In a Huge Victory, Fed Chairman Tells States and Cities seeking Fed Bailouts to go Pound Sand

Regular readers of this blog know that one of my major concerns has been an impending bailout of the blue states and cities by the Federal Reserve.

This concern was largely eliminated when Federal Reserve Chairman Ben Bernanke put a pad-lock on the Federal Reserve cash machine when he announced the Fed would not bail out cities and states who cannot get their fiscal house in order. According to the WSJ, Bernanke said:

“We have no expectation or intention to get involved in state and local finance,” Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, “should not expect loans from the Fed.”

This is a huge victory for rational fiscal policy.

I salute the Chairman of the Fed for this wise and correct decision.

It is not a stretch to say that Bernanke likely averted a fiscal civil war by his announcement.

Any bailout of any state or city by the Fed would have created a chain-reaction of petitions from states and cities in dire straights. Bailing out all of them could have easily surpassed $1 trillion.

If he had bailed out the blue states, see this graph, then he would have created a political firestorm — directed at the Fed — that Bernanke and the Fed governors would not have been able to control. My guess is that it would have cost Bernanke his job, because Congress would have intervened. (Obama, who is now so weakened politically, would not veto any effort to prevent any Fed bailout or the legislation to clip the Feds wings that such a bailout would have created.)

Further, any bailout by the Fed of the blue states or cities would have undermined and discredited Bernanke’s own public statements about needing to get the U.S. Federal deficit under control, as well as ingrained in the minds of the incompetent blue state governments they can spend without consequence.

These states and cities would have thought — and by extension, Congress and the White House — why bother with any fiscal discipline or spending realities, the Fed will just bail us out?

Thankfully, because of Bernanke’s actions, this will not happen.

Given that Congress is fully aware of the polling data around bailouts (the public hates them, really hates them) and the Republican control of the U.S. House — there will be no bailout by the U.S. government of the incompetent and largely blue states and cities.

Now, these spendthrift cities and states will have to fix their fiscal house all by themselves — and the place they will have to cut is the pensions, health benefits and salaries of government employees.

Lets just say the heyday of the public employee is ending, because, simply put, it cannot continue.