There's a bit of buzz going around about several states seeking ways to default on their obligations to public employees while honoring their obligations to bond holders. The discussion is proceeding as if it is about "bankruptcy," but what is really being discussed is selective default. While Yves was among the first to post on the subject a week or two ago, Jesse's post today is more concrete. Make sure to check out this post from Jesse, as well, which contains a pithy put-down of POTUS.
Selective default simply isn't possible. Even under federal bankruptcy laws-- which do not apply to states, who are sovereigns-- the debtor cannot arbitrarily decide which creditors to pay back and how. The creditors have a big say.
Nor is state "default" of any sort desirable. Yet. First, states and municipalities still own a lot of valuable property. Second, retired public employees remain a powerful political force. Third, the money these retired employees spend is helping to prop up state economies. Fourth, and perhaps most importantly for the people pushing the "selective default" non-reality: states and municipalities owe a lot of money to banks and institutional investors.
No, all of this talk is aimed at conditioning the public to accept the privatization of state and local property at pennies on the dollar a la Arizona as the only politically feasible solution.
Of course, the states and municipalities will lease back the property, thus ensuring an additional stream of rents that will actually increase the cost of running state and local governments.
Unfortunately, you can only sell what you own once. In 2012, we'll see the same drama play out again, and this time we may actually see states default, which will lead to the destruction of public unions and pension fund obligations.
One way to look at this is as a replay of 1970s stagflation (aka screwflation), but this time public unions and public property are in the crosshairs.