Suggestion: Postpone the tax talk, and, instead, push the candidates on bailouts. Force them to declare whether they consider themselves to be “Austrian” or neo-Keynesian.” Let them say whether, come the next crisis, they’d wing it, à la Hank Paulson, or actually put forward a plan. Clear the air on 2008, and there will be trust enough for tax reform. But the best pledge for this election round is a “No Bailout” pledge.

More Here.

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The capital city Pennsylvania is broke and will be skipping this month’s multi-million dollar bond payment.On Sept. 15, Harrisburg, Pa., was scheduled to make a $3.29 million payment on the bonds it issued to build a trash plant. But, the cash-strapped city doesn’t have the dough.

Vallejo CA previously filed bankruptcy, and I suppose that is possibility for Harrisburg.  We’re likely to see a lot more headlines like this.  The economy will be too weak too long to bailout many governments.

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“The U.S. financial system remains fragile and banks subjected to additional economic stress might need as much as $76 billion in capital, according to the results of International Monetary Fund stress tests.”

We at CERF have been long concerned about the strength of our financial sector.  In fact I suspect that the IMF study may be understating the severity of the situation.  That would be a problem.  Ask the Japanese what a weak banking sector can do to an economy.  The weakness of their financial sector, and their failure to correct those weaknesses, were a significant contributor to their 20 years of economic malaise.

Failure to promptly deal with our weak financial sector can have similar consequences for us.  You may think the new financial regulation fixes our banks.  It doesn’t.  It creates a new regulatory environment but it does nothing to address the problems that are keeping our banks from fully participating in our economy, inadequate capital and bad assets on their books.

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I believe the probability of at least one sovereign default is disturbingly high, and the financial sector will be hard hit if one or more sovereign defaults materialize.  Bailouts will only postpone the day of reckoning, and a delayed reckoning will be more difficult.

We’ll be lucky if that is all we see. Multiple defaults are not out of the question, and the riots in Greece show how difficult it is to cut government spending.  Any social disturbances will only increase the economic pain and delay the ultimate recovery.  Multiple defaults too will exacerbate the economic problems.

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