Federal Reserve: States Can Drop Dead

Okay not in those words, but behavior is everything.

” “Ford to New York: Drop Dead,” said a famous headline in 1975. President Ford had declared flatly that he would veto any bill calling for “a federal bail-out of New York City.” What he proposed instead was legislation that would make it easier for the city to go bankrupt.

Now the Federal Treasury and Federal Reserve seem to be saying this to the states, which are slated to be the first ritual victims in the battle over the budget ceiling. On May 2, Treasury Secretary Timothy Geithner saidthat the Treasury would stop issuing special securities that help state and local governments pay for their debt. This was to be the first in a series of “extraordinary measures” taken by the Treasury to avoid default in the event that Congress failed to raise the debt ceiling on May 16. On May 13, the Secretary said these extraordinary measures had been set in motion.

The Federal Reserve, too, has declared that it cannot help the states with their budget problems — although those problems were created by the profligate banks under the Fed’s purview. The Fed advanced $12.3 trillionin liquidity and short-term loans to bail out the financial sector from the 2008 banking collapse, 64 times the $191 billion required to balance the budgets of all 50 states. But Fed Chairman Ben Bernanke declared in January that the Fed could not make the same cheap credit lines available to state and local governments — not because the Fed couldn’t find the money, but because it was not in the Fed’s legislative mandate.

The federal government can fix its own budget problems by raising its debt ceiling, and the too-big-to-fail banks have the federal government and Federal Reserve to fall back on. But these options are not available to state governments. Like New York City in 1975, many states are teetering on bankruptcy.

A Beacon in the Storm

Many states are in trouble, but not all. North Dakota has consistently boasted large surpluses, aided by a state-owned bank that is showing landmark profits. On April 20, the Bank of North Dakota (BND) reportedprofits for 2010 of $62 million, setting a record for the seventh straight year. The BND’s profits belong to the citizens and are produced without taxation………”

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