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Sunday, October 31, 2010 1:29 AM

Simulation of a US State Defaulting

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At the recent Buttonwood economic conference in New York City, a team of economists addressed the question "What If a State Defaults".

WHAT happens if an individual state defaults? That was the question posed to a panel of luminaries at the Buttonwood gathering in New York, including Robert Rubin, Josh Bolten, Glenn Hubbard, Laurence Meyer and Laura Tyson.

The panel was assumed to be a bunch of Presidential advisers faced with a request for funding from New Jefferson, a fictional state with many of the problems of a typical state - unfunded pension promises, years of fiddling the numbers to balance the budget and a government divided between the parties. New Jefferson is shut out from the markets and asks the Federal government for $1.5 billion to meet a debt repayment due 48 hours away. There could be systemic risks if default occurs with the Chinese government raising the issue of contagion and with some state banks owning a substantial portion of the state's bonds.

The panel reluctantly agreed to provide temporary funding for the state - say for 30 days - but to require the state to sort out its mess. But it suggested a whole series of stringent conditions, including the use of proper accounting and a requirement to fund its pension plans properly. they were divided over what would happened if New Jefferson failed to save its problem within 30 days.

This is a very long video that some readers might enjoy. However, the panel did not address whether the long-term pension problem can be tackled if the courts decided that existing pension rights are legally protected.

Long-term pension issues are without a doubt the most likely reason a state would default.
Mike "Mish" Shedlock
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