We finally have some great news for the financial future of all of us. As Mish reported yesterday,
“Today a judge ruled that the city of Stockton California is indeed bankrupt and that the city acted in good faith. Creditors asked the judge to void the bankruptcy, saying the city could raise taxes instead.”
Since people should pay their debts, some conservatives might complain about this situation. So let me explain why it is a wonderful decision.
First, regarding debt in general, no one is obligated to do what they cannot do. So even people who are under a debt load they can’t pay off, don’t have that obligation. People who lend money are taking a risk on a possibly profitable enterprise, just like the person who borrowed the money is taking a risk. At some point, both parties need to move on and stop pretending this debt is ever going to be paid back. Otherwise they are forever stuck in the past, unable to progress forward.
Second, though there is some overlap, in general the people who took the obligation are not the same people who are now obligated. People have left Stockton and moved into Stockton. Raising taxes would mean less revenue as more people moved away. Perhaps those with properties that lose their value because no one wants to live in Stockton will be forced to stay in the town, but for that reason the town’s economy will decline future and they won’t be able to provide more revenue to the municipality. But in any case, we’re talking about two different groups of people. Those being burdened with the debt liability were not the same people who took the loan.
Third, people should know to invest in productive assets, not in a ponzi scheme. Loaning money to a government is an inherent scam because they have no productive assets (or if they do have such assets, they will never be managed as effectively as similar assets are managed in the private sector). If you loan money to an oil company or a software developer they will use your money to produce something profitable so that they can pay your money back with interest. But a government is only promising to tax residents in the future to pay you back. Very little or even nothing profitable is done with the money; it is not invested but consumed. The moral obligation is not to pay back an impossible loan. The moral obligation was to invest in real development rather than buy government bonds.
So this left us with the question: Were the courts going to demand that insolvent cities pay back their debts by any means necessary? Were they going to force cities to take out more loans to pay back past loans, so that the spiral of debt only deepened? Were they going to give cities the authority to confiscate all bank accounts within their jurisdiction? (Of course, the Federal Government would never allow this because they are saving this alternative for themselves alone.)
The judge did the right thing. The debt is too large. The bondholders took a risk and lost on it. That happens sometimes; that’s why it is called “risk.”
In the meantime, though the financial meltdown will cause a lot of pain, we will be able to get through it and rebuild if this decision is upheld.