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GLORIFIED FACEBOOK RANT: Puerto Rican Debt Crisis Edition

I can't believe no one is talking about the Puerto Rican debt crisis!!! Okay well, with the election going on and all, maybe I can believe it, but that is no excuse for our ignorance on an issue that presents such tremendous moral hazard.

In case you weren't aware, Puerto Rico has just defaulted on a little less than a half billion dollars worth of debt obligations that came due recently and is set to do so again, to the tune of about two billion dollars in the near future. Right now, Puerto Rico, an island inhabited by about three and a half million people, runs a territory wide budget deficit of about six billion dollars. That's on top of the over 70 BILLION DOLLARS in total outstanding debts they have already accrued to date. No wonder they're in trouble.

This gargantuan pile of debt wouldn't be a major issue if the island had a functioning economy capable of servicing these massive "investments". Unfortunately, however, the Puerto Rican government has seen fit to make the island so inhospitable to business interests that more than a quarter of its working population cashes a government paycheck. All of this adds up to an economically untenable situation that seems ripe for a bail out or some other form of outside intervention.

WE MUST RESIST THIS URGE AT ALL COSTS! Nothing good comes of a Puerto Rican bailout. Ditto for retroactively changing bankruptcy laws to the benefit of the very public employee pensions that have sucked Puerto Rico dry, and to the detriment of creditors who imprudently loaned money to the moribund territory under various pretenses. Both moves would have dire economic consequences that will reverberate through the mainland United States for decades to come.

A bail out would be most pernicious since it will prominently demonstrate, as so often happens, that when any State, Territory or Municipality within the United States engages in such egregious fiscal irresponsibility, big daddy government will be there to bail them out at taxpayer expense; that there are no consequences for profligate spending. In fact, quite the opposite, it will encourage highly indebted states to think of federal bail outs as an insurance policy against their recklessness in a way not unlike the too-big-to-fail bank bail outs did for our largest financial institutions. THIS CANNOT BE ALLOWED TO HAPPEN.

Far less overt, but no less insidious, would be to retroactively change the rules of the game by rewriting US bankruptcy law in a way that is overly sympathetic to the Puerto Rican government in the restructuring of it's debts. Doing this is really playing with fire, since it will betray the trust and confidence of creditors who loan money to local and state governments around the country in the form of municipal bond purchases. This will deter private investments that make financing local and state governments possible. The irony here being, that when we do this, it exacerbates the problem even more, since states with unrestrained and growing debt obligations will begin to have trouble securing outside investment to make up for their budget shortfalls. 'round and 'round we go!

The only plausible solution is to have the federal government take control of Puerto Rico's public infrastructure, placing it in a sort of receivership (we can do this since it's a territory) to be run by a federal committee charged with bringing fiscal responsibility and order to the island as well as implementing free market oriented pro growth policies that should energize the territory's tepid local economy. This would be a strong move by the federal government that would signal to all fifty states unambiguously that any financial assistance with the intention of ameliorating the burden of excessive public debts will come with significant strings attached. Once a positive change is perceived, this same committee would be in a position to negotiate a less onerous restructuring of Puerto Rico's debt whilst doing it's best to dispose of each obligation fairly, with the consent of all interested parties. What we absolutely must not do is write a blank check with no strings attached or change bankruptcy rules in a manner that shatters investor confidence around the country.

(originally posted as a Facebook rant on May the 4th 2016 by David Rigotti)

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