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Puerto Rico Has Become America’s Version of Greece

Debt relief and privatization are the only ways to fix its fiscal mess.

Puerto Rico has now firmly established itself as America's analogue to Greece. To get back to fiscal sanity, Puerto Rico is going to need some combination of debt forgiveness, political reform, and privatization. Congress may be in a position to help, but it will have to face down powerful special interests to do so.

After missing relatively small bond payments last August and this January, Puerto Rico's public sector defaulted on at least $367 million of principal due May 1. As a consolation, investors did receive $9 million in interest from the defaulting entity, Puerto Rico's Government Development Bank.

The fact that Puerto Rico even has a Government Development Bank should raise an eyebrow. State-owned banks are not a major feature of the mainland US economy, perhaps because failures of state banks contributed to a number of state bond defaults in the 1840s. Since the US didn't take over Puerto Rico until 1898, the island was not around to learn that lesson. The GDB is one of over fifty public corporations dominating Puerto Rico's economy. Others control the island's electricity, water, and sewer services.

Public corporations date back to the 1940s and largely owe their existence to the efforts of Rexford Tugwell. "Red Rex" was a Columbia University economist who was sold on the virtues of the Soviet way when he visited Stalin's Russia in 1927. He went on to play a leading role in implementing Roosevelt's New Deal. In 1941, FDR appointed Tugwell as Puerto Rico's governor, where he applied a similar state-led economic model. While much of the New Deal was unwound on the mainland, Puerto Rico's public corporations persisted on the strength of borrowed funds.

Puerto Rico's 1917 congressionally-imposed constitution limited Puerto Rico's central government and municipal debt to 7 percent of assessed property values. It also mandated a balanced budget. These limits did not apply to public corporation debt, and these entities started borrowing liberally.

A new constitution ratified in 1952 as amended in 1961 relaxed constitutional limits on Puerto Rico central government and municipal borrowing. A major cause of this relaxation was a mistranslation of balanced budget language in the 1952 constitution. While the English version instructs the legislature to balance revenues and expenditures, the Spanish translation of revenues was closer to "resources". The Puerto Rico government interpreted "resources" broadly, even including bond proceeds. It thus became possible to "balance" the budget with borrowed funds.

By the early 1980s, public sector debt had reached 82 percent of GNP—not far below today's level of about 100 percent. Puerto Rico muddled along with high debt levels until recently, when a long-lasting recession, out-migration, a string of unbalanced budgets, and loss of bond market access triggered the current crisis.

So what now? Detroit, San Bernardino, Stockton, and Vallejo were able to reduce their debt burdens by using Chapter 9 of the federal bankruptcy code. But that option is not available in Puerto Rico. The Commonwealth passed its own version of Chapter 9 in 2014, but its implementation has been held up by litigation which recently advanced to the Supreme Court. Puerto Rico then asked Congress to extend Chapter 9 to the island, but House and Senate bills making this change went nowhere in 2015.

Now that Puerto Rico's crisis has deepened, House Republican leadership and the Obama Treasury Department have reached a broad agreement on what needs to be done. The plan, embodied in HR 4900, combines a new legal process for debt restructuring with a federal oversight board to help Puerto Rico balance its budget.

Oversight boards are undemocratic, but they succeeded in New York and Washington, DC. As I discussed in a recent paper for the Mercatus Center at George Mason University focusing on the historical causes and potential solutions for the crisis, this formula also proved effective in Newfoundland—which was transformed from an insolvent British Colony to a debt-free province of Canada by an appointed government.

With Puerto Rico's population shrinking, many government facilities could be consolidated. Although some schools have been shut, the Commonwealth has resisted closing prisons. Puerto Rico has maintained the same number of correctional facilities in recent years despite a substantial drop in prison population. It has a large number of unused cells and more guards per inmate than any of the 50 states. Puerto Rico's elected government, susceptible to the influence of correctional officer unions, may be unable to make the necessary cuts. Unelected technocrats staffing an oversight board should be more effective.

The more controversial portion of the bill has been the restructuring authority. The proposed legislation creates a process in which bondholders negotiate with Puerto Rico public sector debt issuers restructuring terms (such as delayed principal and interest payments, or write-downs of bond value). If a restructuring agreement is approved by a certain percentage of bondholders and approved by the oversight authority, courts can impose the deal on all bondholders.

There are several factors beyond the scope of my Mercatus research that merit discussion. The possibility of debt restricting has horrified hedge funds, several of whom bought Puerto Rico's debt at fire sale prices and intend to use litigation to secure maximum payouts. This is the route Paul Singer successfully pursued with defaulted Argentina debt. The House bill, if enacted, shuts down that avenue: Litigious hedge funds would get the same payout as widows living on municipal bond interest in retirement, which is not a good way of justifying the hefty fees they charge their clients.

The fund managers have reacted by trying to derail the legislation. The Center for Individual Freedom—which serves as a useful stand-in for these hedge funds—has been running issue ads on cable news networks, Washington DC broadcast stations, and in committee member districts blasting the proposed bill as a federal bailout. The ads mislead viewers into thinking that U.S. taxpayer dollars will be given to Puerto Rico, ginning up constituents and generating calls. Because CFIF is a dark money group we don't know how much the ads cost, but it is likely to be several million dollars.

