Senator David Vitter (R-LA) introduced legislation yesterday to prevent the Federal Reserve from secretly bailing out states with budget problems. Senators Jim DeMint (R-SC) and Mike Crapo (R-ID) have joined the effort and signed onto S.251, the State Bailout Prevention Act. This legislation music to the taxpayer’s ears.
The Hill reports that Senator Vitter wants to use this legislation to slam the door on state and local bailouts by the federal government.
With the State Bailout Prevention Act, Vitter is looking to make legally binding an earlier commitment from Fed Chairman Ben Bernanke that the central bank would not make loans to states and municipalities struggling with budget gaps and large debt burdens. Testifying before the Senate Budget Committee on Jan. 7, Bernanke said states “should not expect loans from the Fed.”
Vitter is memorializing the Bernanke promise into law. Because of Bernanke’s promise, one should expect the Federal Reserve to wholeheartedly support this effort by Senators Vitter, DeMint and Crapo. This law would make it the iron clad promise of the federal government not to use taxpayer money or taxpayer backed loans to prop up, bail out and otherwise enable state and local governments in deep financial distress because of irresponsible budgetary decisions.
The legislation is a comprehensive effort to shut the door on all of the federal government’s financial tools available today to bailout states and localities. This legislation follows on the heels of the termination of President Obama’s “Build America Bonds” (BABs) created in the President’s so called “Stimulus” plan. The BABs were tax free federal bonds that served to provide a rolling blue state bailout for states that have spent more than they take in. The BABs expired at the end of 2010 and conservatives blocked all efforts to renew these bonds.
The Vitter bill will stop states on the verge of bankruptcy, like California or Illinois, to secretly borrow hundreds of billions from the Federal Reserve to push to the future tough budgetary cuts. The Vitter bill is just what the Tea Party doctor ordered for America and this hopefully is evidence of a trend on Capitol Hill for politicians to just say no to more and more government spending.
The Hill further reports that earlier this year both Republican and Democrat leaders have closed the door on legislative bailouts.
House Majority Leader Eric Cantor (R-Va.) said state and local governments already have all the tools they need to shore up their budgets. House minority whip Steny Hoyer (D-Md.) has agreed that the federal government will not step in to rescue state budgets.
The Vitter legislation makes good on that promise. Vitter said in a press release that taxpayers were exposed to billions in risk when the Fed bailed out failing banks and they should not have the power to do the same for irresponsible state and local governments.
The Federal Reserve has already put taxpayers at serious risk in recent years by unilaterally propping up failing banks and other financial entities, and by no means should the federal government be in the business of bailing out state and local governments that are in the red.
The legislation uses three methods of preventing bailouts. Section (a) of the Vitter legislation prevents federal funds from being used to bail out any state that is at risk of default. This is an effort to prevent the whole federal government from bailing out a State, municipality, locality, county.
Notwithstanding any other provision of law, no Federal funds may be used to purchase or guarantee obligations of, issue lines of credit to, or provide direct of indirect grants-and-aid to, any State government, municipal government, local government, or county government which, or or after January 26, 2011, has defaulted on its obligations, is at risk of defaulting, or is likely to default, absent such assistance from the United States Government.
The next section is more specific to prevent Treasury Secretary Tim Geithner from using Treasury authority to bail out states or localities. Section (b) of the bill prohibits the Department of Treasury from directly or indirectly bailing out those at risk of default.
The Secretary of the Treasury shall not, directly or indirectly, use general fund revenues or funds borrowed pursuant to title 31, United States Code, to purchase or guarantee any asset or obligation of any State government, municipal government, local government, or county government, or otherwise assist such government entity, if, on or after January 26, 2011, that State government, municipal government, local government, or county government has defaulted no its obligations, is at risk of defaulting, or is likely to default, absent such assistance from the United States Government.
The last section targets the Fed and makes good on Chairman of the Fed Ben Bernanke’s promise. Section (c) of the legislation prohibits the Federal Reserve from repeating the mistakes of the past.
Notwithstanding any other provision of law, the Board of Governors of the Federal Reserve System shall not provide or extend to, or authorize with respect to, any State government, municipal government, local government, or county government, or other entity that has taxing authority or bonding authority, any funds, loan guarantees, credits, or any other financial instrument or other authority, including the purchasing of the bonds of such State, municipality, locality, county, or other bonding authority, or to otherwise assist such government entity under any authority of the Board of Governors.
Vitter concluded that “it’s encouraging that the chairman believes that the Fed shouldn’t get involved in bailing out states, but my legislation solidifies that into law.” This bill is a comprehensive means to shut the door on State and local bailouts. It will be interesting to see how quickly Congress acts on this proposal and if the Fed flip-flops on the Bernanke promise.
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