Should the Federal Reserve Refinance Stockton?

San Bernardino City Hall

What if the bankruptcies of California cities -- Stockton, San Bernardino, Mammoth Lakes, Vallejo -- are the beginning of a wave that threatens essential public services and the markets?

Should there be a bailout? And if so, who should do the bailing out?

Two scholars have an answer to that question: the Federal Reserve should provide the same sort of assistance to California cities that it provided to banks.

Earlier this week in the LA Times, the University of Massachusetts Boston political scientist Thomas Ferguson and the Institute for New Economic Thinking's Robert A. Johnson write that the Fed should refinance municipalities just as it rescued the banks:

"We can start by asking why the Federal Reserve cannot refinance municipalities to preserve essential services at interest rates comparable to what it gave to rescue the insolvent banks that created this mess."

The two add that banks should break off derivatives and swap contracts that have cost local and state governments money. Many local governments adopted such contracts, at the urging of banks, to mask today's cash flow problems.

It's a provocative point, but one worth making. If the possible harm to society of bank failures required the Fed's intervention, wouldn't broad harm to vital public services -- which are mostly provided by local governments -- necessitate a similar intervention?

Let's hope that today's bankruptcies are isolated cases -- and we don't have to find out.

Lead Prop Zero blogger Joe Mathews is California editor at Zocalo Public Square, a fellow at Arizona State University’s Center for Social Cohesion, and co-author of California Crackup: How Reform Broke the Golden State and How We Can Fix It (University of California, 2010).

Send us your thoughts via Twitter @PropZero or add your comment to our Facebook page.

Contact Us