Many libertarians are mistakenly supporting the hedge funds' cause: arguing against restructuring legislation because it changes the terms of an agreement between bondholders and Puerto Rico governments in the middle of the game, undermining the sanctity of contract. But, as Murray Rothbard argued in 1992, orthodox libertarians should reject government bond agreements because these obligations are satisfied by coercively extracting money from taxpayers. Rothbard concluded that the only appropriate solution was repudiation of government debt, a view shared by Jeff Hummel and Wendy McElroy. While less pure libertarians may not wish to go that far, these scholars help us to recognize that government contracts should not be considered sacrosanct.

The current House bill is the right way forward for Puerto Rico. Ignore the dark money ads and move forward with the combination of federal oversight and debt relief.

Photo Credit: dianecordell/flickr

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  • Longtorso, Johnny||

    Greece is the word.

  • The Other Libertarian||

    I thought the Bird was the word?

  • Lee G||

    You guys are just trolling me since I was bitching about not enough economic coverage.

  • Brochettaward||

    Reason does have articles like this a few times a week. Problem is they often don't draw enough attention.

  • Chipper Morning Wood||

    Economics are totally lame. And patriarchal.

  • Lee G||

    +1 Bathroom rant

  • Tundra||

  • Homple||

    Perhaps, having experienced bankruptcy several times, Trump sees signs of its approach in the federal deficit, national debt and unfunded liabilities. He could be laying the groundwork for negotiations with the work out gang.

  • Brochettaward||

    The morons who attack hedge funds make me laugh. Almost as much as the people who talked about how the EU was 'forcing' austerity on Greece. These idiots seem oblivious to the fact that the people who own their debts are what make their deficits possible in the first place. Austerity in Greece's case wasn't a choice. The voters of Greece cannot vote themselves the money of another nation's tax base.

    These assholes want to demonize the lenders when they come around to collect are like the little kid who believes in Santa Clause.

  • Lee G||

    Don't cry for Argentina

  • Lee G||

    I do think that all creditors should be subject to restructuring of the debt just like in normal bankruptcy proceedings. It will become harder for governments to sell bonds in times of economic duress as a result, not necessarily a bad thing.

  • Brochettaward||

    That should be the case. Nikki (who has vanished) raised this point in a previous thread on Greece. The problem is that when governments are involved, we end up with politics (aka force) influencing decisions. In the case of Greece, the EU nations took on the debt to bail out their banks who made stupid decisions to lend. In Puerto Rico we'll get the retroactive changing of terms if not a complete bailout.

  • Je suis Woodchipper||

    After the credit markets are shuttered to PR, the new outrage will be a FRB bailout to correct a market failure. If the FRB can expand its balance sheet and offer a veritable alphabet soup of lending mechanisms to bailout the banks, then surely it can expand its balance sheet another couple tens of billions to bail out PR. Right, comrades??

  • invisible finger||

    Those against usury would accomplish more by working toward interest rates of 55% than rates of 2%.

  • John||

    I don't have a problem with hedge funds. I do however have a problem when someone expects me to care when they lose money. Whenever you loan money to someone there is a risk that it won't be paid back. That is why you charge interest. I couldn't care less about the bond holders of Puerto Rico or Greece or anywhere else.

    Loaning money to a government is risky because there isn't anything you can do about it if they don't pay. You can't repossess Puerto Rico. They should have known that and taken it into account before they loaned the money. If they don't like it that the Island is broke and they are not going to get paid, tough shit. That is what you get for loaning money to a socialist government.

    If the solution to these bankruptcies is to set up some kind of oversight committee to make sure the taxpayers work to pay the bond holders off, this shit will never end. The government officials who borrowed that money are long gone and couldn't give a shit less if they are paid and future government officials are not going to be deterred from borrowing more money than can be paid. The only way to stop this shit is fuck the bond holders up the ass so hard that no one ever wants to loan money to a government again. Then the future government officials can't borrow money no matter how badly they want to and we never have to worry about this problem again.

  • Je suis Woodchipper||

    That is the solution, but that is not what's going to happen.

  • Brochettaward||

    I can sign on to a 'let it all burn' plan. But that isn't what the critics of the lenders want or at least intend. When they criticize, it's simply to demonize and to obscure that the real problem is the spending they support.

  • kbolino||

    That will just lead to something worse, like mandatory bond purchases or sky-high marginal tax rates (toe-may-toe, toe-mah-toe).

    Ultimately, there is no right answer except for the voters to stop electing politicians who accrue so much debt.

  • John||

    If you are having to cover the bonds no matter what, that is marginal bond purchases. IT is insane that a government is allowed to borrow money like this. And the only reason anyone will lend it to them is they are counting on future tax payers getting fucked in order to pay them back. Some PR official 20 years ago borrowed money and the taxpayers today are supposed to pay that back? No way. If it can't be paid back, then walk away and too bad so sad for the bond holders. Any other solution is just going to ensure that we eventually end up back in the same situation. If the bond holders get paid, people will still be willing to loan and future politicians will still want to borrow and the process starts all over again. If the bond holders get fucked, then no one loans and the government has to pay its own way instead of fucking future taxpayers.

