.S. taxpayers far more in disaster relief to California and Illinois to relieve hunger and disease if the money is not spent, so they are really saving the U.S. Taxpayers money.

Now the emergency nature of the California and Illinois problems will have been established with the public and members of both political parties are committed to "fixing the emergency" as long as they do not have to vote to spend more of the taxpayer's money.

Congress would also change the bankruptcy laws to "ensure" bailout moneys "loaned" to the states would be paid back before other creditors and to give the federal government control of the bankruptcy process of any state that accepted bailout monies from the Federal Government. All in the name of protecting the U.S. taxpayers.

Then the stage would be set for banks, acting on behalf of the FED, to buy special reorganization bonds from the states, and the FED would be able to loan the banks monies against the assets created on the Banks' books by these loans. Buried deep in the new laws protecting the U.S. Taxpayer would be a provision that allowed these special reorganization bonds from the states to be given special treatment by bankruptcy laws, and to be accepted as collateral for purposes of the Federal Reserve Bank making loans to banks.

[Reality Check]

The question would be how would they do this if it comes to the point that the states are the tipping point. What Bernanke is saying is he doesn't want the Fed involved with that directly, that the Federal government needs to be involved. It's six of one and half a dozen of the other they would probably have the Federal government bail the states out directly, then have the Fed buy the excess US Treasuries that result from the bailout.

I agree that the Congress would likely need to be involved in some small way for political cover.

Even if Obama is re-elected the political will to provide enough money to CA and IL to really address the problem is unlikely. Should Democrats gain super majorities in both the House of Representatives and the Senate, in addition to Obama being re-elected, then a full blown bailout by Congress might be possible, but otherwise, doubtful.

The rule about doing as little as is necessary to "kick the can down the road" will likely apply to those expending political capital in asking Congress to do something.

The Generation Xers who would actually be writing the "bailout bill" passed by Congress would be inclined to use deception and deceit to obtain their objectives, rather than expending political capital to obtain what they want directly from Congress.

I believe my above post provides one scenario that agrees with both your superior analysis of what the FED would want to do and the "kick the can down the road" limitations on what can be done.

[Higgenbotham]

The rule about doing the least possible to kick the can down the road will likely apply to those asking Congress to do something.

Yes, I covered only what will happen the day one of the states hits the wall and needs money. From there, your scenario looks likely to me.

Then the stage would be set for banks, acting on behalf of the FED, to buy special reorganization bonds from the states, and the FED would be able to loan the banks monies against the assets created on the Banks' books by these loans. Buried deep in the new laws protecting the U.S. Taxpayer would be a provision that allowed these special reorganization bonds from the states to be given special treatment by bankruptcy laws, and to be accepted as collateral for purposes of the Federal Reserve Bank making loans to banks.

I think they could and probably would do this. The investment banks and the Fed would want to get involved with the slice that they know the states, even with minimal revenue in the worst case scenario, can service. It would be free money for the investment banks and the regular now inferior muni bonds would then be the junk the public has in their portfolios, mutual funds, pension funds, etc.