Moral Hazard Spreads: TBTF States? During the Financial Crisis, it was California that made the headlines with ‘out-of-money dates’ and fancy-looking IOUs with which it paid its suppliers. The booms in the stock market and the startup scene – the state is desperately hooked on capital-gains tax revenues – but also housing, construction, etc. sent a flood of moolah into the state coffers. Now legislators are working overtime to spend this taxpayer money. Gov. Jerry Brown is brandishing recession talk to keep them in check. Everyone knows: the next recession and stock-market swoon will send California back to square one.
Now Puerto Rico is in the headlines. It’s not even a state. And it’s relatively small. But look at wild gyrations by the federal government and Congress to deal with it, to let the island and its bondholders somehow off the hook.
But Puerto Rico may just be the model. Big states are sliding deeper into financial troubles, particularly New Jersey, Connecticut, and Illinois.
These three states hold the top positions in the ‘Zombie Index’ that Bill Bergman, Director of Research at Truth in Accounting, developed two years ago. California is in 7th place. Whew!!!
This post was published at Wolf Street on June 23, 2016.