  • kbolino||

    If you are having to cover the bonds no matter what, that is marginal bond purchases.

    No, it is mandatory bond payments. The purchases remain free, although you could say honestly that the interest the purchaser receives in return is being extracted by force.

    The problem is that you are completely ignoring the bond purchaser's contribution of capital. You are saying cancel the debts to starve the beast, but the beast will not be starved until the whole population starves. It will sate itself until the land is barren.

    Reform must come from the voters and it must be in the form of reduced spending. Otherwise, the end result is just state ownership of all capital.

  • John||

    If you make the taxpayers pay it back no matter what, you are effectively making them purchase the bond and assume that risk that it can't be paid back without drastic efforts rather than the bond sellers. The bond sellers are not loaning any money there. The taxpayers are. If future tax payers are going to be on the hook no matter what, the loan if from them without their consent.

    And sure they made capital contribution. And they did that planning to charge interest on what was paid back. The interest is what covers the risk. The risk didn't work out. There is nothing wrong with them not getting paid. If debts were sacred and always were paid back, people who loaned the money would charge much lower interest rates. I don't begrudge the bond holders who make money because they took the risk of loaning the money. But don't should not get both interest and not assume any risk of the money being paid back. That is not business that is theft.

  • kbolino||

    This goes to the same point I made below. If you want a new government every 10-20 years with each new "unfairly" obligated generation, then you have to go through all the pain and hardship such a constant churning will bring. The rule of law, the stability of institutions, the peace of the nation, all of these things must be left to chance. Edmund Burke wept.

    The destruction of capital is a malevolent affair. Whether the loss is from the taxpayer or the bondholder is ultimately immaterial. I understand your perspective and it has a nice anarchistic tone to it, but the consequences have to be considered, as well.

  • John||

    No. You won't go through a constant churn. Do it once and no one ever lends them money again unless they government is in perfect fiscal shape. Imagine the PR government as a drug addict and the bond holders as his drug dealers. If you want the guy to stay clean, the worst thing you can do is pay his dealers. That just makes them willing to sell him more drugs. If you screw his dealers, they never will sell him any drugs much less on credit. Its the same thing here. The problem is PR wont' stop running up debt. The only way to stop that is to make it impossible for them to borrow more money.

  • kbolino||

    Do it once and no one ever lends them money again

    This is just wishful thinking. No one (well, very few people) will dare to loan them money for quite some time. But eventually someone will think "things have changed, there's new people in charge" and the lending will start up in earnest again.

    The only way to stop that is to make it impossible for them to borrow more money.

    So ban them from issuing bonds. It's not even a state, FFS.

  • John||

    If someone wants to loan them money, that is their choice. And if PR can't pay it back, then they won't get paid. If PR can figure out a way to finance its government via gullible bond holders, good for them. My point is that bond holders need to run the risk of not being paid back.

  • kbolino||

    My point is that bond holders need to run the risk of not being paid back.

    And my point is that there is a difference between saying this and saying "fuck the bondholders". Of course bondholders run the risk of not being paid back. But when you cease being able to pay them back, expect them to get choosy and start setting terms.

    If you don't want to become beholden to bondholders, then don't issue bonds.

  • Suicidy||

    Far better to just start throwing socialists in prison.

  • bvandyke||

    I think you are incorrect on this point. There will be a line waiting to loan them money (at a higher interest rate and deferred principal payments). It is government and loaning a government with a tax base is actually pretty low risk. The amount gained on interest would be huge, very well worth the risk to many.

    This is why they go through so many iterations of "restructuring" before it finally comes to a head.

  • Lee G||

    Exactly. There's a huge moral hazard issue here that's being ignored.

  • Homple||

    Loaning money to a government is risky because there isn't anything you can do about it if they don't pay. You can't repossess Puerto Rico. They should have known that and taken it into account before they loaned the money.

    Due diligence, anybody?

  • Rational Exuberance||

    You shouldn't care about hedge funds per se, but you should care about whether one group of lenders gets preference over others based on political factors.

    And, of course, these hedge funds are taking risk into account: the more money they lose now, the less likely they are going to lend in the future, and the more expensive borrowing becomes for governments. So far, they have been willing to lend because the US government has made good on its loans, and the US government does that because having to pay higher interest rates in the future would be a disaster for progressive policies and current spending policies.

  • Rasilio||

    Yes, but on the flip side there comes a point where you have to be a moron to not realize the bonds you are buying could never be paid off and it becomes clear that your gamble is not on whether the borrower can pay them but how well you can play the political game when the eventual default occurs so I don't shed any tears for any hedge funds or other institutional investors forced to take a haircut on these types of government bonds

  • Lee G||

    With Puerto Rico's population shrinking, many government facilities could be consolidated.

    Always easier said than done. Detroit comes to mind.

  • Chipper Morning Wood||

    Oh yeah? Show me a gay Puerto Rican. I dare you.

  • Swiss Servator||

    "Sure, wait until he has had his second beer"

    /joke told to me by a Mexican rugby player

  • Rational Exuberance||

    They're all in New York.

  • Suicidy||

    Fire Island?

  • The Last American Hero||

    Time to grant PR statehood or cut them off the teat. Same with the Native American "Nations" and other US territories. While we're at it, sign a Lateran Treaty for DC, relegating all non-federal property to Maryland or Virginia.

  • DJF||

    Great Idea about the Lateran Treaty but I fear it will start the Civil War up again as Armies of Virginia and Maryland fight over who gets what, each trying to get as little as possible

  • Brochettaward||

    A war over who to take Baltimore?

  • Brochettaward||

    *has to

  • ||

    Time to grant PR statehood or cut them off the teat. Same with the Native American "Nations" and other US territories.

    ^ This.

  • Homple||

    Cut them loose. I'm all for the Independejo movement.

  • Rational Exuberance||

    That would actually be good for them as well, since questions of investments, citizenship, and property rights would be addressed far better than they are under the current corrupt mechanisms. That would finally allow investments and economic growth. If these places play it smart and turn themselves into small government and low tax enclaves, they could prosper greatly.

  • ||

    A Grecian Formula?

    Does it have a number?

  • R C Dean||

    A default like this should have hit the derivatives market, pretty hard, since that market is as big as it was the last time it took a dump and nearly took the entire financial system with it.

    I haven't heard a peep about that. I wonder if the oversight body for derivatives has decided this isn't a default-default, so the derivatives aren't triggered into default mode.

  • Je suis Woodchipper||

    When was the last time a default-default was declared?

  • DesigNate||

    2008?

  • PBR Streetgang||

    Can we call the solution a "Grecian Formula"?

  • Free Market Socialist $park¥||

    Just how much does a Grecian earn?

  • Swiss Servator||

    *narrows gaze at both*

  • Pompey||

    Are there five?

  • ||

    Should have read ahead.

    There are at least 16 different answers to this problem.

  • invisible finger||

    Puerto Rico Has Become America’s Version of Greece

    Only if we give them independence.

    Otherwise, they're just America's umpteenth version of Detroit.

  • Shirley Knott||

    "Undemocratic" -- you say that like it's a bad thing. Democracy is 2 wolves and a sheep voting on what's for dinner.

  • John||

    It amazes me that Libertarians would be for doing anything but screwing the bond holders here. If you hate big government, you might want to make it less attractive for people to finance big government. It takes two sides to make a debt. Yeah, PR borrowed all that money but someone had to loan it to them. If no one had been willing to do that,we wouldn't have this problem. As everyone who is familiar with Laffer knows, there is a limit to how much taxes a government can collect. The limit for how much a government can borrow seems to be pretty high. I think it is about time we lowered that limit a bit and let investors know that governments are a very bad risk and the days of depending on future taxpayers getting fucked in the name of "paying our debts" to cover their investment in big government are over.

  • invisible finger||

    Isn't that what the last paragraph of the article says?

  • John||

    Yes. And i agree with that. The libertarians who say otherwise are making a fetish out of contract obligations at the expense of the larger picture.

  • kbolino||

    The problem with the argument, and this applies just as well to Rothbard as to you, is that all government expenditures are paid coercively. Rothbard says the debt should be canceled (by the government!) but fails to account for the fact that it will not result in a lesser burden on the taxpayers. If anything, the burden will increase.

  • Lee G||

    So where's the breaking point? At what point does the cycle become unsustainable?

  • kbolino||

    In an article making a comparison to Greece, the breaking point is fairly obvious. It is when your bondholders are imposing (some measure of) the fiscal discipline that your voters should be imposing. The situation in Greece is hardly laudatory but it is better than canceling their debts.

  • Lee G||

    I agree that reduced spending is a better choice up to a point. The problem is that the risk has been underpriced for way too long because of implicit guarantees to extract that money by force, either thru taxation or inflation. Forcing the lenders to take a haircut while simultaneously cutting government helps to restore some sanity to the bond markets.

    Unfortunately, we are so far down the rabbit hole, that there is no painless way out.

  • kbolino||

    Unfortunately, we are so far down the rabbit hole, that there is no painless way out.

    This much is true. It's hard for me to say that people should suffer under my ideas instead of suffering under John's, because there is suffering either way. But I do believe that the more radical the action, the more risk that is introduced, and thus the greater the potential suffering may be.

    I guess I'm getting mellow.

  • ||

    But Greece didn't really get any kind of restrictions put on them by bondholders until it became glaringly obvious that Greece was planning to give them some good ole fashioned Greek love!

  • John||

    Sure they are. But I at least get a vote in the current government. Yeah. its coercive but it has to be to some degree or there wouldn't be a government. What makes it legitimate is that I at least get a vote and some nominal voice in what is going on. I didn't get that in past governments and they therefore have no right to obligate me to pay anything.

  • kbolino||

    I didn't get that in past governments and they therefore have no right to obligate me to pay anything.

    The only way to square this circle is to lower spending below revenues. That's it.

    Yes, you had no choice in the obligation. But you also say you want certain things from your government. To say that you have a right to functioning government but no concomitant obligation to continuity of government is petulant.

  • Brochettaward||

    I can say that I don't want anything from government. I just want to be left alone. Unfortunately, government exists and won't do that.

    The issue I have with John's argument is simply that I don't think governments are just going to be starved, as you've suggested. They will turn to greater force and have a large amount of the populous supporting them in doing so.

  • John||

    There are two sources of revenue for a government, taxes and borrowing. If governments can no longer borrow, then yes they will have to tax to get the money. Will taking away the ability to borrow cause them to tax more? Probably but that is not a bad thing. At least with taxes the current taxpayers are paying for the government they get. If they want to pay those taxes and get that government, i don't agree with their choice but at least they are paying for it. If you let governments borrow money and let them bind future taxpayers, then the taxpayers are not paying for that government; future taxpayers are or at least are paying for it to some degree.

    More than anything what has driven this problem is that borrowing money has allowed current taxpayers and government officials to enjoy the benefits of big government while passing the bill onto future taxpayers. If you bail out the bond holders, all you do is allow that system to continue and continue to make big government more attractive than it should be. Yeah, its great to fuck the taxpayers now and save the bond holders. But at some point that debt will come down and the heat will be off and the PR government will be right back in business spending money they don't have and passing the bill to future taxpayers. And there will be lots of people ready to lend them money.

  • kbolino||

    The issue I have with John's argument is simply that I don't think governments are just going to be starved, as you've suggested. They will turn to greater force and have a large amount of the populous supporting them in doing so.

    And I have this issue as well. I'm arguing from multiple perspectives, however. John does, as far as I know, believe the government has certain functions that it's obligated to perform, not the least of which being a strong national defense.

    You can look at the welfare state as the prime or even sole driver of the debt, but canceling the debt is not going to eliminate the desire of the people to have a welfare state.

  • John||

    If I want things from my government, I should have to pay taxes to get them not borrow the money and stick future taxpayers with the bill.

  • kbolino||

    If I want things from my government, I should have to pay taxes to get them not borrow the money and stick future taxpayers with the bill.

    Then push for a Constitutional Amendment banning further borrowing. I don't understand how canceling obligations is a superior choice to making better ones.

  • John||

    I don't need to do that. Just walk away from these bonds and the problem is solved. And those bonds are not legal or moral. The government officials had no right to bind future tax payers. Sure, they could promise that. And yes, they should try and pay it. But if the money runs out and the Island goes broke, too bad. The government should default and start over. And future bond holders can take that risk into account when lending money.

    If you do otherwise, you are just giving governments access to artificially cheap money. Everyone knew PR was going broke but no one cared and they kept lending them money because they knew the taxpayers would cover it no matter what. Make it clear the taxpayers won't always cover it and governments like PR will never be able to get into this kind of mess again because people will stop buying their bonds long before they do.

  • kbolino||

    I don't need to do that. Just walk away from these bonds and the problem is solved.

    Yes, and unicorns will shit rainbows.

    The problem isn't solved until voters demonstrate lasting fiscal discipline.

  • kbolino||

    You are stressing this argument beyond the breaking point. Politicians and the people who vote for them are the prime movers here; blame the electorate before you blame the bond purchasers.

    It should not come as any surprise that libertarians would be on the side of people who loaned money in good faith and not those who borrowed it in bad faith.

  • Tundra||

    Good faith? Sort of. They loaned money knowing that their risk was negligible because the taxpayers are there to bail them out. Sort of like banks writing all kinds of shitty mortgage paper, knowing that the Feds would take it.

    When lenders are truly on the hook, they make generally rational decisions.

  • kbolino||

    Fair enough. But that still leaves the government agents as the worse moral offenders. We could dig them up and hang them in grand fashion like Oliver Cromwell, but that won't do much good.

    The current crop of politicians is a different story, and should fear being hanged before they rest peacefully in the ground.

  • John||

    If you loaned the money thinking that future taxpayers would pay you no mater what, how is that loaning it in good faith? It is a government. You can't get a secured interest in a government. And since future taxpayers are not part of the bargain, you can't or should not be able to get a secured interest in their tax money. How can you come and take my money to pay a debt made by a politician who was in office before I was born and I never voted in an election that put them in office?

    When you say pay the bond holders, you are saying "allow government officials to bind future taxpayers". How is that in anything other than theft? It is one thing when the government now that I am stuck with but at least get a vote on obligates my tax money. That is just how government has to work. It is something else entirely to say my tax money can be obligated by people from the past that I never met nor voted for and there is nothing I can do to get out of that obligation.

    Fuck the bond holders. They assumed the risk and want to make current taxpayers into indentured servants to avoid that risk.

  • ||

    If you loaned the money thinking that future taxpayers would pay you no mater what, how is that loaning it in good faith?

    Because you are accepting a very low interest rate in return for the security. If you want a junk bond, you buy a junk bond at a higher interest rate.

  • John||

    You accepted lower interest rates based on a promise that those government officials had no right to make. Sucks to be you.

  • ||

    You accepted lower interest rates based on a promise that those government officials had no right to make

    No - you accepted lower interest rates based on a consistent history of the debtor paying the debts. Is there still risk of default? Yes. Does that mean you are lending in bad faith? No. Is the borrower who is going to default borrowing in bad faith? Yes.

    The point I am responding to = the assertion that there is equal bad faith on the part of the borrowers and the lenders.

  • DesigNate||

    But the security is a government official saying "Yeah, fuck the people's grandkids, I want that choo-choo today."

    Anyone that loans with that assumed security (because as we see here, taxes collected can't keep up with all the spending so low-and-behold they're defaulting) is a fucking moron, or loaning in bad faith, knowing that the government will bail them out/prop them up.

  • John||

    Bingo

    What kind of a nut loans PR money any time in the last 20 years? The kind of nut who knows the money can't be paid back but figures future tax payers will get screwed to do so no matter what.

  • ||

    But the security is a government official saying "Yeah, fuck the people's grandkids, I want that choo-choo today."

    Sometimes, yes. But most often they issue bonds, they spend the money, they pay the bonds back. This is why government bonds for stable governments have low interest rates.

    If I loan money to Donald Trump based on his consistent ability to pay loans back, and he happens to raise the revenue to pay back the money I have loaned by abusing his political connections to use imminent domain laws to seize someone else's property, am I acting in bad faith?

  • DesigNate||

    If you knew he was going to do that, then I would say yes.

    But I get your point.

  • kbolino||

    If it really matters so much, then commit that greatest of sins and compromise. Shave, say, 10% off the face value of every outstanding bond and see what happens.

  • Homple||

    Nice deal, these taxpayer-funded bailouts. Lend money to A and, when he doesn't pay it back, send guys to get A's money from B at gunpoint under threat of prison.

    Better than the Mafia because it's legal.

  • kbolino||

    It's a terrible fucking system but it's not going to end without some hurt. Hurting the bondholders may feel nice because they're just bankers and they should have known better, but pretending voters and government agents don't moral agency doesn't remove their culpability.

  • Rasilio||

    Your assumption of good faith is ridiculous.

    In every on of these cases it had become obvious more than a decade before the eventual default that there was literally no way for those governments to repay even the majority of their outstanding obligations forget all of them yet investors continued to purchase those bonds at very favorable rates (at least when compared to non governmental junk bonds they were the equivalent of) because of the implicit guarantee presented by the government.

    Those investors knew at the moment they bought those bonds that someone was going to get fucked over good and hard because of them, they just assumed (and so far correctly) that they could play the political game to ensure it wasn't them who took it up the ass.

    Lending to a borrower you know with absolute certainty cannot repay the debt because you believe you can use the political process to ensure that some 3rd party (in this case taxpayers) can be forced to repay that debt it is the opposite of "Good Faith"

  • kbolino||

    How can a lender "use the political process" in a way that's more powerful than the majority of voters? The number of substantial borrowers is far lower than the number of total voters.

    Harping about whether or not the lender's faith was good enough ignores the part where the borrower's faith was unquestionably bad.

    If you feel that the lender isn't sufficiently moral, then cancel the bond and refund the principal.

    Oops. That's right. You don't have it any more. It was spent. Because the real problem is spending.

  • kbolino||

    Correction: The number of substantial LENDERS is far lower than the total number of voters.

  • Rasilio||

    The same way the big banks got bailed out when the housing market went kablooey but the individual homeowners were not bailed out .

    If you think individual voters have ANY say in the policies that get enacted you are delusional. If you think even the majority of voters has more than a marginal say you need to learn the way the system actually works now.

    See politicians don't even run this stuff, it is all handled by unaccountable career bureaucrats and when a major entity goes tits up there is a political and legal process that goes on to determine exactly how to spread the haircuts around.

    Now if you think I am exempting the taxpayers of PR (or any other government entity that spends itself into insolvency) you are mistaken I'm just not buying the bullshit the big institutional investors sell about the sanctity of contract when they fucking knew going in that contract could never be honored.

    See BOTH the taxpayers AND the hedge funds need to loose just about everything and if you let EITHER off the hook you are just setting the whole thing up to happen again.

  • kbolino||

    Saying that individual voters don't have any say because certain players get special treatment is sidestepping the mechanism by which corrupt kleptocrats get into power.

    The ultimate deciding authority on election night is the vote tally. Now it is possible that the tally is fraudulent, or that the process of translating the tally into a winner is not representative, but ultimately a sufficient number of votes will change the outcome.

    I stick by my original statement that the real problem has always been and will always be a desire to spend money that isn't there. Raising interest rates and restricting the flow of debt doesn't affect the power to tax. As long as people are willing to extract money forcibly from others, this is not going away.

    People who buy bonds may be complicit in the propping up of an unsustainable system. But the system wasn't ordained by God. It is demanded and tolerated by voters and set up and managed by their representatives.

  • kbolino||

    And it's bizarre to harp about manipulation of the political process, when the entire purpose of canceling the debt is to nullify the votes people have made in favor of more debt.

  • kbolino||

    Well, not the entire purpose. I doubt Greeks want to cancel the debt to punish themselves. They just think they can get more free shit by not having to pay for last year's free shit. It is however at the crux of Rothbard's reason for doing it.

  • kbolino||

    Lending to a borrowerVoting for a program you know with absolute certainty cannot repay the debt be paid for because you believe you can use the political process to ensure that some 3rd party (in this case taxpayers) can be forced to repay that debt pay for it is the opposite of "Good Faith"

    Lending to a borrowerMaking a promise to the voters you know with absolute certainty cannot repay the debt be paid for because you believe you can use the political process to ensure that some 3rd party (in this case taxpayers) can be forced to repay that debt pay for it is the opposite of "Good Faith"

    Why are bondholders the only guilty party? Or even the most culpable?

  • JFree||

    Oh yeesh. PR bonds were bought because they are, by act of Congress, exempt from all taxes regardless of where you live. So every muni bond fund could stuff some PR bonds in their portfolio - and then move it from a CA fund to a NY fund and back again without having to price it on a public market. There really is nothing 'good faith' about this. PR bonds have always been a tax gimmick subject to financial engineering gimmicks - because PR is a federal colony not a state.

  • kbolino||

    blame the electorate before you blame the bond purchasers.

    I dunno, maybe somebody will read the entire comment. I doubt it.

  • toolkien||

    Government bonds (unlike Social Security) are a voluntary Ponzi Scheme.

  • ant1sthenes||

    Well, I fully support dicking over PR's creditors, but the bondholders alone shouldn't be made to suffer. The pubsec pensioners are just as worthy of a dicking, especially given they have a lot of responsibility for PR getting itself so indebted in the first place. All of the secured creditors should share the pain.

  • Rational Exuberance||

    I think you are merely projecting your conservative straw men onto libertarians.

    I don't see a lot of libertarians having problems with PR declaring bankruptcy.

    The only thing I have a problem with is treating different political groups differently when it comes to taking losses. "Little old ladies" should be on the hook just as much as billionaire hedge funds, because "little old ladies" in practice just means "powerful lobbyists".

  • invisible finger||

    Sounds like a battle between "Fuck You, pay me" versus "Fuck You, that's why".

  • Raven Nation||

    Puerto Rico has maintained the same number of correctional facilities in recent years despite a substantial drop in prison population. It has a large number of unused cells and more guards per inmate than any of the 50 states.

    Haven't we heard stories about over-crowding in US prisons? PR should sell cell space to US states. State prison over-crowding goes away, PR makes money - win/win.

  • Jordan||

    How could you leave out Puerto Rico's 96% unfunded pension liabilities?

  • John||

    Another group that needs to be told to go fuck themselves. Your pension is nothing but an IOU from your employer and is only as good as your employer's ability to pay it. I feel bad for the pensioners but the people who are to blame for their misfortune are both the pensioners themselves and their corrupt union bosses. It does you no good to negotiate a pension so generous your employer will go bankrupt tying to pay for it. And if they are bailed out, then future employees will do exactly the same thing.

  • sarcasmic||

    This is why I have no problem with private sector unions, but I believe all public sector unions should be abolished if not criminalized. Private sector unions can bankrupt their company, and then that's it. The company goes under. Not so much with governments. They very rarely go bankrupt. They just suck more and more from their citizens, spreading pain and misery, all for the benefit of the union members. It turns every member of that union into an active extortionist against the people they are supposed to serve. A firing squad is too good for people like that.

  • Lee G||

    Private sector unions can bankrupt their company, and then that's it.

    Not anymore, thanks to the GM debacle.

  • kbolino||

    If I honestly believed that pensions and transfer payments were going to be discarded along with the debts, then I might support the cancellation of them.

    But I would basically have to ignore every historical example of a sovereign entity canceling its own debt to believe that.

  • John||

    Its up to the people of PR what they pay. If they want to pay the pensioners and not the bond holders, that is their call. Since I have no sympathy for either if they don't get paid, I don't care if one does or the other doesn't.

  • kbolino||

    Its up to the people of PR what they pay.

    Not for too much longer, it won't be.

    PR isn't sovereign anyway. If they want to set their own priorities so badly, then they'll need to declare independence or else petition for statehood.

  • Rhywun||

    Why doesn't PR just import a bunch of rich people? It's the only thing keeping places like NYC afloat.

  • Quincy.||

    Rich people won't come over until PR has those fancy GMO mosquitos.

  • Jerryskids||

    Now that Puerto Rico's crisis has deepened, House Republican leadership and the Obama Treasury Department have reached a broad agreement on what needs to be done.

    SPOILER ALERT: It ends up with Larry bonking Moe on the head and Moe poking Curly in the eye and Curly doing a spin and knocking over Larry and Moe with the ladder he's holding horizontally. It stops being funny after the first few hundred times you've seen it, assuming you're more than about eight years old.

  • Jordan||

    Oh, and anyone want to guess what happens to Puerto Rico's economy if the minimum wage gets bumped up?

  • Pompey||

    Ask Bernie Sanders, he has all of the answers.

  • Brochettaward||

    Puerto Ricans will earn a living wage?

  • Quincy.||

    Sure, in New York or Miami.

  • Juvenile Bluster||

    More people will have more money, which leads to more spending, which leads to more jobs, which leads to more money, which leads to more spending, which leads to more jobs, which leads to more money, which leads to utopia, right?

    I mean, that's what I've been told about the $15 minimum wage.

  • R C Dean||

    + 1 self-licking ice cream cone

  • Diane Reynolds (Paul.)||

    Does any of this mean I can get some cheap beach-front property in PR?

  • DOOMco||

    Yes. Very much

  • Diane Reynolds (Paul.)||

    Congress may be in a position to help, but it will have to face down powerful special interests to do so.

    You know, if there's a snarling, rabid, vicious animal that got itself trapped in a hole, what say we just leave it in there?

  • kbolino||

    The problem is that that animal has a thread in its mouth, and if tugs hard enough, that threat unravels the tapestry that you've spent so much time working on.

    Breaking out of overextended metaphors, as long as PR can continue issuing bonds, they are going to continue borrowing, and as such threaten the stability of the currency.

    PR is a territory and can be told to go pound sand. The states should be forbidden from issuing bonds denominated in U.S. dollars. As for the Federal government, only the voters can truly reign it in.

  • kbolino||

    Someday, I will use the preview button properly.

  • Diane Reynolds (Paul.)||

    Huh, I certainly learned some new stuff about PR's history:

    Public corporations date back to the 1940s and largely owe their existence to the efforts of Rexford Tugwell. "Red Rex" was a Columbia University economist who was sold on the virtues of the Soviet way when he visited Stalin's Russia in 1927. He went on to play a leading role in implementing Roosevelt's New Deal. In 1941, FDR appointed Tugwell as Puerto Rico's governor, where he applied a similar state-led economic model. While much of the New Deal was unwound on the mainland, Puerto Rico's public corporations persisted on the strength of borrowed funds.

    It's too bad the Kochs ruined PR. Otherwise Stalinism clearly would have flourished.

  • Pompey||

    Tugwell was a cunt, and I learned this from Amity Shlaes' The Forgotten Man, as recommended by another commenter here years ago.

  • Diane Reynolds (Paul.)||

    I dare say anyone who found Stalinism "compelling" has to have at least some cunty attributes.

  • MiloMinderbinder||

    Didn't Reason run a bunch of articles a few years ago about the Puerto Rico miracle?

  • MiloMinderbinder||

    Yes, they did!

    Governor Luis Fortuno on How Puerto Rico Avoided Becoming "America's Greece"

    http://reason.com/reasontv/201.....-on-how-pu

  • kbolino||

    Fortuno lost the next election.

  • Diane Reynolds (Paul.)||

    The only thing I can find is a Reason video on celebrating Puerto Rico's "public private partnership" authority.

    Both Reason and Cato have sometimes glommed on to these Public/Private partnership concepts which at some point, are really just government officials choosing a monopoly partner, then the whole thing devolves into the same graft, corruption and public fleecing that a public/public partnership offers, but at least now you can blame it on the Kochs.

    I guess the Public/Private partnership to 'mainstream libertarians' is the compromise you settle on when it's clear Leviathan is never ever EVER going to shrink or get out of the way entirely, so you take your libertarian moments where you can.

  • R C Dean||

    It never hurts to think of the government as organized crime.

    When a made man says he wants a "partnership" with you, you pretty know how that's to going to work. Why people pretend public/private partnerships aren't cut from the same cloth is, as ever, a mystery.

  • DesigNate||

    To be fair, that was like four years ago. A lot can change in that amount of time and with a shitty election.

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  • Zeroth Position||

  • AD-RtR/OS!||

    Cut it loose....let it go its own way.

  • buybuydandavis||

    The Commonwealth passed its own version of Chapter 9 in 2014, but its implementation has been held up by litigation which recently advanced to the Supreme Court.

    I hope that the Supremes ok bankruptcy. If you make bad loans, you eat them. That's the only real check against government overspending - tank your credit rating so that no one will loan to you.

  • buybuydandavis||

    But, as Murray Rothbard argued in 1992, orthodox libertarians should reject government bond agreements because these obligations are satisfied by coercively extracting money from taxpayers. Rothbard concluded that the only appropriate solution was repudiation of government debt, a view shared by Jeff Hummel and Wendy McElroy.

    Yay! Libertarians for the Win!

  • Robert||

    Marc D. Joffe?

  • Scott Lahti||

    The one, the only.

  • Rational Exuberance||

    It's not about sanctity of contract. Obviously, if Puerto Rico can't pay everything back people are going to lose money. But government shouldn't pick winners and losers among creditors based on how politically sympathetic particular creditors may appear.

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